A look at the various approaches regulators have taken to pricing energy in competitive markets, and how some are rethinking those plans.

The states that have implemented electric competition have taken very different approaches to the pricing 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" and "last resort service" for customers that are not eligible for standard offer.

Prior to the June order, both standard offer and last resort service were priced at 3.8 cents per kilowatt-hour. However, market prices are far higher. In April, the state's largest electric distribution company entered into a six-month contract for last resort service supply at monthly prices ranging from 3.8 cents in May, to 6.5 cents in June, and 8 to 10 cents in July and August.

However, the PUC chose to hold last resort service prices well below market prices. For non-residential customers, it set last resort service prices at 2 to 3 cents below the utility's cost of power. For residential customers, it set last resort prices at 3 to 6 cents below the utility's power cost.

New York: Force Utilities to Exit Sales?

The New York Public Service Commission has opened a proceeding to consider a range of issues relating to the further development of the competitive retail electric and gas markets (Case 00-M-0504). Electric competition is well underway in New York. In this proceeding, the PSC will "refine [its] concept of the mature competitive retail energy markets (especially the future role of the regulated utilities) and ... identify and remove obstacles to its achievement."¹

Among the issues regulators are considering is a different approach to pricing utility generation service: removing the problem altogether by requiring the regulated utilities to exit the business of selling electricity. The PSC has adopted a similar policy for the gas market. It described the advantages as follows: "Avoid the market-limiting effects of the LDC's dominant-provider position; provide a level playing field for gas supply marketers; place downward pressure on prices; and eliminate the regulation of what would become a competitive function."²

If the utility stops selling electricity altogether, it is no longer necessary to struggle with the pricing of utility generation service. However, it becomes necessary to designate another entity to serve as the provider of last resort, and to determine how that service will be priced. These and other issues will be considered in the New York proceeding.

Texas: Competitive Bidding for Last Resort Service?

The Public Utility Commission of Texas has two proceedings underway relating to the pricing of utility generation service.

The first concerns the establishment of the Provider of Last Resort, or POLR The Texas electric restructuring act provides that competitive retail electric suppliers--and not the regulated distribution companies--will serve as the providers of last resort. The statute requires the PUC to designate those providers, and requires POLR providers to offer a standard retail service package to any customer that requests it.³

The PUC staff has issued a draft rule regarding POLR. The draft rule provides that the POLR providers will be selected through a competitive bidding process that will also determine the rate for POLR service. The staff is requesting comments on this and other aspects of the draft rule.

The second Texas proceeding concerns the "price to beat" . The Texas restructuring act requires competitive affiliates of the regulated utilities to offer 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, , 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.

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