Competition and Consumer

Protection Perspectives 

on Electric Power 

Regulatory Reform: 

Focus on Retail Competition

 Report by the Federal Trade Commission Staff

September 2001
FEDERAL TRADE COMMISSION

TIMOTHY J. MURIS Chairman

SHEILA F. ANTHONY Commissioner

MOZELLE W. THOMPSON Commissioner

ORSON SWINDLE Commissioner

THOMAS B. LEARY Commissioner

Joseph J. Simons Director, Bureau of Competition

J. Howard Beales, III Director, Bureau of Consumer Protection

David T. Scheffman Director, Bureau of Economics

William E. Kovacic General Counsel

Rosemarie Straight Executive Director

This Report represents the views of the staff of the Federal Trade Commission. It does not

necessarily represent the views of the Federal Trade Commission or any Commissioner.

Report Contributors:

Susan DeSanti, Deputy General Counsel for Policy Studies

Michael Wroblewski, Assistant General Counsel for Policy Studies

John Hilke, Bureau of Economics, Electricity Project Coordinator

Denis Breen, Bureau of Economics, Assistant Director for Policy Analysis

Susan Braman, Bureau of Economics, Deputy Assistant Director for Consumer Protection

Randi Boorstein, Bureau of Economics

Sandy Lin, Bureau of Economics

Joni Lupovitz, Bureau of Consumer Protection, Assistant Director for Enforcement

Hampton Newsome, Bureau of Consumer Protection

Elizabeth Vail, Bureau of Competition

Inquiries concerning this report should be directed to:

Michael Wroblewski (202) 326-2155 (Office of General Counsel, Policy Studies)

John Hilke (303) 844-3565 (Bureau of Economics)

Joni Lupovitz (202) 326-3743 (Bureau of Consumer Protection)

Acknowledgments:

FTC Staff is grateful for the contributions of time and expertise by members and staff at

the 12 state public utility commissions whose states’ retail competition plans are analyzed in

this Report. 
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Table of Contents

EXECUTIVE SUMMARY ...................................................... i

CHAPTER I SETTING THE STAGE

A. Underlying Technological and Regulatory Changes in the 

Electricity Industry ............................................... 1

B. Competition, in General, Tends to Produce Price and Nonprice 

Benefits to Customers ............................................. 4

C. Retail Competition Policy Issues ................................... 6

D. Wholesale Market Issues .......................................... 9

CHAPTER II COMPETITIVE WHOLESALE MARKETS ARE IMPORTANT TO 

 EFFECTIVE RETAIL COMPETITION PROGRAMS

A. Introduction and Summary ....................................... 13

B. Effective Operation and Expansion of the Transmission Grid 

Can Expand Wholesale Electricity Markets ......................... 14

1. Independent Operation of the Transmission Grid is 

Necessary for Effective Wholesale Competition ............... 16

a. Current ISOs Have Assisted the Development of 

Wholesale Competition .............................. 17

b. Market Design and Congestion Pricing Must Be 

Addressed ......................................... 18

2. Efficient, Comparable Pricing of Transmission Services 

Enables Markets to Work More Effectively ................... 20

3. Regional Transmission Siting ............................... 22

C. Increased Generation Capacity Also May Address Market Power

Concerns ....................................................... 25

1. Generation Siting and Adequate Generation Capacity .......... 26
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

