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Energy Retailing: Setting a Standard Offer for Every Season

Sending Price Signals, Without Illegal Tying
Fortnightly Magazine - August 2000

of utility generation service, and most continue to grapple with the issue.

In Massachusetts, for example, regulators adopted a long-term "standard offer," with a seven-year schedule of gradually increasing prices. Wholesale market prices have risen far more rapidly than the standard offer, however, leaving standard offer prices well below the market price. As a result, Massachusetts has achieved just a 0.3 percent customer-switching rate after two years of competition.

California prices its utility generation service at the Power Exchange price, adjusted for class load profiles, line losses, uplift charges, and uncollectibles. The California approach has the advantage of keeping utility generation service prices in step with fluctuating market prices. However, the price does not include the non-commodity costs of providing generation service, such as customer service, accounting, legal, and an allocation of corporate overheads. As a result, competitive suppliers must compete against a utility generation service that is priced at less than the full costs of providing the service.

At some Pennsylvania utilities, "shopping credits" were set above the forecasted cost of power in order to spur the development of the retail market. This approach has worked well, and Pennsylvania quickly developed the most active retail electric market in the country. Indeed, more customers have switched to a competitive electric supplier in Pennsylvania than in all of the other U.S. states combined. However, the Pennsylvania approach does not include a mechanism for adjusting the shopping credits as wholesale market prices change. Recently, several commissions have opened proceedings or issued orders addressing this important issue.

Massachusetts: Moving to Market Prices

On June 30, the Massachusetts Department of Telecommunications and Energy issued an order regarding the procurement and pricing of default service . In Massachusetts, "default service" is the utility generation service provided to customers that are not eligible for the "standard offer." Approximately 20 percent of Massachusetts customers are on default service.

The DTE's order provides that the utilities must procure the power for default service through competitive bids to wholesale suppliers. The wholesale providers must provide an all-requirements service, and are responsible for all costs associated with being the load-serving entity at the independent system operator. The wholesale suppliers must bid a per-kilowatt-hour price for each month of the default service term.

The retail default service prices to customers will be the prices bid by the winning wholesale supplier. As a result, retail default service prices will be linked to market prices. Customers will have two pricing options: a price that is flat for six months, or a price that varies monthly. By setting the retail default service price at the price bid by the wholesale providers, the DTE has included all of the costs of the commodity in the default service price. However, the regulators rejected a request by retail suppliers to also include the non-commodity costs of providing default service.

Rhode Island: Prices Still at Rock Bottom

On June 2, the Rhode Island Public Utilities Commission issued an order regarding the pricing of last resort service . Like Massachusetts, Rhode Island has two forms of utility generation service: "standard offer"