THE ROAD TO RETAIL COMPETITION IS A LONG ONE. HAVING realized that, utility management has quelled its initial panic and has begun to concentrate on longer-term objectives. For instance, how much market share am I likely to lose during competition's early stages? And what prices can I charge to various customer classes without incurring a loss in market share?
The answer could affect decisions about future load, asset divestiture and competitive strategies.
Quantitative measurement of future load in a competitive world relies on methods that capture customer sensitivity to changing prices. %n1%n Estimates of the price elasticity of demand, defined as the percentage change in demand for electric power caused by a given percentage change in the price of power, can be used to formulate generation market share. The problem might be characterized in this way: How much market share would the incumbent utility lose to competition if it should continue to charge regulated rates while competitors were free to enter and drive prices down toward the variable cost of producing electricity?
We know, for example, that even under regulated rates customers still have some ability to substitute for energy purchased from their electric provider. For instance, customers could always choose to cut their electricity consumption if prices rise. (This ability to curtail consumption is reflected in studies that estimate negative demand elasticities for electric power. %n2%n) Yet while customers have never been completely at the mercy of the incumbent provider, it is indisputable that their choices will expand dramatically under retail competition.