2. The Special Case of Distributed Resources (Generation)

Owned by Retail Customers ................................ 28

3. Reserve Requirements ..................................... 29

D. Conclusions .................................................... 31

CHAPTER III SUPPLY AND DEMAND: THE SOUND OF ONE HAND CLAPPING

A. Introduction and Summary: Retail and Wholesale Customer 

Response Is Diluted Or Missing From Electricity Markets ............ 33

B. Policies That Increase Transparency of Market Signals in Retail 

Electricity Markets Are Vital to Effective Competition ................ 34

C. States That Have Implemented Retail Competition Programs Have 

Not Yet Permitted Retail or Wholesale Customers to Participate

Effectively in Wholesale Electricity Markets ........................ 37

D. Conclusion ..................................................... 41

CHAPTER IV STANDARD OFFER SERVICE PRICING HAS A SUBSTANTIAL

 EFFECT ON ENTRY OF NEW RETAIL SUPPLIERS

A. Introduction and Summary ....................................... 43

B. The Price of Standard Offer Service Can Significantly Affect Entry ..... 45

1. Policy Elements Affect the Pricing of Standard Offer Service .... 46

a. Pass Through of Fuel and Other Costs of Generation ..... 47

b. Stranded Cost Recovery .............................. 51

c. Initial Rate Reductions ............................... 55

C. States Should Consider How to Move Beyond Standard Offer 

Service to Allow Competitive Markets to Develop ................... 56

D. Alternative Suppliers and Standard Offer Service Providers Should 

Be Able to Acquire Wholesale Electricity Through A Variety of 

Market-Based Means ............................................ 58
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

1. Providers of Standard Offer Service Need to Use Varying 

Methods to Secure Necessary Electric Power .................. 59

2. Jump Starts to Competition ................................. 60

E. Conclusions .................................................... 61

CHAPTER V CONSUMER PROTECTION POLICIES AND RETAIL ELECTRICITY

 COMPETITION PROGRAMS

A. Introduction and Summary ....................................... 63

B. Minimizing Direct Entry Costs Associated with Desired Consumer

Protections ..................................................... 64

1. Supplier Licensing ........................................ 65

2. Customer Switching and Protecting Residential Customers 

from “Slamming” and “Cramming” in Competitive Retail 

Markets .................................................. 66

C. Consumer Information ........................................... 67

1. Advertising .............................................. 67

2. Standardized Labeling ..................................... 68

3. Consumer Education ...................................... 72

D. Restrictions on Distribution Utilities’ Behavior ...................... 73

1. Cross-Subsidization ....................................... 73

2. Discrimination in Access to Distribution Lines, Customer 

Referrals and Customer Information ......................... 73

3. Policy Approaches ........................................ 74

4. Affiliate Use of the Distribution Utility’s Name and Logo ....... 74

E. Other Consumer Issues .......................................... 76
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

1. Customer Aggregation ..................................... 76

2. Public Benefit Programs .................................... 77

F. Conclusions .................................................... 78

APPENDIX A – STATE PROFILES

Arizona ............................................................. A1

California ........................................................... A9

Illinois ............................................................. A19

Maine ............................................................. A29

Maryland .......................................................... A43

Massachusetts ...................................................... A55

Michigan ........................................................... A67

New Jersey ......................................................... A75

New York .......................................................... A87

Ohio ............................................................... A97

Pennsylvania ...................................................... A105

Texas ............................................................. A119

APPENDIX B – COMMENTS AND ABBREVIATIONS
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Competition and Consumer Protection Perspectives on Electric 

Power Regulatory Reform: Focus on Retail Competition

Executive Summary

In the 1990's, both the federal government and

the states sought to spur competition in

electricity generation and retail marketing

services; the transmission and distribution of

electricity remains, and is expected to remain,

regulated. The Federal Energy Regulatory

Commission(FERC) has overseen, and continues

to regulate, changes at the wholesale level

designed to facilitatecompetitive wholesale sales

of electricity generation; some of these changes

involve regulating transmission in ways that

allow electricity to be transmitted from distant

generators. Various states – 24 in all – similarly

have decided to move toward competition in

electricity supply at the retail level. Using

different methods, and working with different

time frames, the states developed plans that will

eventually allow all customers – from large

industrial customers to individual households –

to choose their supplier of electricity services.

These changes have moved the provision of

electricity generation and marketing services in

a direction opposite from the traditional system

in which vertically integrated monopolists

provided all electricity services in their

franchised, local geographic area. 

