[BETA] Fortnightly

Bigger payoffs for larger electric customers should surprise no one, says one exec, while a consultant blames the Fortnightly for obscuring the point.

It is not surprising that authors Bierman, Nelson and Stover ("Anomalies in Residential Electric Rates: Harbinger of Competition?" Public Utilities Fortnightly, July 15, 1999) found an increasing differential between residential and industrial rates. It also is not surprising that there is a correlation with deregulation activities. This situation is the natural result of competition causing subsidies to unwind. The same thing happened with telecommunications services, when competition caused the long-distance subsidy of local service to unwind.

The politics of electric utility regulation has created subsidies in two ways I discuss here. One way is through rates of return for industrial service that are typically about the same as the average rate of return, rates of return for commercial service above the average, and rates of return for residential service below the average. The other way is through utilization of cost-of-service study techniques selected more for their effect than for their validity. Examples of such techniques are:

* Application of energy-related allocation factors to demand-related costs, thereby over-allocating costs to high load factor customers; and

* Not recognizing how distribution systems are actually used to provide service to primary and secondary voltage customers.

My Feb. 1, 1996, Fortnightly article discussed the second example, which has two aspects. (See "Transmission or Distribution? Reengineering Cost-of-Service Studies for the Emerging Competitive Market.") One aspect is recognition that single-phase primary lines are rarely utilized to serve primary voltage customers. In his May 15, 1999, Fortnightly article, George Pleat indicated that the Baltimore Gas & Electric Co. unbundling study recognized this situation. (See "Unbundling Retail Prices: An Electric Utility Prepares for Life as a Disco.") The other aspect is that residential customers require much larger investments in secondary and single-phase primary lines, per unit of usage, than do non-residential customers. I am unaware of anyone recognizing this later aspect in recent years, so the subsidy it provides to residential customers is not being, and may never be, addressed.

The authors suggest cost of service and exercise of market power as reasons for the increasing rate differential. The influence of competition on cost of service through elimination of subsidies clearly is at work. The authors seem to be suggesting that the increasing rate differential is an indication of utility market power influencing residential rates. Market power exercised by industrial customers to eliminate subsidies from their rates may be a more significant influence.

It is clear that cost of service is the critical pricing factor under competition. My Nov. 20, 1975, Fortnightly article, "Building Blocks of Rates - Revisited," listed 16 pricing considerations other than cost. These pricing considerations influenced rates under regulation, but most of them cannot apply under competition.

The authors present Table 2, Schedules 1 and 2, to question why residential rates have not declined. Both schedules raise questions not addressed by the article.

Schedule 1 categories expenses in a manner that may influence their significance. Maintenance is shown as a separate line item