[BETA] Fortnightly

BY THE END OF MARCH, CALIFORNIA, RHODE ISLAND, and Massachusetts planned to offer retail choice to customers. However, early signs suggest electric competition may fall short of expectations due to stranded cost recovery mechanisms and the desire of customers to protect themselves from risks inherent in a competitive market.

When the California market was about open, less than 5 percent of customers had elected to switch suppliers. In Massachusetts, more than 40 companies originally planned to compete to supply retail power; only three companies had submitted applications by press time. In Rhode Island, which opened last summer for large customers, most customers opted to remain with the incumbent utility.

These three states have one thing in common: Rates are frozen at a preset level during a transition period. In Massachusetts, customers must pay delivery charges and a competitive transition charge to the incumbent utility. However, to ensure that customer rates do not rise above what they would have been under regulation, the incumbent utility must offer service at an initial rate of $2.80 per megawatt-hour. Therefore, whenever the wholesale power market prices rise above $2.80 per MWh, a customer will receive the lowest bill by purchasing power from the incumbent utility. Indeed, prices have recently risen above this level, making it extremely difficult for competitors to supply power profitably. Rhode Island has a similar mechanism.

In California, the rates are frozen at 1996 levels. Again, the customer pays delivery charges and a CTC to the incumbent utility. The CTC is the customer's frozen rate less the sum of delivery charges and the price of power in the wholesale market. Therefore, whenever the price of power in the competitive market increases, the CTC decreases. Similarly, if the price of power in the competitive market decreases, the CTC increases. The only method by which a customer can receive a lower price than the frozen rate is by purchasing power at a price lower than current wholesale prices. And the economics for achieving such purchasing ability are not compelling. If residential customers could purchase power at a price 10 percent lower than the wholesale market price, they would only decrease their entire electricity bill by 2 percent. Given that the customer sees almost no difference in electricity price no matter the supplier, convincing that customer to leave the incumbent utility is extremely difficult.

The primary motivation for setting up restructuring in this manner is twofold. First, utilities want to recover their stranded costs. Second, politicians and consumer groups seem unwilling to accept the risks of competition.

A competitive market that adopts price controls is unlikely to yield the desired benefits. Instead, such a market will slow the entrance of new competitors and inhibit any competition because of price. Offering stranded cost recovery for utilities without such price controls is possible. But utilities must accept that they will only be given an opportunity to recover stranded costs and customers must endure the risk of price increases.

Christopher Seiple is principal with Resource Data International Inc.

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