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Why Special Contract Discounts are Good For Electric Competition

Fortnightly Magazine - May 15 1997

discount, it might still compete with the rival. In such instances, the customer will benefit from receiving the best possible price and term (em a result of competition. By contrast, if the local utility cannot offer a discount, it will lose its ability to effectively compete, and the rival will lure away its customers.

Indeed, even a newer entrant may not face a disadvantage when competing against the local utility. In many cases, the new firm may avoid incurring the significant fixed costs that the utility had to bear to meet customer needs and provide universal service. As a result, newer entrants may be able to offer better prices, more innovative service or unusual specialties not offered by traditional utilities.

Meshing With

Antitrust Law

Price discounts usually do not pose a concern even where the seller holds a monopoly. To the contrary, the concern is that the monopolist will force higher costs, reduce output or offer poor service. %n10%n In addition, the position that utilities should not be able to offer discounts runs counter to the recognized view that even a monopolist should be allowed to compete on the basis of price %n11%n and reduce its price in order to retain customers that might otherwise be lost. %n12%n

Discounts do not often fall below cost, where they would become predatory. The present regulatory environment imposes safeguards to prevent that from happening. Indeed, in the present market for electricity, it would prove very difficult for a local utility to engage in predatory pricing through discounts. For pricing to be "predatory," a seller with market power must reduce its prices below its cost (usually its average variable cost) with the specific intent, first of forcing its rivals to leave the marketplace, and, following this, of recouping its short-run losses by imposing monopoly rents. %n13%n

If a utility should lower prices to force out rivals, consumers would only benefit from lower rates. Even if certain rivals temporarily left the market, competition would not suffer until the utility tried to charge monopoly rents. %n14%n Once it did so, however, rivals from outside the market would have every reason to enter the market and underprice the utility. The ease with which these firms could enter from outside the market would act as a check on the ability of the utility to extract supra-competitive profits. In the end, any effort by a utility to engage in predatory conduct might well only produce losses for its shareholders. %n15%n

A discount offered by a utility to a large-volume customer is not a form of anti-competitive price discrimination. This analysis is inconsistent with theories of price discrimination developed under the antitrust laws and, in particular, the Robinson-Patman Act (15 U.S.C. §13a). To begin with, there remains a dispute among courts as to whether electricity is even a commodity subject to Robinson-Patman. %n16%n But assuming such pricing is discriminatory (em even when offered to retain a large customer (em it still would not be unlawful under Robinson-Patman. Rather, such conduct would be protected under the "meeting competition" defense to the act. Under