Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

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

Fortnightly Magazine - February 1 1999

cannot be given consideration. This may mean that innovative bids, for example, from a potential supplier that wants to combine some conservation measures along with its supply proposal, cannot be assessed.

Service Rights: Exclusive to Each Zone?

Another important issue is whether there should be only one supplier or if multiple suppliers for each RMA should be allowed. It may be more advantageous for customers to have one supplier serving the RMA since smaller customers, such as residential customers, will benefit from the aggregation with larger customers. In this case, the bids could be evaluated based on a weighted average of several different predetermined tariffs. Alternatively, multiple suppliers could be allowed in a system that awards the bid for each customer group to the best bidder of that tariff. The advantage of this approach is that suppliers with certain generation characteristics could specialize in supplying certain customers. The disadvantage is that these suppliers could target ("cherry pick") the choicest customers and ignore or at least not be as aggressive in marketing to smaller customers.

Many other design features will need to be worked out. These include whether there should be discrete versus continuous rounds, the number of price categories and the timing limits (if any) of the rounds and the auction.

Once winning bidders are selected, the PUC will have to arrange contracting with the suppliers. Standard contract terms and conditions could be worked out in advance and publicly disclosed. These could include operating standards, a requirement that the RMA supplier serve new customers that move into the RMA and do not choose a specific supplier, force majeure clauses and performance security bond or letter of credit requirements. Contracts should also include contingency provisions in the event of non-performance or financial insolvency.

Why We Need RMAs

Ohio utilities, not surprisingly, have concerns about this proposal. They understand that without customer assignment, they would retain 70 or 80 percent of the market in their old service territories, even if their prices are higher than alternatives. However, the proposed RMA concept gives incumbent utilities three opportunities to convince customers to choose them as their supplier.

First, the incumbent utility will be allowed to convince customers to select it as the supplier and not become part of the RMA. Second, the incumbent utility will be allowed to bid to serve its historic service territory customers and new customers outside of its traditional territory. It may expand (or contract) its customer base at its discretion. Finally, the incumbent utility can urge customers to return to it once they are in the RMA not served by the incumbent. Incumbents can retain customers they had when they were monopolists, but they will have to do it in the same way suppliers that are new to the area will attract customers - that is, by convincing customers that they offer the best deal for their needs. In short, utilities will not just inherit the lion's share of customers; they will have to do it the old-fashioned way, by earning their market.

A criticism of the RMA concept is that