In this report, the Commission staff updates the

July 2000 FederalTrade Commission Staff Report

to examine which features of various state retail

electricity programs appear to have resulted in

consumer benefits and which have not. In

addition, this report highlights certain

jurisdictional limitations on the states’ authority

to design successful retail competition plans and

discusses whether there is a need for federal

legislative or regulatory action in this regard.

The report responds to the request to update the

FTC July 2000 Staff Report made by the

Chairman of the Energy and Commerce

Committee of the United States House of

Representatives, W. J. “Billy” Tauzin, and the

Chairman of the Subcommittee on Energy and

Air Quality, Joe Barton. 

At both the federal and state level, the

movement toward competition was done in

anticipation of the benefits that competition can

bring in comparison to regulation: when

competition is effective, it is likely to result in

lower prices, higher quality, and greater

innovation than takes place under a regulatory

regime. Because regulatory reform remains a

work in progress, and has transpired during a

periodinwhich fuel prices have fluctuated much

more than anticipated, it is not possible at this

point to report the ultimate effects of retail

competition in this industry. This report,

therefore, is an interim review of progress to

date toward retail electricity competition.

In the FTC July 2000 Staff Report, the

Commission staff discussed how best to achieve

the very complex task ofmoving from regulation

to competition in this industry. There, the FTC

staff provided an analytical framework that

federal and state policymakers might use to

ensure that consumers and businesses benefit

from electricity restructuring. This framework

was based on four policy objectives the

Commission had previously articulated as

applicable. Briefly, they are: (1) to eliminate or

reduce substantial and durable horizontal

market power in electricity generation markets;
ii

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

(2) to remove incentives for vertically integrated

firms to engage in undue discrimination and

cross-subsidization; (3) to foster accurate, nondeceptive information disclosure to customers

about price and service offerings; and (4) to

promote uniform disclosure of the prices and

other relevant attributes of offers to customers.

To prepare this report, the Commission

published a Federal Register notice seeking

comments on a variety of issues related to the

different state plans designed to introduce

competition into retail electricity markets. In

addition, FTC staff researched and analyzed the

features of a sampling of state restructuring

plans in states that have introduced, or are about

to introduce, retail competition, including:

Arizona, California, Illinois, Maine, Maryland,

Massachusetts, Michigan, New Jersey, New

York, Ohio, Pennsylvania, and Texas. These

profiles are presented in Appendix A.

Some overall points can be made about how

restructuring has proceeded at the state level so

far:

• The states that have moved toward

competition in electricitygeneration and

retail marketing are in a transition

period, during which retail price

regulation will continue as some

elements of competition are introduced.

No state has completed the transition

period. The states have dual goals: to

restructure markets to begin to bring the

benefits of competition to consumers and,

at the same time, to ensure that

consumers receive reliable service at rates

not higher -- and often lower -- than

provided under regulation. States

alreadymoving towardretail competition

have decided that, to protect consumers

while introducing competition, there

should be a transition period during

which some elements of regulation

remain. The length of this transition

period is typically determined by how

long states have allowed utilities to

recover previously-incurred generation

investments that would be stranded

under competition.

• Most policy choices that confront states

during this transition period involve

tradeoffs, with each option presenting

potential costs and benefits. The work of

moving from a regulatory regime to

competition is immensely complex. There

are no easy answers. To achieve the dual

goals identified above, states must make

policy judgments about how best to

manage the various tradeoffs that are

necessary. The use of additional pilot

programs to test various tradeoffs may

well assist states in these matters.

• Given that states are in a transition

phase that represents a hybrid of

regulation and competition, many of the

expected benefits of competition have

not yet emerged. The decision of most

states to set fixed retail prices for

customers who remain with the

incumbent utility, coupled with very

substantial increases in wholesale

electricity prices, has slowed new retail

entry that could increase competition and

provide customers with more timely and

accurate price information. These

decisions have also jeopardized the

financial stability of some incumbent

utilities that are serving customers that
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Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

have not chosen an alternative supplier.

