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Energy Retailing: Setting a Standard Offer for Every Season

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

a rate known as the "price to beat" to residential and small commercial customers. 4 These customers will be placed automatically on "price to beat" service if they don't choose another competitive supplier. Accordingly, "price to beat" functions the way utility generation service does in other states. The price to beat must reflect a 6 percent discount off bundled rates in effect as of Jan. 1, 1999.

Commission staff is conducting workshops regarding the price to beat, and plans to issue a preliminary proposal for comment. Staff is addressing issues such as the rate design for the service and the process for adjusting the "price to beat" rate for fuel price changes and other factors.

1 New York Public Service Commission, Order Instituting Proceeding, Case 00-M-0504, p. 2 (March 21, 2000).

2 Id. pp. 2-3

3 Public Utility Regulatory Act, Texas Utilities Code Annotated § 39.106.

4 Public Utility Regulatory Act, Texas Utilities Code Annotated § 39.202.

The Folly of Market Forecasting

As regulators design deregulating energy markets, many rely on price forecasts of one, two, three, or more years to establish regulated utility prices. The goal is to protect consumers. Unfortunately, this approach is guaranteed to cause major problems not only for those consumers, but also for regulated utilities.

The assumed benefit of the forecasting approach is price stability for consumers, an undeniable political benefit in the short run. However, just as none of us can forecast any market correctly (or we wouldn't be here reading or writing this), none of us can forecast energy markets correctly. That means that when the effects of our incorrect forecast become visible, we'll see negative consequences as early as this summer for the political benefit of stable prices this year or next.

Let's view these consequences hypothetically in two scenarios: too low a forecast, or too high a forecast.

Too low a forecast has the apparent benefit of providing a low price to the regulated utility's energy customers. Because real costs are higher than the regulated utility's price (remember, the forecast is too low), those costs need to be recovered somewhere: either utility shareholders will have to absorb some of those costs or ratepayers (of monopoly distribution prices) will have to pay higher rates. The likely result is a combination of these undesirable possibilities. Another result of too low prices is too little capacity being built--with the possibility of shortages during critical summer peaks leading to the unthinkable: rolling outages. A further result is lack of customer choice, because competitors are inhibited from entering the market. No competitors means no competition, which means no benefits from competition in terms of lower prices and greater innovations.

Those worst affected may be the utility shareholders themselves. Wall Street sees utilities in too-low-forecast situations buying power for more than they are selling the power. Buy high, sell low, and bear the risk of wholesale price fluctuation? Hmmm. ... The result: Investors are selling utility stocks.

Too high a forecast , interestingly enough, is hardly a problem, because competitive markets quickly work to solve the consequences (remember the