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Why Special Contract Discounts are Good For Electric Competition

Fortnightly Magazine - May 15 1997

that have approved discounts limit their application: The discount must be required for business retention. This condition is neither an idle nor speculative concern. Many utilities encounter problems retaining large customers. In a growing number of cases, a utility has lured away a large customer with a seemingly less-expensive or more appealing alternative source of electricity. The tug of these alternatives will only grow greater as competition for customers increases. Later, as competitive alternatives become increasingly available, even the utility's smaller customers will leave. What was once the dominant utility may soon go the way of the dinosaur. In a very real sense, even when a utility enjoys a "dominant" share of the market today it must engage in price

competition to remain a viable competitor. The purpose of the discount is not to entrench the dominant local suppliers of electricity at the expense of potential competitors, nor to cause injury to smaller customers. However, if a utility is prohibited from taking steps to keep its larger customers, those customers will leave.

Are discounts a sort of "Devil's Pact" between utilities and their largest customers? On the contrary; discounts serve legitimate commercial interests. It is wrong to assume that any discount given by a utility to retain large-load customers will harm customers that do not receive a discount. In fact, a substantial body of law shows that the contrary is true; discounts to large customers generally lead to lower rates for other customers of the utility. %n8%n

Commissions have recognized that if a large customer leaves a utility, that customer will no longer contribute to the utility's fixed costs. As more big customers leave, smaller ratepayers will bear a larger and larger share of the utility's fixed costs. Those customers with the fewest competitive alternatives, including residential and low-income users, will be hit hardest by these greater costs. If a utility cannot offer a discount to keep its large customers, it may become saddled with "uneconomic bypass." A discount that enables the utility to retain its large customers benefits all customers of the utility. Indeed, a review of the decisions approving discounts shows many instances where regulators have insisted on a showing that small customers will benefit from the discount. %n9%n

Discounts do not destroy emerging competition. Smaller and more vulnerable firms will not likely emerge as the only new rivals for market share. The local utility may find that its greatest rival comes from outside its service territory, in the form of another utility from an adjacent territory or from out of state. Any fears that discounts offered by the local utility may "quell or kill specific rivals in market niches" are unfounded. For example, a company in Minneapolis may be enticed to buy its electricity from a Wisconsin utility rather than its local utility. That rival utility may prove bigger and more established. The rival utility might underprice the local utility because it has lower expenses or fixed costs. A more modern or efficient infrastructure might allow it to offer superior service. However, if the local utility can offer a