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Using Auctions to Jump-Start Competition and Short-Circuit Incumbent Market Power

Fortnightly Magazine - February 1 1999

it forces a choice on consumers. This is simply not the case. Customers will have ample opportunity to select their preferred suppliers and never will be "stuck" with suppliers they do not want. Clearly, it would be better if there was no need for RMAs. We could simply let each customer decide and allow the competitive market to sort out the suppliers and find the best way to satisfy demand with the available supply. However, even with the multi-million dollar consumer education campaigns we have seen for the long-distance telephone market and electric markets, customers may be slow to switch from their incumbent utilities.

This customer inertia is a source of horizontal market power for the incumbent utility and a significant barrier to entry for alternative suppliers. Some states have required divestiture of generation as a means of alleviating vertical market power. However, divestiture does little to lessen horizontal market power unless it is coupled with a limit on the percentage of the total capacity that may be owned by one firm. This may be difficult to implement and result in a loss of some economies of scale. Also, for some jurisdictions, the divestiture option may be difficult for a state to mandate, such as in the case of multi-state holding companies and where some generation is beyond the state's borders.

The temporary use of RMAs is intended to overcome customer inertia in the early stages of retail competition. This will prevent the incumbent utility from getting the vast majority of customers by default. The RMA idea is proposed as a better alternative to the random assignment of customers to suppliers since it is less arbitrary. If RMAs are not used to solve the problem of customer inertia, then some other means should be considered.

Kenneth Rose, Ph.D. is senior economist at the National Regulatory Research Institute at the Ohio State University. Rose assisted lawmakers in the development of proposed legislation, introduced in 1998, which included the RMA concept. He can be reached at rose.8@osu.edu. His views and opinions do not necessarily reflect those of the NRRI or funding organizations of the NRRI.

The Ohio Legislation RMAs Caught in a Crossfire?

As of December 1998, legislation to set up RMAs appeared less than a sure thing, after Ohio's major investor-owned electric utilities had weighed in with recommended changes to the state's proposed electric restructuring plan.

RMA Proposal. The twin bills on electric restructuring - S.B. 237, sponsored by Sen. Bruce E. Johnson (R), and H.B. 732, sponsored by Rep. Priscilla D. Mead (R) - were introduced to the Ohio legislature March 26. The bills proposed a broad plan covering many issues, including "temporary" RMAs during a five-year transition period, through which retail customers might choose to receive electric generation service as part of an aggregated group.

However, the bills died late last year when the 122nd General Assembly adjourned without approving them, and were to be reintroduced in the new 123rd General Assembly this month.

Utilities Weigh In. In August, American Electric Power, Cinergy, Dayton Power & Light and FirstEnergy had