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Standard-Offer Service: Beauty or Beast?

Fortnightly Magazine - September 2008

BGE also has bid into the auction a substantial amount of demand-side resources under its new PeakRewards program, which provides credits to participating customers for the control of central air conditioning under various cycling strategies using either a smart thermostat or radio-controlled switch.

The issues raised by the Maryland PSC et al. complaint will need to be addressed fully and might result in the identification of some areas in which market rules can be improved. However, concerns about the effectiveness of the competitive wholesale market will not be mitigated by requiring LDCs to build power plants or sign long-term contracts. Such an approach may have substantial unintended consequences. First and foremost, the regulatory landscape is strewn with the wrecks of well-intentioned policies aimed at providing administrative guidance for the construction of power plants ( e.g., uneconomic PURPA contracts) or purchase-power agreements ( e.g., contracts signed after the California electricity crises). Second, local initiatives aimed at requiring LDCs to build power plants or sign long-term contracts will distort current markets, create uncertainty and discourage construction of merchant generation, and place risks associated with generation supply back onto ratepayers. Under traditional regulation, consumers bore the risk for faulty investments (including the overbuilding of expensive capacity), instead of the utilities and their shareholders. Much of the momentum for the change to the reliance on competitive wholesale markets directly resulted from the perceived failure of traditional regulation. Perhaps now is not the time to turn back the clock and re-regulate.

Retail Choice vs. Standard-Offer Service

The choice is simple: Do we allow wholesale and retail markets to continue to develop? Do we want to allow investors to evaluate market conditions, expected future prices and take appropriate risks in choosing the best possible options for the construction of new generation? Or do we simply want to assume that rising prices for electricity are the result of the so-called failure of deregulation, and that the local regulatory authorities are better suited than the regional competitive wholesale market to ensure there is adequate supply at reasonable prices?

Given appropriate and diligent market monitoring to ensure that rules are in place and enforced so that the regional wholesale market is operating in a workably competitive manner, the competitive market will yield the best possible price. Mandated building or contracting for long-term supplies is not the way to achieve efficient and reliable power supplies.

Competition will encourage investment in generation capacity, will stimulate innovation and the deployment of new technologies, will foster supply diversity where alternative technologies and fuels are economically viable and most importantly will place risks and rewards for market decisions on investors, leading to efficient market outcomes. The competitive wholesale market will provide the best prices to utilities as standard-offer service providers, as well as to alternative competitive retail-electricity suppliers.

For some customers, retail choice is nearly the only option. BGE’s electric customers who have established a PJM capacity peak-load contribution of 600 kW or greater are not able to obtain a fixed price for standard-offer service. Rather, the only backstop option available is an hourly priced service.