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.

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.

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, spiewak1@soho.ios.com. If we get enough, we will publish a regular column.

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.)

I. ARTIFICIAL COSTS

Basic Principles of Using Artificial Costs to Undermine Retail Access

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.

What is considered a "significant" savings of money, however, will vary among customers.

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.

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.

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.

Here are some of the "costs" or charges imposed by utilities which render a competitive market illusory:

1. Stranded Investment Charges. 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 its powerplants-- sort of like telling you that you can buy apples or oranges, but either way, you have to pay for the apples.
2. Onerous penalties. 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.
3. Excessive transmission charges. 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.
4. Meter requirements. 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.
5. Tracking and product mix requirements. 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 can 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.

II. PROCEDURAL AND IMPLEMENTATION DELAYS

U.S. consumers spend over half a billion dollars every day 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.

Here are some examples of procedural and implementation delaying tactics:

1. Abuse of the administrative process. 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.
2. Litigation by utilities to delay open access. 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 commission was therefore delaying customer benefits.
3. Legislative participation. Legislators often demand a role in deregulation. Many times such a role is required. However, with legislative participation the forces of politics really 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.
4. Certification delays. 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."
5. Slow processing of information. 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 only 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.

III. STRUCTURAL BARRIERS TO COMPETITION

If delays and unworkable fees and costs do not render open access markets nonviable, market structure problems may do the job.

Here are some examples:

1. Utility and Utility-affiliate preferences. 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.


The number of ways a utility can engage in preferential treatment toward its affiliate are legion. They include:

(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, reliable service provider;

(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.

(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.

2. Market power concentration. 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.
3. Fly-by-night competitors. 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.

IV. Conclusion

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.

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 spiewak1@soho.ios.com.