Those in the electric industry use all manner of methods to calculate the size of generation shopping credits-the figure (sometimes referred to as the "price to beat") that is supposed to represent the stand-alone price of the bare electricity commodity that customers might otherwise buy from a competitive supplier, rather than from their traditional utility.

Some compute the credit from the bottom up, adding the individual cost components of generation supply (should that include marketing expenses as well?), while others take the total traditional utility bill and try to back off the various costs, one by one, that don't have anything to do with generation.

Yet even when the resulting figure seems to fall way below the recognized spot market power price, as often occurs during the peak summer months, it can prove difficult for suppliers to convince regulators to increase the credit. Utilities also have been known to ask for a seasonally adjusted credit, to discourage customers from churning their accounts back and forth between utility and competitor.

Consider the recent case involving New York State Electric & Gas Co. Everyone conceded that NYSEG's 3.7 cent credit fell short of summer spot prices, but regulators said they wouldn't bump up the credit to 5 cents, as requested by Advantage Energy, the unregulated supplier, since the commission found no proof that the current credit strayed from the true wholesale price.

To cut through the clutter, solicited the aid of Henry Yoshimura, senior manager of economics and public policy and staff at XENERGY Inc., an energy services and consulting firm, who computed the table of generation credits shown on p. 54, based on distribution company tariffs, filings with regulatory agencies, and state commission orders and website materials.

"Most of these are determined by looking at tariffs and then calculating from the tariff what the shopping credit would be if this customer were purchasing from a competitive supplier." Bear in mind, of course, that in a given territory, there might be a couple dozen tariffs. Compound that with the fact that energy charges can be time-differentiated, say, between peak and off-peak, and sometimes even seasonally differentiated, and the puzzle gets even more complex.

"One of the things we tried to do in the table is reduce the shopping credit to a single cents per kilowatt-hour number so they're comparable," Yoshimura says.

Arizona: One State, Three Theories

One can find different approaches to the shopping credit puzzle even within a single state. Arizona offers a good example, where the utilities, Arizona Public Service, Salt River Project, and Tucson Electric Power (not shown in the table), each follow different methods for representing the generation credit in their respective tariffs.

For APS, the generation credit is a derivative value that is calculated by backing out the "direct access rate"—the rate that APS charges to customers taking power from a competitive supplier—from the utility's standard offer rate billed to default customers, which includes various cost components, including demand and energy charges, plus an account ("customer") charge. The backout method is used because APS has not broken down, or "unbundled," its default rate into functional components (e.g., generation, transmission, distribution, etc.). Thus, for APS customers, the shopping credit is somewhat opaque. The value seems not so much a product of a transparent spot market, as dependent on how you calculate the wires and account charges that are subtracted from the total bill.

By contrast, the Salt River River Project has unbundled all retail charges in its service territory, from metering and billing to generation and ancillary services, making it easy to pinpoint what the shopping credit would be, provided you understand something about the load profile of your targeted customer or customer group. XENERGY's Yoshimura explains further.

"[I]n order to calculate a cents per-kilowatt-hour shopping credit, you have to basically assume a customer. Assume some billing determinants and then calculate it through, and then divide by kilowatt-hour and come up with a cents per kilowatt-hour number.... You have to assume a customer that has a certain demand and energy use. [F]rom that information you then determine... which tariff I'm going to use."

And yet Tucson Electric Power offers still a third method, according to Yoshimura. He notes that TEP's generation credit is based on a market generation benchmark that fluctuates with actual market prices. The formula takes into account the electricity futures prices for the Palo Verde (Ariz.) contract operated by the New York Mercantile Exchange, plus on- and off-peak price differentials reflected in the California Power Exchange, and class-specific losses. In addition, Tucson Electric includes a fixed "adder" in its generation credit, reflecting additional retail costs such as marketing, customer care, and overhead expenses.

In some cases, in fact, XENERGY computes shopping credits by taking the most typical tariff and then looking at data on a company-by-company basis for average use of commercial and industrial customers per month—information available from the U.S. Energy Information Administration.

The Bicoastal Spot Market Approach

The Salt River and APS examples are fairly typical of methods used in other states—but not California and New York, where the shopping credit is benchmarked against the monthly power exchange price, according to Yoshimura.

"Of course, you don't know your shopping credit ahead of time," Yoshimura explains, pointing out a key feature of the New York and California markets. "That's the difference."

And what of the average residential customer, who doesn't have time or inclination to track the spot markets from hour to hour? "They don't even know their usage," Yoshimura says.

Another disadvantage of benchmarking against wholesale prices, adds Yoshimura, is that it creates very little room for a retailer to be able to beat the standard offer, especially given a marketer's overhead expenses.

"If it's being based directly on the wholesale market price, where's the room for the middle person, the retailer? There's very little room, because the only way a retailer can beat the market price is by signing some bilateral wholesale deal to keep their wholesale power cost below that of the PX."

Yoshimura blames California's shopping credit method at least partially for the state's anemic switch rate.

Illinois: Marketers and Utilities Unite?

What about Illinois, where state regulators decided in April to replace the state's unique "neutral fact finder" method with one in which the price is based directly on a market index?

What is ironic about the Illinois case, Yoshimura says, is that a common interest emerged between suppliers and utilities. The supplier naturally fretted that it couldn't beat the "power purchase option" (for all intents and purposes, the standard offer), but the utility faced its own problem: It would be forced to serve customers at the preset low price, and the customers, to the chagrin of the utility, would be unlikely to leave the utility at such low prices—an even graver problem for the utility that has divested much of its generation.

"So there's a funny synergy there," Yoshimura observes.

Finally, there is the most straightforward of methods, such as what is found in Massachusetts and Rhode Island, where a dollars per kilowatt-hour clearly is stated. Those states, in fact, employ the most simplified form of this method by setting the same shopping credit for every class. Even this simplified approach, however, presents problems because the average cost to serve a customer with a flat load profile (that is, a load without peaks and valleys) on average is much lower than a customer with a profile that spikes—even with the same usage, since suppliers must buy a lot more capacity for them.

And since residential customers are more costly to serve because they tend to have a variable load shape, whereas industrial customers tend to be more flat over the course of a day, the end result is that it potentially encourages the industrial customers to switch while discouraging residential customers to do so. "Presumably, what that does is that the larger users with the real flat load shapes are going to be advantaged by that," Yoshimura says.

To Yoshimura, no matter the method, the shopping credit skews the very concept of retail choice. "In one sense, [the shopping credit] is a benchmark, but as long as the underlying cost is moving, from hour to hour and from season to season, that shopping credit is going to cause all sorts of market problems.

"Whatever that design of the price of the default service, that kind of sets the pace for all suppliers. ... It's not a truly open market where people are making deals and creating new deals that try to address every consumer's different needs. What it turns out to be is a market in which everyone's trying to beat this one thing that's being supplied by the utility."

But whatever approach is taken on the matter, shopping credits are the hand that the players have been dealt.

"Every time I talk to suppliers, they're always complaining about one or some other aspect of whatever the default pricing is, which tells me is that there's something about that default which is setting the pace for what they have to do in order to beat it. It is setting the game."

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