[BETA] Fortnightly

Professor Shepherd sees selective price cutting as anti-competitive, but even a monopolist should be allowed to compete on price.

As the electric industry deregulates, state public utility commissions are asked increasingly to allow the local utility to offer price discounts to large-load customers who might otherwise turn to other sellers. So far, nearly all the PUCs faced with this issue have agreed that such discounts are beneficial: They help retain large-load customers, who help pay the utility's fixed costs. Without that contribution, a heavier cost burden would fall on those customers who remain. Professor William G. Shepherd, on the other hand, views this consensus with dread and alarm. %n1%n He argues that regulators must reverse the present trend and forbid utilities from offering discounts to large-load customers. He predicts that, if left unchecked, strategic discounts may stifle competition in a deregulated electricity market.

Professor Shepherd's doomsday forecast is in error. His thesis rests on a misunderstanding of the electric market and misapplies the principles of antitrust law. In reality, strategic discounts promote competition. They play an important role in easing the transition to a deregulated market.

Moreover, Professor Shepherd loses sight of the ultimate goal of the antitrust laws (em to protect the competitive process and the interests of consumers. %n2%n Discounts benefit both the customers to which they are offered and the other ratepayers of the utility.

Of course, one could perhaps envision a predatory discount (em a price set below costs specifically to force out rivals (em but that case would imply market power, and Professor Shepherd has shown no example of such conduct. This unlikely prospect should give no reason to abandon a practice that has served the interests of electricity consumers. Instead, specific abuses can be addressed through the present regulatory environment or, following deregulation, through governmental or private enforcement of the antitrust laws. Allowing utilities to compete to retain large customers leads to more effective competition and promotes the interests of electricity consumers generally.

Many States

Have Given Approval

As of today, approximately 20 states have allowed electric utilities to offer some form of discount to large-load customers that might otherwise leave the system. These states include: Alabama, Alaska, Arizona, Arkansas, California, Connecticut, Idaho, Illinois, Indiana, Maine, Massachusetts, Michigan, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio and Washington. Several of these states, including Connecticut, %n3%n Maine %n4%n and Massachusetts, %n5%n have passed statutes that expressly authorize such discounts. Many other regulatory commissions have approved special contracts following regulatory proceedings, which have often included briefing and hearing. %n6%n

Commissions often require utilities to meet certain conditions before offering price discounts. First, in most cases, the utility must prove the customer would leave its system if not offered the discount. Second, in most cases, the utility must show that, even with the discount, the price charged to the large customer will still contribute sufficiently to fixed-cost recovery, which would benefit other utility customers. In the alternative, the utility must show that the discount will not harm other ratepayers. %n7%n

Promoting Important Regulatory Interests

Most states