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<td width="75%" valign="top"><strong><u><font face="Arial">Tales from the Front</font></u><p><strong><big><big><big><font face="Arial">THE UNDERMINING OF RETAIL ACCESS</font></big></big></big></p>
<p ALIGN="JUSTIFY"><font face="Arial">by Scott Spiewak<br>
</font><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine: 03/98</em>)</font></p>
<p ALIGN="JUSTIFY"></strong></strong><font face="Arial">It is said that happy families are
much alike, but that there is infinite variety in dysfunctional families. The same is true
with retail open access programs. Workable programs have certain elements in common --
reasonably-priced access, workable terms and procedures, and a competitive marketplace.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Unworkable programs are much more interesting. They
may have nothing in common with each other, and can provide the imaginative with unlimited
opportunities to create new and innovative mechanisms for undermining open access.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In the spirit of inclusiveness, we at PMA Online
invite you, our readers, to report the effective, entertaining and frustrating means which
you have encountered for supporting continued monopolies and high prices throughout the
U.S. E-mail your anecdotes to Scott Spiewak, <a href="mailto:[email protected]">[email protected]</a>.
If we get enough, we will publish a regular column.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">For our first look at this subject, we will review
three methods for undermining retail access programs: (1) artificial costs; (2) procedural
and implementation delays; and (3) market structure problems. (Please feel free to suggest
additional categories and subcategories.)</font></p>
<p ALIGN="JUSTIFY"> </p>
<p ALIGN="JUSTIFY"><strong><font face="Arial">I. ARTIFICIAL COSTS</font></strong><u></p>
<p ALIGN="JUSTIFY"><strong><font face="Arial">Basic Principles of Using Artificial Costs
to Undermine Retail Access</font></strong></u></p>
<p ALIGN="JUSTIFY"><font face="Arial">If customers find that they cannot save a
significant amount of money by purchasing from a supplier other than their local utility,
they will not choose to buy power in the open market and open access competition will
never happen.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">What is considered a "significant" savings
of money, however, will vary among customers. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Residential customers generally must see larger
percentage savings than commercial or industrial customers to make customer choice
worthwhile to them, because the absolute amounts of money at stake for them are smaller.
For example, a residential customer saving 5% is only saving (on average) $30 per year.
Given the time involved in evaluating alternative suppliers, and reviewing supplier'
contracts, added to the customer's concerns about reliability, this small saving is rarely
worthwhile.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">A commercial customer saving 5%, in comparison, may
save $5000 per year -- more than enough to cover the transaction costs involved in
selecting a new supplier. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">If customers merely had to pay legitimate
distribution fees, virtually all of them, from the largest to the smallest, would see
substantial savings from an open market. Thus far, most utilities have been able to
prevent the growth of a truly competitive market by factoring various "costs" in
to their pricing. In this way, by keeping customer savings low, the utilities achieve two
ends: they minimize the revenue losses of competition and give credence to their argument
that only larger users benefit from deregulation. This can in turn create a political
backlash against deregulation, which may provide years more of monopoly profits.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Here are some of the "costs" or charges
imposed by utilities which render a competitive market illusory:</font></p>
<ol TYPE="A">
<li><font face="Arial"><strong>Stranded Investment Charges.</strong> By far the most
important category of charge imposed on customers is the "stranded investment
charge", also called "transition" charges. These fees are unrelated to
services provided to the customer by the utility. The largest component supports debt
service for nuclear powerplants. Significant amounts represent above-market power purchase
and fuel purchase agreements. The bottom line is that the customer is free to buy power
from anyone they wish, but they still have to pay the local utility for <u>its</u>
powerplants-- sort of like telling you that you can buy apples or oranges, but either way,
you have to pay for the apples.</font></li>
<li><font face="Arial"><strong>Onerous penalties.</strong> In the "real world",
penalties which have no relationship to damages caused are unenforceable. In the
semi-demi-regulated worked of open access programs, utilities are sometimes permitted to
assess penalties so wild that no supplier would risk incurring them. In some cases,
utilities have imposed onerous penalties on marketers for trivial matters. For example,
one utility's policy is to turn back energy at its border if two digits (in a series of
seven) are reversed in the contract nomination, even when it is evident which schedule the
supplies are to fulfill. The utility then assesses exorbitant penalties for failure to
meet delivery requirements.</font></li>
<li><font face="Arial"><strong>Excessive transmission charges. </strong>Some utilities, in
preparation for competitive markets, have aggressively moved expenses off their generation
budgets and onto their transmission budgets. One way this is done is to simultaneously
extend depreciation periods for transmission lines, while reducing them for generation
assets. Others include imposing high "congestion" fees or access fees on
customers of non-utility suppliers. </font></li>
<li><font face="Arial"><strong>Meter requirements.</strong> In some cases, utilities require
that a customer switching to a new supplier install a new meter -- but not just any meter.
