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

Fortnightly Magazine - February 1 1999

specifically choose a supplier, rather than have them simply default to the incumbent utility.

The Ohio plan, which would create "retail marketing areas," or RMAs, represents a fully developed bidding plan. Potentially, the biggest selling point for RMAs is that they should ensure that all customers - large and small - will benefit from retail competition from the beginning, not just the "big dogs eating first." This more equal footing among customers is coupled with a more equal footing among the incumbent utility and new entrants. This model should help "jump-start" competition in a state by providing a means for fair entry by all qualified suppliers and provide a platform for vigorous competition. Even so, the RMA plan creates its own set of complexities. Auction design is critical in avoiding collusion or bias in allocating market rights.

The Ohio Plan:

Competition Through Auctions

Legislation proposed in Ohio in both the House and Senate in 1998 would divide the state into geographic areas, or RMAs, representing subdivisions of the current utility service territories. Each RMA would consist of an aggregate pool of retail customers. Only those retail customers that did not choose a specific electric supplier would be in the RMA.

Under the proposed legislation, the Public Utilities Commission of Ohio would conduct a bidding process to determine the supplier for customers in each RMA. The proposed RMAs would be temporary. They would run for five years with the first bid at the beginning of retail competition (proposed to begin Jan. 1, 2000) and the second bid 2-1/2 years later.

RMAs are not intended to replace customer choice. The proposed process will not interfere with the right and ability of customers to choose an electric power supplier. Customers first will be given an opportunity to choose a supplier, including choosing to remain with their incumbent utility. Then customers will be given a warning notice that they are about to become a part of a pool of retail customers unless they "opt-out" by choosing a supplier. After that, customers still can choose a different supplier from the one that wins the bid for their RMA. However, they may be required to pay a switching fee based on the administrative cost of the changeover. At no time will customers be stuck with a supplier they do not want or be prevented from choosing to buy power from any available and qualified supplier they want. The only customers in the RMA are those that either chose to be in it or never made a specific choice.

The size and composition of the RMAs would depend on several factors. The RMAs would have to be a large enough aggregation of customers that the benefits of size would be obtainable (the same benefit that large industrial customers enjoy). Also, the RMAs would have to be large enough that the total number of RMAs in the state is manageable by the PUC when administering the bidding program. However, they should be small enough that new suppliers will be given a reasonable opportunity to participate in the bidding process. Also,