Building alternative pricing models
The electricity business is in a period of profound change. The markets are opening up, and new suppliers are jumping in, providing large industrial and commercial users with a rapidly expanding set of supply options. As this happens, the way electricity prices are traditionally set is being altered forever. Today, given the supply options available to customers, prices increasingly are being set on the basis of what service is worth. These options may include self-generation, the use of an alternative fuel, relocation to another service territory, or even retail wheeling (that is, bringing in power generated by someone else over the local utility's lines). Whatever alternative is at the margin, the effect is to change utilities and their regulators from price [open quotes]makers[close quotes] to price [open quotes]takers.[close quotes] The market, in short, is beginning to set the price itself. In this new environment, ratemaking policies and practices refined over the last 70 years or more are beginning to show their age. Rigid, cost-based prices, set without regard to market value and maintained for years on end -- irrespective of what is happening in the market -- threaten to put franchised utilities at a competitive disadvantage. And when regulated utilities fail in the market, it is not just utility shareholders and their investments that are affected -- captive customers are hurt, too. This can happen if large industrial and commercial customers bypass the system, leaving stranded costs (that is, the cost of the system built to serve the departing customers) to be borne by shareholders and remaining customers. Those customers can also experience reduced reliability if, because of insolvency, their franchised supplier cannot afford to maintain its system adequately or raise capital to build necessary increments of capacity. It is in everyone's interest to update regulatory pricing. Clearly, regulatory policies need to work with market forces, not against them.
- OSTI ID:
- 5442922
- Journal Information:
- Electric Perspectives; (United States), Vol. 18:1; ISSN 0364-474X
- Country of Publication:
- United States
- Language:
- English
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