• Nothing that has happened so far,

however, indicates that competition --

once the transition period is completed --

will not produce additional benefits to

electricity customers. Rather, the task at

hand is to identify, to the extent possible,

which policy elements are likely to lead to

competitive markets and whether current

transition policies need modification or

elimination. 

This report identifies certain policy elements that

have operated most successfully in states’

transitional plans or that, by contrast, appear

relatively unsuccessful so far. For many policy

choices, however, it is still too early to determine

whether they have been, or ultimately will be,

beneficial to consumers. The following outlines

the main conclusions of the report. A discussion

of the comments on these topics and the

reasoning underlying these conclusions is

contained in the relevant chapters.

Competitive Wholesale Markets Are

Important To AchievingEffective Competition

In Retail Markets

• For all of the expected benefits of retail

competitionto be realized, it is imperative

that wholesale markets be competitive.

Effective wholesale and retail competition

will mutually reinforce each other, thus

combining to bring benefits to retail

customers. If more distant generators

cannot compete effectively with local

generators, or electricitymarketers cannot

obtain generation services, because of

problems obtaining transmission service,

and there are entry barriers to building

new generation, local generators may be

able to exercise market power.

• As wholesale and retail markets become

regional, governing policies and

jurisdictional approaches also must move

in that direction for wholesale and retail

competition to be successful.

• Independent and nondiscriminatory,

open access to the transmission grid is

essential for effective wholesale

competition. Independent operation of

the transmission grid not only ensures

nondiscriminatory service and rate

treatment, but also helps to ensure

impartial interconnection rules for

electricity generators to connect to the

transmission grid.

• In states that have implemented retail

competition,transmissionservices should

be priced the same, regardless of whether

transmission services are bundled with

generation services in wholesale or retail

sales or whether transmission services are

sold separately in wholesale or retail

sales. Providers of standard offer service

should not have preferential access to the

transmission grid in markets with retail

competition. Transmission pricing

should include a congestion component.

Locational marginal pricing is an

appropriate approach for pricing

transmission congestion in an efficient

manner unless an alternative is shown to

be superior.

• A regional entity with state involvement,

or FERC, should have transmission siting

authority. The entity would have the
iv

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

power of eminent domain. Such an entity

could be the RTO that will manage the

transmission grid in any one region,

provided its scope is broad enough and it

is subject to state involvement and FERC

oversight. 

• States generally have sufficient authority

over generation siting; however, with the

emergence of retail competition and the

regional scope of wholesale electricity

markets, states should eliminate “need”

requirements for generation siting. In

addition, uniform procedures across

states governing how new generation

capacity interconnects with the

transmission grid may ease the addition

of new generation capacity by reducing

interconnection costs.

• Interconnection standards and retail

tariffs relevant for distributed resources

(including distributedgeneration) should

be streamlined and made as uniform as

practicable on a regional or national basis.

• States may wish to evaluate whether

policies that govern generation reserves

in electricity markets may inadvertently

be hampering competitive retail and

wholesale markets. 

Policies Are Needed In Retail and Wholesale

Markets That Will Increase Demand-Side

Responsiveness

• So far, neither retail nor wholesale

markets for electricity generation

encourage effective demand-side

responses. Generally, retail customers do

not have price information and timesensitive rates that reflect the changing

price of obtaining electricity at various

times of the day and over the course of

the year. Prices are likely to be lower and

reliability is likely to improve if more

customers have time-sensitive rates and

timely and accurate price information.

With these things, customers can make

better consumption and investment

decisions that determine an efficient

market equilibrium for electricity

services. Increasing the price sensitivity

of demand also will help to constrain

existing or potential market power in

generation. This is true because a price

increase will be less profitable for

generators if it is passed through and

retail buyers respond by reducing their

consumption by a significant amount.

