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Redundant Restructuring: How the Dual-Retailer Model Makes Electric Markets Too Complex

Fortnightly Magazine - July 1 2000

itself from the retail arena, it may not be able to do so under requirements that an LDC serve as provider of last resort for all customers. As long as the potential obligation to serve all customers remains with the regulated entity, it makes no sense to eliminate retail infrastructure from the regulated cost base. If relieved of its default service obligations, it might be possible to give LDCs an incentive to end costly retail services through performance-based ratemaking. However, it is more likely that in the short run, new regulation will be required to keep the natural monopoly focused on its mission: maintaining network facilities and reliable delivery of the commodity.

Operational Complexity. Second, the coexistence of redundant retailers shifts each firm's retail cost curve above the original monopolist cost curve. That largely is due to the increased complexity of business functions. Observing the California retail market, Robert McCullough, a professor at Portland State University and managing partner of McCullough Research, wrote, "The complex mechanics and high entry fees simply have made large-scale customer participation impossible." 6

Though two parties claim the retail relationship, customers often want one bill for all their electricity charges. Producing one bill for the charges of two retailers, each wishing to track their receivables at an end-use customer level, requires retailers to exchange a significant amount of information. This information exchange usually is facilitated through complex protocols for EDI transactions. These protocols require the exchange of several EDI transactions per customer per month.

Although EDI transactions are effective, they are costly. Fixed costs include the information technology required for EDI and the immense labor needed to define common transactions. New information technologies, such as EDI translators and interfaces with billing systems, are essential infrastructure, required by all firms to be capable of sending and receiving transactions. According to a study by Xenergy, "Utilities report spending from $1.22 to $22 per customer, with one utility reportedly spending up to $82 million to make billing system changes needed to accommodate retail access." 7 In addition to IT costs, intensive man-hours are required to define transaction sets and their underlying business processes. This chore is complicated by the difficulties of reaching consensus among all market participants.

New variable costs result from the maintenance of EDI software and the skilled analysts needed to test compliance and resolve data issues with trading partners when communications go awry. According to some estimates, a supplier must spend "$500,000 to comply with a region's EDI standards before selling the first megawatt. In addition, the company will have to spend another $50,000 per utility in the region to meet varying EDI standards." 8 There also are network fees such as a price per byte or fixed access charges.

It wouldn't be accurate to claim that a single retail provider would eliminate the demands of information exchange. However, by simply treating the LDC as a wholesale supplier to the retailer, information traffic could be reduced to a few transactions per retailer per month rather than the three or more per end-use customer per month required under