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Anti-Competitive Impacts of Secret Strategic Pricing in the Electricity Industry

Fortnightly Magazine - February 15 1997

firm. Such discounts often are called "business-enhancement" or "economic-development" discounts.

In either case, the anti-competitive effects are the same: The best and largest customers tend to be favored with the low prices. The utility chooses to favor precisely those customers that it wants to keep away from new competitors.

Two main features make discounts anti-competitive. The first is long-duration agreements. Some recent contracts are 10 years long, such as Detroit Edison's discounts to the Big Three automobile producers (see table 1). By locking companies in with discounts, the utility makes those customers difficult, if not impossible, for any new competitors to attract. Discounts contracted for long periods merely extend the lock-out of new competition.

Of course, long-term contracts usually are harmless or even efficiency-promoting in a competitive market. But when a powerful dominant firm uses them effectively to block out future competitors, the effect is anti-competitive.

The second feature making discounts anti-competitive is that the discounts often are held secret by the firms and the public regulatory agencies. %n3%n Typically, even the name of the favored customer is kept secret, as well as the extent of the discount. Massachusetts, for example, now has scores of secret rates. Each customer is listed by the Department of Public Utilities by an anonymous code number with no pricing information.

By allowing secrecy, the regulators are assisting the monopoly in maximizing the anti-competitive effect of the discounting. Secrecy lets the dominant firm confine its pin-point price reductions to the minimum extent. This maximizes the harm to emerging competition and minimizes the firms' own sacrifice of revenues.

The secrecy and rapid spread of discrimination makes it impossible to accurately assess the effects of anti-competitive tactics. Many commissions have complied with the utility and large-customer pressures for approval of these discounts (see table 2).

But, although secrecy is widespread, there are exceptions.

There has been resistance in some states (notably California, Florida, New Hampshire, and Ohio), both to the discounts and especially to the secrecy. In those states, the possibility of the large-customer discounts has stirred sharp debate.

Some of the resistance comes from a sense of unfairness that big companies are getting benefits before small buyers. Some of the resistance also recognizes the competition-blocking effects of the discounts.

The discounting is unfair and anti-competitive only during the critical, early phase of the transition to competition, when there is still market dominance. If and when fully effective competition is established, the restraints on

discounting can be dropped entirely. And smaller firms should always be permitted to offer discounting, since their gains will only promote competition.

In addition, if effective competition does not develop, then a "select" or "privileged" group of industrial customers may reap most or all of the benefits from the aborted attempt at competition. Even if some competition does develop, the sequence of discounting (em to biggest customers first (em leaves the smaller customers out in the cold. In fact, if the large-customer discounts are large enough, then common costs will be shifted to the later, less-lucky small customers. The small customers' prices will end up