• Real-time meters, which use two-way

electronic linkages between customers

and suppliers to allow the retail supplier

to charge prices that echo changes in

wholesaleprices,provide retail customers

with instantaneous information about

prices, and record not only the amount of

electricity used, but when it is used

(especially for industrial and large

commercial customers). State policies

that eliminate barriers that limit the

ability or incentive of electricity suppliers

to offer variable pricing through the use

of real-time meters are likely to increase

the demand-side response. Real-time

pricing will help alleviate market power

concerns and reduce the fluctuations in

quantity demanded. Seasonal and timeof-day pricing differences also will

increase the demand-side response, but

not as effectively as real-time metering
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Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

and pricing.

• In conjunction with variable pricing for

generation services, retail suppliers

should be permitted to offer competitive

metering and billing services to their

customers. Such competition would

encourage the development of innovative

new services (e.g., real-time pricing).

• At present, in most organized wholesale

spot markets, retail electricity suppliers

bid only quantities, not prices. This

characteristic should be modified to

permit buyers to bid a variety of

combinations of price andquantity so that

wholesale prices arenot establishedsolely

by sellers’ supply offers. Because

wholesale supplier demand is derived

from retail demand levels, this policy will

be most effective when retail customers

are provided accurate and timely price

information and real-time rates so that

they can adjust their consumption

according to price changes. These

varying levels of retail demand can then

be passed on to retail suppliers so that

they can participate in wholesale spot

markets in a more effective manner.

Currently, most wholesale spot markets

do not allow retail customers to

participate directly as suppliers at all.

State Policies Should Be Designed to

Minimize Entry Barriers Into Retail

Competition: Policies that Set the Price of

Standard Offer Service for Non-Choosing

Customers Have A Substantial Effect on the

Entry of New Retail Suppliers

• Effective retail competition, and the

subsequent consumer benefits of retail

competition, are much more likely with

actual entry. State policies that eliminate

barriers to entry to allow for the long-run,

efficient entry of entities to compete with

the incumbentwill assist the development

of retail electricity markets. There are a

number of entry barriers that impede the

efficient entry of alternative retail

electricity suppliers.

• Most states have required the existing

distribution utility to continue to offer

service (“standard offer service”) at fixed,

regulated rates to customers that do not

choose a new supplier or whose supplier

exits the market. Often the duration of

this service is coterminous with the time

period during which the state allows the

utility to recover its stranded costs (those

generation-related costs that are

uneconomic in a competitive

environment). In some states, the price

for standard offer service has become a

retail entry barrier.

• States should design standard offer

service policies that provide entrants with

sufficient incentives to offer service and

do not, unintentionally, create a barrier to

entry. Ensuring that standard offer

service providers can pass on changes in

fuel costs and wholesale electricity prices

will aid this goal.

• Initial rate reductions for standard offer

service, which are not based on cost

reductions, tend to distort entry decisions

and reduce incentives for retail customers

to search for alternative suppliers. If rate

reductions are applied to total rates, this
vi

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

effect may be severe. Rate reductions for

standard offer service that are financed

through deferred charges paid by all

distribution customers may result in

below-cost prices for standard offer

service and, consequently, reduce

incentives of alternative service providers

to enter.

• States may wish to implement pilot

programs that test alternatives to

standard offer service, in light of the

difficulties in establishing an appropriate

standard offer price and the dampening

effects that inappropriately-priced

standard offer service can have on

incentives for suppliers to enter retail

electricity markets.

• Requiring incumbent utilities to provide

generation capacity to retail suppliers at

prices that reflect the value of generation

assets as determined administratively

when assessing the level of the utility’s

stranded costs, may mask whether the

underlying market is conducive to

support retail competition. As a

transition mechanism while stranded

costs are being recovered, however, these

programs may allow entrants to start

serving customers while they make

longer-term supply arrangements.

State Consumer Protection Policies Can

Affect Both Consumers and the Likelihood of

New Entry to Increase Competition

• States have adopted measures to protect

consumers who are able to choose among

competing suppliers in retail electricity

markets. A key policy goal is how best to

meet important consumer protection

objectives while minimizing compliance

requirements for competing energy

suppliers. Avoiding unnecessary

state-imposed costs and burdens will

accelerate the evolution of competitive

retail electric power markets.