It must be a top-of-the-line, time-of-use, automatic meter reading device, with real-time
telecommunications linkage to the utility-designated meter-servicing organization. This
equipment is very high-tech, extremely expensive, and of course, only necessary if you
choose a supplier other than the local utility.</font></li>
<li><font face="Arial"><strong>Tracking and product mix requirements.</strong> Several
jurisdictions require marketers to disclose the sources of the electricity they are
selling before the marketer enters into a contract with the customer. Other jurisdictions
want to require that so-called "green power" be a part of the mix. In the real
world of markets, actual sources of supply are selected well after the customer has signed
with a supplier. Energy is a commodity. It is not normal commercial practice to track
commodities. Imagine that there was a requirement that each loaf of bread have a sticker
on it saying where the wheat used in it was grown. Tough to do. The wheat was mixed in
grain silos, railcars and bakeries a hundred times on the way to market. The same is true
of electricity. Yes, you <i>can</i> track it, but this is an expensive process which would
only have the effect of driving the cost of power up. And again, utilities only seek to
have this tracking requirement imposed on power purchased from the non-utility supplier.
Utilities can't even tell you a price ahead of time, much less the source of the power
they are selling.</font></li>
</ol>
<p ALIGN="JUSTIFY"> </p>
<p ALIGN="JUSTIFY"><strong><font face="Arial">II. PROCEDURAL AND IMPLEMENTATION DELAYS</font></strong></p>
<p ALIGN="JUSTIFY"><font face="Arial">U.S. consumers spend <u>over half a billion dollars
every day</u> on electricity. Prices in an open market would readily fall by 40%. That is
$200 million every single day which utilities would lose if they just rolled over and let
their "ratepayers" buy power on the same open market they use. Think what a
budget can be justified for lobbying, doing favors, buying constituencies and generally
walking around town with cash to win friends and influence people. Every day true customer
choice can be delayed is another $200 million in the pockets of the monopolies-- a strong
motive for procrastination.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Here are some examples of procedural and
implementation delaying tactics:</font></p>
<ol TYPE="A">
<li><font face="Arial"><strong>Abuse of the administrative process. </strong>The process for
establishing open access can, and has been drawn out for years in interminable hearings,
study groups and proceedings. Opponents of open access argue that the states must be
careful before simply permitting ignorant customers to select a vendor. There should be
weekly, perhaps daily meetings to discuss all the "issues" created by customer
choice. These are attended by many well-paid lawyers, whose job it is to find even more
issues, so that the process can go on and on.</font></li>
<li><font face="Arial"><strong>Litigation by utilities to delay open access.</strong>
Litigation is threatened regularly by utilities seeking to delay true competition In New
Hampshire, a utility obtained an injunction against the local public utilities commission
to stop it from permitting competition. In Massachusetts, one legislator justified his
rolling over to utility demands for "transition charges" to the fear of
litigation-- "we have to know how far we can push them before they will go to
court." In Pennsylvania, the immediate response of PECO was to threaten suit when the
commission failed to approve an open access plan to their liking, noting that the <i>commission</i>
was therefore delaying customer benefits.</font></li>
<li><font face="Arial"><strong>Legislative participation.</strong> Legislators often demand
a role in deregulation. Many times such a role is required. However, with legislative
participation the forces of politics <i>really</i> come into play. For example, the best
way to appeal to your individual constituents is to support customer choice. However,
legislation has a much better chance of being approved if the big, monopoly utilities are
behind it. (Besides, utilities have always been substantial campaign contributors.) When
this game of juggling interests begins, legislation grinds slowly to a halt. And the
process of deregulation is successfully delayed.</font></li>
<li><font face="Arial"><strong>Certification delays.</strong> Even after markets are open,
marketers typically have to be licensed by the state and/or certified by the utility to
operate on particular systems. Delays in certification can cause the loss of entire sales
seasons. Aggressive marketers may default on large numbers of contracts, because of delays
in processing paperwork or because forms have not been designed. Even suppliers with well
known -- and respected -- "household names" may find their certification delayed
pending lengthy "credit checks."</font></li>
<li><font face="Arial"><strong>Slow processing of information. </strong>The first step in
the vendor selection process is obtaining a price quote. But customers can not be given
price quotes until vendors receive certain customer information -- such as load data --
from local utilities. This information is generally <u>only</u> available from the
utility. Vendors report that utilities provide the information at a snails pace. In an
open market, utilities will receive hundreds of thousands of these information requests.
So if the utilities stay with outdated, slow and inefficient mainframe systems, they can
effectively stall the open access process. These information systems are also expensive
and, as such, perfect for justifying large data recovery fees.</font></li>
</ol>
<p> </p>
<p ALIGN="JUSTIFY"><strong><font face="Arial">III. STRUCTURAL BARRIERS TO COMPETITION</font></strong></p>
<p ALIGN="JUSTIFY"><font face="Arial">If delays and unworkable fees and costs do not
render open access markets nonviable, market structure problems may do the job. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Here are some examples:</font></p>
<ol TYPE="A">
<li><font face="Arial"><strong>Utility and Utility-affiliate preferences.</strong> If you
find a utility with a marketing affiliate which has brilliantly garnered market share in
its parent's territories, but seems hopelessly inept elsewhere, you have probably found
yourself a company which has mastered the art of preferential treatment.</font></li>
<p ALIGN="JUSTIFY"><font face="Arial"><br>
The number of ways a utility can engage in preferential treatment toward its affiliate are
legion. They include: </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">(1) Lending the affiliate the parent's name or
advertising the relationship between parent and affiliate. This is typically done in order
to suggest to customers that the marketing affiliate is more reliable than the new players
in their market. Although reliability is not a real issue (the regulated arm of the local
utility guarantees delivery), studies show that it is perceived by customers to be so. A
utility can take advantage of this by noting that the affiliate is the only company
related to their old, <i>reliable</i> service provider; </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">(2) Cross-subsidizing services by providing
inexpensive personnel, office space, electricity or transmission service, or causing
vendors of those services to offer the affiliate low cost services in exchange for
contracts with the parent. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">(3) Providing special privileges, such as access to
information. This can include providing customer load data on a preferential basis, e.g.,
getting load data to the affiliate overnight, while others wait for weeks. The utility can
also leak information to the affiliate on the timing and location for open access pilot
programs, or allow personnel from the affiliate to preview tariffs before they become
generally available, or cycle personnel from the parent to the affiliate and back again,
so they can memorize customer information and take it with them to the unregulated
affiliate.</font></p>
<li><font face="Arial"><strong>Market power concentration.</strong> Even after deregulation,
market power concentration can be sustained. For example, transmission constraints in a
given region coupled with a lack of effective competition by suppliers within the region
can be a boon for the local utility -- effectively giving it a monopoly in a deregulated
environment. Also, the use of such devices as "official" power pools will
restrict open market access. California is working to put a "poolco" in place
which may prove to be a safe and effective means of avoiding open markets. Utility
restructuring also provides opportunities to garner the benefits of monopoly in a
competitive environment. The utility which is selling off its generating units can sell
them as a block, to a single buyer, so that market power can be maintained by the buyer.
The utility receives a premium on the sale, equal to the value of the monopoly power
transferred, and years of additional proceedings will be required to break up market power
concentration in the hands of the unregulated purchaser. Pioneered by the New England
Electric System, Boston Edison appears to be taking the same approach.</font></li>
<li><font face="Arial"><strong>Fly-by-night competitors.</strong> Unethical players in the
market can poison the waters of competition by creating distrust. Such distrust inures to
the benefit of the local utility. Utilities can actually encourage these unethical market
participants by lobbying for fully open markets, with no bonding requirements, no
effective consumer protection measures, and no means for the customer to distinguish
qualified from unqualified suppliers. The more customer confusion, the better. A customer
in doubt, is a customer who is likely to stay with its local utility.</font></li>
</ol>
<p ALIGN="JUSTIFY"><strong><font face="Arial">IV. Conclusion</font></strong></p>
<p ALIGN="JUSTIFY"><font face="Arial">Only some of the very effective ways to suppress
competition are described herein: (1) High costs imposed on customers selecting
alternative suppliers; (2) Delays in implementation and (3) Structural barriers to
competition.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">If you have seen other approaches used to undermine
markets, please write in and tell us-- we'll publish the best of them. Send your e-mails
to Scott Spiewak at <a href="mailto:[email protected]">[email protected]</a>.</font></td>
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