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The Baby and the Bathwater: Utility Competition, But at What Price?

Fortnightly Magazine - November 15 1999

services for its own use or that of its affiliates, to the detriment of its competitors who cannot obtain such access to such rights. In these circumstances, the incumbent should be compelled to make available to new entrants the essential inputs that it controls and makes available to itself or its competitive affiliates, and on the same terms and conditions. Otherwise, regulators might consider prohibiting joint use of those facilities by utilities and their competitive affiliates.

Also, Iowa teaches a reasoned approach: The justifiable restrictions are those that do not unnecessarily add "significant administrative and social costs inconsistent with" the purposes of the governing legislation. These acceptable restrictions will not diminish the incumbent's incentive to keep up or to improve the property by depriving it of the benefits of its "value-creating investment, research or labor."[Fn.17]

These issues can arise in the context of asset divestiture or codes of conduct.

For example, there are vocal constituencies that seek to mandate that the incumbent provider of regulated energy or telecommunications service must divest itself of all competitive functions plus the facilities, support services and personnel related thereto. This structural separation or divestiture would leave the incumbent utility with the obligation to serve but with none of the economies of scale it previously enjoyed. To the extent that such recommendations result in more restrictions than are absolutely necessary, or to the extent that they result in excessive costs, Iowa would suggest that they cannot be sustained.

In addition, some state commissions have recognized that compelling structural separation or divestiture can impose direct monetary costs, and result in loss of efficiencies and economies of scope. For example, in New Jersey the Board of Public Utilities rejected structural separation as the only way to guard against cross-subsidization, relying instead on a cost allocation system reviewed and approved by the Board and found to be an adequate safeguard for competition.[Fn.18] A counterexample is Pennsylvania, where as part of its Aug. 26 decision, the commission ordered Bell Atlantic to market its wholesale and retail services through separate subsidiaries.[Fn.19]

Similarly, standards or codes of conduct are designed to prevent discrimination or preferential treatment that might favor the incumbent's affiliate in offering competitive products. The standards are based in large part on the assumption that the utility has access to certain information, services, facilities and unused capacity and supply and, as a result, can enhance its competitive position or that of its affiliate, at the expense of competitors.

While some might favor a prohibition against any sharing of information, services, facilities or capacity between the competitive entity and the entity providing traditional electric and/or gas public utility merchant functions, a complete bar might cause unnecessary duplication of expenses. This would result, as the Court warned in Iowa, in "significant administrative and social costs" that may "make the game not worth the candle."[Fn.20]

Cross Subsidies: Restricting the

Incumbent in Pricing Decisions

While most may agree that the incumbent should not use regulated services to cross-subsidize competitive offerings, pricing restrictions still spark controversy. Here Iowa would suggest that regulators keep the goal in