• Initially, a diversity of regulatory

programs across states can help to

identify the best approaches to protecting

consumers while imposing minimal

burdens on suppliers. Subsequently,

however, significant cost reductions to

electricity suppliers may follow from

uniform supplier licensing and customer

switching rules across the states. To that

end, industry members have been

working to develop model uniform rules.

If the states, in turn, implement consistent

regulatory frameworks, such rules can

lead to significant benefits for market

participants and consumers.

• Consumers’ choices will be made most

efficiently if consumers are exposed to

accurate, timely and comparable

information about retail suppliers of

electricity. Enforcement of truth-inadvertising laws will help ensure that

suppliers make truthful, nondeceptive,

and substantiated advertising claims in

the new retail marketplace.

• Standardized labeling of retail electricity

products and services may be beneficial

to consumers and competing electricity

suppliers, as long as it allows suppliers to

provide additional information as they

begin to offer innovative services and

products to customers. Whether required
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Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

by differing state rules or uniform rules

across the country,mandatorydisclosures

to consumers can help ensure that

consumers receive, before purchase,

accurate information important to their

purchasing decisions in a newly

restructuredmarket. Excessive disclosure

requirements, however, may discourage

the provision of information, particularly

in advertising. Uniform rules can reduce

supplier labeling costs, but they reduce

the ability of states to tailor the rules to

their own policy needs.

• Policies are needed to prohibit vertically

integratedutilities fromanticompetitively

(1) shifting costs from their unregulated

generation and retail operations to their

regulated distribution and default service

operations, and (2) exercising

discrimination in the provision to retail

suppliers of inputs over which the utility

has a monopoly.

• Consumer education programs that

provide general information to increase

consumer awareness about retail

competition, as well as “nuts and bolts”

information to allow consumers to shop

effectively and select their supplier, will

help to ensure that consumers have the

information they need to participate

effectively in competitive retail electricity

markets.
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

CHAPTER I SETTING THE STAGE

States face a myriad of policy choices about how

to implement retail electricity competition

programs. The policy options generally balance

measures to encourage the introduction of

market forces into the retail sale of electricity

generationsupplieswithmeasures to ensure that

customers are still able to obtain essential

electricity services at just and reasonable prices.1

The available choices are influenced by the fact

that in most states electricity has been

traditionally generated,transmitted, and distributed

to customers by state-franchised, vertically

integrated monopoly utilities. Part of the

challenge is to make a successful transition to

restructured electricity generation markets that

will remain dependent on regulated entities for

transmission and distribution. Another part of

the challenge is to ensure adequate information

for consumers who are choosing among

electricity suppliers. During this transition

period, states have generally determined to keep

some aspects of retail price regulation as they

introduce certain elements of competition.

This chapter describes briefly both the

technological changes that have facilitated

competition among retail electricity suppliers

and the expected benefits of competition. This

background sets the stage for a discussion of the

basic policy issues that states face as they decide

whether and, if so, how to implement retail

electricity competition programs. Appendix A

contains profiles of a sampling of representative

states that have either introduced, or are about to

introduce, retail competition. These states

include: Arizona, California, Illinois, Maine,

Maryland,Massachusetts,Michigan,New Jersey,

New York, Ohio, Pennsylvania, and Texas. Not

all of these states have implemented retail

electricity competition in the same manner;

rather this chapter refers to the policy choices

most typically made by states that have begun

electricity restructuring. A discussion of the

basic features of wholesale electricity markets

follows the summary of retail issues.

A. Underlying Technological and

Regulatory Changes in the Electricity

Industry

As part of the New Deal, Congress enacted the

Federal Power Act and the Public Utility

Holding Company Act,2 which relied on

regulation, not competition, to govern the

electric power industry. At the time, the three

physical elements of the electric power industry

(generation,transmission, anddistribution) were

generally seen as natural monopolies that could

be provided more efficiently by regulated,

vertically-integrated suppliers, each being the

sole supplier in its franchised territory. Also,

because of the importance of electricity to all

segments of the economy, it was thought that

service reliability was very important and that

this goal was better achieved within a regulated

environment. The perceived need for regulation

was heightened because electricity cannot be

economically stored in large quantities and

consumption and production must be balanced

continuously and instantaneously to maintain

service reliability. 

