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

Fortnightly Magazine - July 1 2000

increased efficiency also could be realized through technological innovation. The recent explosion of Internet services for investment and stock trading is evidence of a large segment of the population that will trade full service for low-cost service, as long as they can participate in the savings. Likewise, technical innovation has the potential to bring about significant downward shifts in the average cost curve of supplying Q R. For competitive energy suppliers, innovation is spurred by incentives to increase profits and market share. It is doubtful that the LDC's incentives could be as compelling, since they recover costs and have a protected, heterogeneous customer base.

Electronic bill presentation and payment, or EBPP, could reduce the costs of supplying Q R. Cost estimates of EBPP are around $0.40 per customer per month, vs. around $1 for paper bills. 10 If customers could elect to forego call center service and shift credit risk to their credit card companies, the potential for cost reductions would rise even higher. That is just one example of potential innovation. Suppliers doubtless would find other cost-reducing services, but only if given the incentive through full ownership of the retail relationship.

Shopping Credits: Politics Intervenes in Pricing

Under current deregulation plans, utility commissions face the difficult and inevitably politicized quandary as to what retail price incentives to establish in the market, i.e., how they should establish the shopping credit. The shopping credit is designed to be sufficiently large to induce competition, but not large enough to send the LDC's customers running for the exit. However, retail price incentives set by regulation are an oxymoron. Experience shows that the parameters of the shopping credit determine the success of the market. California set the credit equal to the wholesale price of electricity with dire results. 11 Pennsylvania set higher credits, fomenting the initial success of its market.

At the same time shopping credits are debated, the regulated prices for services, including generation, that the utility provides as the default supplier often are reduced. The combination of guaranteed price reductions and arbitrary shopping credits results in competitive markets without clear price signals or meaningful changes in the retail cost structure. Without complete separation of retail and wholesale functions, determination of prices is a political rather than a market issue. In any scenario in which regulated utilities perform retail functions for hundreds of thousands of customers, it is difficult to imagine that their regulated rates are not subsidizing their retail functions, no matter how much the costs might be unbundled in the tariff itself.

The Georgia Gas Model: A Better Market

One utility that has taken the greatest strides at restructuring is Atlanta Gas & Light. In response to the deregulation of the gas market in Georgia, AGL implemented a far-reaching restructuring plan focusing on delivery.

According to Mark Caudill, vice president of energy competition for AGL Resources, AGL asked two fundamental questions: "What are we doing and ought not to do, and what are we doing that we should continue to do and do better?"

To answer these questions, AGL took a