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News Analysis

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

below that of the PX."

Yoshimura blames California's shopping credit method at least partially for the state's anemic switch rate.

Illinois: Marketers and Utilities Unite?

What about Illinois, where state regulators decided in April to replace the state's unique "neutral fact finder" method with one in which the price is based directly on a market index?

What is ironic about the Illinois case, Yoshimura says, is that a common interest emerged between suppliers and utilities. The supplier naturally fretted that it couldn't beat the "power purchase option" (for all intents and purposes, the standard offer), but the utility faced its own problem: It would be forced to serve customers at the preset low price, and the customers, to the chagrin of the utility, would be unlikely to leave the utility at such low prices—an even graver problem for the utility that has divested much of its generation.

"So there's a funny synergy there," Yoshimura observes.

Finally, there is the most straightforward of methods, such as what is found in Massachusetts and Rhode Island, where a dollars per kilowatt-hour clearly is stated. Those states, in fact, employ the most simplified form of this method by setting the same shopping credit for every class. Even this simplified approach, however, presents problems because the average cost to serve a customer with a flat load profile (that is, a load without peaks and valleys) on average is much lower than a customer with a profile that spikes—even with the same usage, since suppliers must buy a lot more capacity for them.

And since residential customers are more costly to serve because they tend to have a variable load shape, whereas industrial customers tend to be more flat over the course of a day, the end result is that it potentially encourages the industrial customers to switch while discouraging residential customers to do so. "Presumably, what that does is that the larger users with the real flat load shapes are going to be advantaged by that," Yoshimura says.

To Yoshimura, no matter the method, the shopping credit skews the very concept of retail choice. "In one sense, [the shopping credit] is a benchmark, but as long as the underlying cost is moving, from hour to hour and from season to season, that shopping credit is going to cause all sorts of market problems.

"Whatever that design of the price of the default service, that kind of sets the pace for all suppliers. ... It's not a truly open market where people are making deals and creating new deals that try to address every consumer's different needs. What it turns out to be is a market in which everyone's trying to beat this one thing that's being supplied by the utility."

But whatever approach is taken on the matter, shopping credits are the hand that the players have been dealt.

"Every time I talk to suppliers, they're always complaining about one or some other aspect of whatever the default pricing is, which tells me is that there's something about that default which is setting the pace for what