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Fortnightly Magazine - January 15 1997

Avoiding Rate Shock

All of this brings us to the one major concern of low-cost states (em that a rise in exports would boost prices for in-state consumers, perhaps significantly.

It is plausible that prices could increase, especially if a state enjoys a low-cost resource for which generators are not currently earning economic rents. On the other hand, in a region with surplus power and open markets, prices could immediately fall for all electricity consumers, even those in low-cost states. To protect in-state consumers from a possible price increase, a state may want to establish a temporary price cap. The cap would apply to those utility customers who are not allowed to purchase on the open market. The cap could incorporate a formula designed to create incentives that would motivate a utility to become more cost-efficient. In one example, the formula would set the allowable yearly price change equal to the change in the consumer price index, minus an allowance (an offset) for gains in productivity.

As another (admittedly less desirable) option, a portion of the economic rents earned by owners of existing generation plants who export power out-of-state might be redistributed or credited back to in-state customers. These credits would be temporary and restricted to those retail customers who continued to take a package of bundled services from the local utility. This idea, in effect, allows customers to retain some of the economic rents they received prior to open trading, in the form of below-market prices.

Either option would inevitably prove superior to a policy designed to curb electricity exports from state to state. That policy, steeped in protectionism, goes against all economic theory. It repudiates the experience of markets and ignores the long-term economic interests of state governments. Its proponents should look carefully at the consequences before espousing it as a way to stall reform of the electric power industry in their state. t

Kenneth Costello is Associate Director for Electric and Gas Research at The National Regulatory Research Institute, Columbus, Ohio. The author gratefully acknowledges the helpful contributions of Kenneth Rose, Senior Institute Economist at NRRI.


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