Fortnightly Magazine - March 2004

Pricing Power in Whosesale Markets: A Risky Business

A Risky Business Utilities wrestle with how much to charge for their product.

A Risky Business Utilities wrestle with how much to charge for their product.

The trading model has many good points, including the imposition of market discipline upon both transfer prices and prices to external third parties. Trading also encourages the use of resources and capital at their market value and the cultivation of specialized skills within different business units. But applying the model, particularly to the risks of power pricing, continues to be a challenge.

Byline: 
Dr. Lawrence Haar
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Retail Risk-Based Pricing

A new approach to rate design.

A new approach to rate design.

As energy markets have evolved in the late 1990s away from cost-based transactions to competitive market-based transactions, the exposure to market risks for the variable cost of supply has substantially increased.1 Reflected in these market risks are the diminishing reserves for North American gas supply, which has created conditions of extreme volatility in gas supply. The added market risk is compounded by the sensitivity of some retail load customers to weather conditions.

Byline: 
Gary Dorris and Sean Burrows
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The Road Not Taken

Revisiting performance-based rates with endogenous market designs.

Revisiting performance-based rates with endogenous market designs.

More than 20 years ago in the pages of this publication, economist William Baumol outlined a method by which the regulation of public utility monopolies could be streamlined while simultaneously providing incentives for efficiency and productivity growth.1 Baumol proposed a productivity incentive clause that adjusts rates automatically according to the formula,

Byline: 
Francis J. Cronin and Stephen A. Motluk
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The Reliability Spending Conundrum

What is the right and prudent level of spending on service?

What is the right and prudent level of spending on service?

Times have changed for electric utilities. The combination of deregulation, mergers, major storms, and widespread outages has shifted the industry's emphasis to reliability. That wasn't always true. Even 20 years ago, the growth of load was adding so much to ratebases and driving such large rate increases that regulators spent a lot of time reviewing plans for capacity additions-and challenging utilities for over-spending.

Byline: 
Daniel O'Neill
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