Aligning retail rates with market prices: Pricing initiatives for the transition

Journal Article · Sun Jun 01 04:00:00 EDT 1997 · Electricity Journal

DOI:https://doi.org/10.1016/S1040-6190(97)80530-1· OSTI ID:543177

Phillips, B A; Fisher, N S ^[1]

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1. Northbridge Group, Waltham, MA (United States)

Conventional retail rates often send both marginal and relative price signals that are out of line with market prices, substantially increasing utility stranded cost exposure. Market-based pricing initiatives, properly structured and targeted, can align rates more closely with market prices and reduce stranded cost exposure. To date, much of the discussion within the electric industry about how the utility marketing function can prepare for retail competition has centered on ways to segment the customer base, create differentiated products and price services in a fully competitive retail market. However, the reality of retail competition is still a number of years off for most states. Moreover, some states contemplating a more rapid transition will allow customers to continue purchasing their electricity from the local utility on a traditional basis during a multi-year transition period. So for most utilities, it is still appropriate to ask: What types of utility pricing initiatives might be pursued now to help manage the transition to retail competition? The authors answer to this question stems from the view that conventional ratemaking is not at all well suited for competition. In particular, conventional rate design often causes three types of problems: (1) Marginal rates above market prices. (2) Marginal rates below market prices. (3) Relative price signals above market prices. The solution to these mismatches between conventionally designed rates and competitive market prices is to redesign utility rates so that marginal rates and the total price of optional services relative to full requirements service are more closely aligned with market prices. Economists of course have argued for many years that marginal rates should reflect marginal costs, since competitive market prices will be driven by the marginal cost of production, the pricing initiatives described in this article are in many ways an outgrowth of those ideas.

• OSTI ID: 543177
• Journal Information: Electricity Journal, Journal Name: Electricity Journal Journal Issue: 5 Vol. 10; ISSN ELEJE4; ISSN 1040-6190
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
COMPETITION
DEREGULATION
ELECTRIC POWER INDUSTRY
MARGINAL-COST PRICING
PRICING REGULATIONS
RETAIL PRICES