Energy Retailing: Setting a Standard Offer for Every Season

 

For deregulation to work, consumers must see the real price-- including all utility costs.

Summer is back, and with it, concerns that not enough power will be available to meet critical peak demands in the Northeast, Mid-Atlantic, Midwest, and California. Why potential shortages when capital is abundant and deregulation and competition are supposed to make the industry work better? Because regulators, with the best of intentions, are setting the wrong prices for power sold by the regulated utilities in competitive markets.

Establishing electricity and gas prices charged by the regulated utilities has been a key consideration for policymakers in deregulating states. Set properly, such prices, referred to as "standard offers," "prices to beat," or "default prices," enable consumers to make choices that force electricity providers to become more efficient and offer better service. Properly set prices also protect regulated utilities. Set improperly, prices inhibit competition and encourage consumers to make uneconomic choices about when to buy power and from whom. Those choices can have dramatic consequences, including lack of sufficient generating capacity during summer peaks.

Prices in free markets reflect the full cost of a company offering a product or service, including fluctuations in wholesale costs. "Full cost" includes three items: