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Regulation or Technology? Low-Income Electric Customers and the Transition to Competition

Fortnightly Magazine - November 15 1995


To maintain the benefits of competitive market pricing, the size of the subsidy flow must be reasonable. Perhaps not every service offered to residential customers would be provided at subsidized rates to qualified low-income customers.

Rather than adapting the scope and design of existing low-income assistance programs, public authorities should rethink and redesign targeted assistance programs.4 Redesign should reflect the competitive industry paradigm and the potential deployment of new

technologies. In addition, any redesign should recognize that if we target subsidies to low-income customers while moving all other customers toward competitive market pricing, we can offer more assistance than we do under the

current Rube Goldberg system of cross-subsidies.

Three possible targeted-assistance mechanisms could be widely deployed, complemented by new technologies to improve services for low-income customers:

s Utility as sole residual supplier (em To receive subsidized service, low-income customers would have to take service from the utility. The financial burden of providing subsidized services would fall fairly on all competitors operating in the utility's service territory.

s Residential customer chooses supplier (em Qualified customers would be allowed to receive subsidized service from the generation supplier of their choice. All suppliers would make financial contributions to support subsidized services.

s Direct assignment (em Low-income customers that qualify for subsidized service would be assigned on a pro rata basis to residential marketers that would bear the subsidy responsibility not borne by public authorities.

Springing into Action

Utilities have little time to get the proactive transition process underway. Their overarching

transitional objective should be to gain substantial flexibility from regulators in pricing services and dealing with customers. In addition to pricing flexibility and rate design reform, utilities will need flexibility to market services to customers and to implement new information technologies.

Addressing the problems of low-income customers to provide meaningful new services and lower bills will be critical in gaining regulatory support for this flexibility. By working jointly with low-income customer groups and other interested parties, utilities may be surprised to find mutually agreeable solutions to the problems faced by low-income customers and those they face themselves in the transition toward an increasingly competitive market. t

Philip O'Connor is principal and Erik Jacobson manager of the Coopers & Lybrand Consulting/Palmer Bellevue Utilities/Energy Division. Mr. O'Connor previously served as chair of the Illinois Commerce Commission. Mr. Jacobson served as deputy director of the Division of Ratepayer Advocates at the California Public Utilities Commission. Terrence Barnich is chairman and president of New Paradigm Resources Group, a Chicago consultancy specializing in the competitive aspects of the telecommunications and energy industries. Mr. Barnich is a former chief utility regulator for Illinois, and one-time general counsel to Gov. James R. Thompson.1 This paper uses the term "choice" to refer to a retail customer's ability to choose to participate in the competitive electricity market. In this environment, the customer acts as regulator and has access to prices and services in the market. Customers, for example, would have access to alternative suppliers of generation services through nondiscriminatory access to utilities' transmission and distribution network. Under this customer choice model, transmission