Financial News

Fortnightly Magazine - January 1 1995
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Retail wheeling has been repeatedly condemned by opponents who claim that it would cause rate discrimination between customer classes. They allege that it would unfairly reduce rates for large customers, while raising them for small ones. But discriminatory rate structures already result from the selective discounts that utilities grant their large customers. Ironically, the easiest way to eliminate this discrimination is to make retail wheeling available to all customers.

Traditional cost-of-service ratemaking structures rates to avoid discrimination between customer classes. Regulators determine a utility's total revenue requirement and then allocate it across customer classes according to the costs of serving the various classes. The resulting rate structure is nondiscriminatory in that rate differentials between classes of service are tied to cost differentials.

Competition will undermine the structure of cost-of-service rates in most but not all circumstances. For instance, competition would not affect the rates of a utility whose cost-of-service rates equal those that would exist under competition (em that is, whose rate for each class of customers matches the competitive rate. Permitting retail wheeling in such a case would have no effect on rates, and thus cause no discrimination. This result would be true whether retail wheeling was extended to all or only some customers.

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