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Fortnightly Magazine - April 15 1997

Why We Sign Those Secret Deals

Out here in the trenches, Professor William Shepherd's attempts to correlate anti-competitive pricing strategies with market dominance will take a while to sink in, mostly because the politics seem to get in the way of clear thinking. While his article ("Anti-Competitive Impacts of Secret Strategic Pricing in the Electricity Industry," Feb. 15, 1997, p. 24.) indicates that Ohio has been one of the states willing to question the effect of secret discounts on emerging electricity competition, efforts in the Buckeye State to take on this issue have been complicated intentionally by utilities that are ready, willing and able to use their political power as readily as they use their market power.

The opportunity to sign a secret discount deal can place a large energy user in an awkward position. The external and internal pressure of global competition requires that companies take steps to be competitive today. Moreover, Ohio's elected officials have not delivered the tools that customers require to address electricity price and service objectives. For example, large-industrial customers have been urging Ohio to "do the right thing" since 1991, supporting customer choice legislation to give all customers the benefits of effective competition, introduced recently for the third time in Ohio.

If customers cannot get the tools they need they will use whatever tools are available. The alternative is not acceptable (em a fact well known in monopoly power politics. As a compromise between the "right thing" and the political realities of the moment, we have urged regulators to require the unbundling of discounted, long-term contracts for electric service. Separate rates and services should be submitted so that the regulator, and perhaps others, can see what is being discounted. Unbundling

will improve the opportunity to determine if and to what extent anti-competitive pricing is being used to preserve market power or impede the forces of effective competition.

Through comparable and non-discriminatory unbundling of charges, prices and services (including any allowance recovery of uneconomic costs), we could tell more readily if predatory pricing exists or if undue advantages are being extended. While the term of the contact for distribution and transmission service could extend for a long period, the term applicable to generation services could be defined to end, at the customer's election, on the effective date of retail customer choice.

Choice for retail customers is coming to Ohio. In the meantime, policy makers should recognize the problems described by Mr. Shepherd and do something about them. As I have indicated, the current choices are broader than: 1) rejecting all discounted agreements because they might impede effective competition or 2) simply approving them without significant review. These choices include options that will help to remedy the problems without hurting customers that need immediate relief from electric prices that place them at a competitive disadvantage. Appropriate unbundling of large customer contracts can help to provide information that will promote effective competition for all customers.

Sam Randazzo

General Counsel

Industrial Energy Users-Ohio

Columbus, Ohio

And Why Worry?

I am having trouble understanding Professor Shepherd's argument that individually negotiated contracts