As a result of this mixture of technical and

1

See generally, NARUC at 1.

2

The Federal Power Act (Part II) (cited as the

Public Utility Act of 1935), ch. 687, 49 State. 847, was

enacted in 1935 and is now codified at 16 U.S.C. § 824

(1994, Supp. 1999); Public Utility Holding Company Act,

15 U.S.C. § 79a et. seq.
2

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

economic relationships and regulatory choices,

the electricity industry has been dominated by

state-franchised utilities that performed all three

functions of providing electricity to retail

customers (i.e., residential, commercial, and

industrial) -- these utilities generated electricity,

transmitted it over long distance lines at high

voltages, and distributed it at useable voltage

levels to retail customers. In an era of retail

competition, there is a fourth function that

derives from separating the distributionfunction

into two components: physical distribution of

electricity and retailing or marketing of electricity

to customers. These vertically integrated utilities

were largely self-sufficient -- they typically

generated enough electricity to satisfy customer

demand in their exclusive geographic territory.

In most areas, generation is by far the largest

component of the industry in terms of

investment and revenues. Distribution is the

next largest component, and transmission is the

smallest component. In some rural areas,

distributioninvestments may surpass generation

investments in light of a dispersed customer

base. Often rural areas are served by consumerowned cooperative electric utilities. These rural

cooperatives, along with municipal or

government-owned electric utilities, account for

approximately 20 percent of the nation’s

electricity generation capacity. They have

generally been exempt from the move to retail

competition.

During most of the twentieth century, as a result

of increasing economies of scale in coal-fired and

nuclear generators, coupled with limited

transmission capacity, many customer areas

could be efficiently served by only a few

generating facilities. As a result, it was widely

believed that generation was a natural

monopoly. Technological improvements in

electricity generationandtransmission,however,

have largely negated the reasoning underlying

the treatment of generation services as a natural

monopoly. The most important technological

advance has beenthe development of the natural

gas combustion turbine and combined-cycle

generators. Efficient-scale electricity generation

plants that use this technology may be less than

one-quarter the size of plants fueled by coal or of

nuclear plants, thus changing the economics of

constructing and operating large, centralized

generating plants. Recently, micro-turbines,

reflecting additional declines in minimum

efficient scale for generators, have entered the

marketplace and now provide customers with

broader options for onsite or self-generation.3 

In addition to technological changes, several

policy shocks hit the industry during the 1970s

and 1980s. The litany of disruptions is as

familiar as "yesterday’s" headlines: the OPEC

energy crisis, nuclear safety, acid rain, blackouts

and brownouts, and deregulation of natural gas

prices. These shocks both motivated and

facilitated the restructuring of the industry that

is now taking place. In addition, many states

were concerned that their electricity prices were

above the national average, thus potentially

hampering their economic development efforts.

See Table 1 infra. 

The U.S. regulatory system remained largely

unchanged until the 1990s, despite the new

technologies, shocks, and disparities in prices

between states. In many ways, the U.S. electric

3

See FTC Staff Report: Competition and

Consumer Protection Perspectives on Electric Power

Regulatory Reform (July 2000) at 2 (FTC July 2000 Staff

Report). 
3

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

power industry followed restructuring

developments in the United Kingdom. In 1989-

1990, the United Kingdom moved from a

nationalized, vertically integrated monopoly to

a privatized and vertically unbundled industry

committed to opening up competition gradually

even at the retail level for both commercial and

residential customers.4

An important problem with the U.K.’s new

electric system proved to be market power in

generation. Initially, generation assets remained

highly concentrated. This resulted in the

exercise of market power at the generation level.

