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News Analysis

Methods vary, notes one analyst, but are they barking up the wrong tree?
Fortnightly Magazine - July 15 2000

which includes various cost components, including demand and energy charges, plus an account ("customer") charge. The backout method is used because APS has not broken down, or "unbundled," its default rate into functional components (e.g., generation, transmission, distribution, etc.). Thus, for APS customers, the shopping credit is somewhat opaque. The value seems not so much a product of a transparent spot market, as dependent on how you calculate the wires and account charges that are subtracted from the total bill.

By contrast, the Salt River River Project has unbundled all retail charges in its service territory, from metering and billing to generation and ancillary services, making it easy to pinpoint what the shopping credit would be, provided you understand something about the load profile of your targeted customer or customer group. XENERGY's Yoshimura explains further.

"[I]n order to calculate a cents per-kilowatt-hour shopping credit, you have to basically assume a customer. Assume some billing determinants and then calculate it through, and then divide by kilowatt-hour and come up with a cents per kilowatt-hour number.... You have to assume a customer that has a certain demand and energy use. [F]rom that information you then determine... which tariff I'm going to use."

And yet Tucson Electric Power offers still a third method, according to Yoshimura. He notes that TEP's generation credit is based on a market generation benchmark that fluctuates with actual market prices. The formula takes into account the electricity futures prices for the Palo Verde (Ariz.) contract operated by the New York Mercantile Exchange, plus on- and off-peak price differentials reflected in the California Power Exchange, and class-specific losses. In addition, Tucson Electric includes a fixed "adder" in its generation credit, reflecting additional retail costs such as marketing, customer care, and overhead expenses.

In some cases, in fact, XENERGY computes shopping credits by taking the most typical tariff and then looking at data on a company-by-company basis for average use of commercial and industrial customers per month—information available from the U.S. Energy Information Administration.

The Bicoastal Spot Market Approach

The Salt River and APS examples are fairly typical of methods used in other states—but not California and New York, where the shopping credit is benchmarked against the monthly power exchange price, according to Yoshimura.

"Of course, you don't know your shopping credit ahead of time," Yoshimura explains, pointing out a key feature of the New York and California markets. "That's the difference."

And what of the average residential customer, who doesn't have time or inclination to track the spot markets from hour to hour? "They don't even know their usage," Yoshimura says.

Another disadvantage of benchmarking against wholesale prices, adds Yoshimura, is that it creates very little room for a retailer to be able to beat the standard offer, especially given a marketer's overhead expenses.

"If it's being based directly on the wholesale market price, where's the room for the middle person, the retailer? There's very little room, because the only way a retailer can beat the market price is by signing some bilateral wholesale deal to keep their wholesale power cost