With competition looming, electric utilities increasingly resort to price discounts, both to retain customers and to alleviate some of the pressure to introduce retail competition. Performance-based ratemaking (PBR), which allows utilities greater flexibility in offering price discounts, is emerging as an integral component of many restructuring proposals.
However, flexible pricing can create inequity among ratepayers. Thus, regulators should allow flexible prices only when they yield net benefits for all customers. One way to increase the potential for net benefits to all customers is to encourage utilities to minimize the number and size of price discounts by requiring utility stockholders to absorb a significant portion of the lost revenues created from those discounts.
Flexible prices also mark one way of addressing strandable costs (em even though they are rarely thought of in that way.1 By receiving discounts, customers in effect bypass a share of strandable costs. Thus, as the electric industry moves toward greater competition,
regulators should provide all customers with price discounts by explicitly identifying strandable costs, and requiring that they be shared between ratepayers and stockholders.
The equity issue raised by price discounts is not as simple as it first appears. Some price discounts can produce net benefits to all ratepayers, and can therefore be considered in the public interest.