Subsequently, the problem was addressed, in

part, by requiring that the leading generating

firms divest some of their facilities, and by new

entry. 

The first major move toward regulatory reform

and restructuring of the U.S. electric power

industry was passage of the 1992 Energy Policy

Act (EPAct). This initiated the process of

opening access to the transmission grid and

encouraging independent operation of the

transmission grid. These measures were

designed to increase competition at the

wholesale level, where electricity is bought and

sold between generators, electricity traders, and

retail sellers of electricity. EPAct built on the

policies in the Public Utility Regulatory Policy

Act of 1978 (PURPA), which demonstrated that

independently-owned generators could be

integrated successfully into the transmission

system without impairing system reliability. 

In 1996, California became the first state to

contemplate retail competition whereby end

users of electricity would be allowed to choose

among retail electricity suppliers. Most of the

states that have implemented retail competition

programs since then had electricity rates above

the national average as shown in Table 1. 

Moreover, when wholesale prices fell in the mid1990s due to surplus generation capacity and

lower fuel costs, as suggested by Table 2, large

industrial customers in high-cost states wanted

access to those wholesale prices and markets.

States that moved toward retail competition

were motivated to do so in part so that

customers could have access to competitive

wholesale market prices.

4

 Many other countries have undertaken

electricity restructuring efforts in addition to the U.K. 

Most of these efforts, however, have concentrated on

issues surrounding privatization, as well as unbundling,

and have not dealt with the stranded cost and transition

period issues facing U.S. policymakers.
4

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Table 1. Retail Electric Power Prices – 1988 to 2000

Average Annual Revenue (in cents, not adjusted for inflation) per kilowatt-hour 1988 TO 2000

Area 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

U.S. 6.4 6.5 6.6 6.7 6.8 6.9 6.9 6.9 6.9 6.9 6.7 6.6 6.7

AZ 7.4 7.5 7.8 7.8 8.1 8.2 7.9 7.6 7.5 7.4 7.3 7.2 7.2

CA 8 8.5 8.8 9.4 9.7 9.7 9.8 9.9 9.5 9.5 9 9.2 8.4

IL 7.3 7.5 7.5 7.6 7.7 7.8 7.4 7.7 7.7 7.7 7.5 7 6.6

ME 6.7 7 7.6 8.6 9.1 9.1 9.6 9.5 9.5 9.5 9.8 9.8 NA

MD 5.8 6 6.3 6.8 6.8 7 7 7.1 7 7 7 7 6.8

MA 7.8 8.3 8.8 9.5 9.7 10 10 10.1 10.1 10.5 9.6 9.1 9.5

MI 6.6 6.8 7.1 7.2 7.2 7.1 7.1 7.1 7.1 7 7.1 7.1 7.1

NJ 8.5 8.8 9.1 9.5 9.5 10 10.1 10.4 10.5 10.5 10.2 10 9.1

NY 8.5 8.9 9.4 9.6 10.2 10.7 10.9 11.1 11.1 11.1 10.7 10.4 11.2

OH 5.7 5.7 5.9 6.1 6.1 6.2 6.2 6.2 6.3 6.3 6.4 6.4 6.5

PA 7.1 7.4 7.7 8 8 7.9 7.9 7.9 8 8 7.9 7.4 6.6

TX 5.6 5.7 5.8 6.1 6.2 6.4 6.4 6.1 6.2 6.1 6.1 6

Notes: 

1. Data for 2000 are preliminary.

2. Some of the variation in annual state data may be due to relative shifts in use of electric power among customer classes,

changes in fuel costs, changes in hydrological conditions, entry and exit of generators, and changes in importance of contracts

with qualifying facilities under PURPA.

Source: Energy Information Administration

Table 2. Annual Fuel Cost Index

Annual Fuel Cost Index, 1982 = 100

Fuel 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Coal 97.5 97.2 95 96.1 96.7 95 94.5 96.3 93.6 90.7 87.9

Natural Gas 80.4 79.1 80.6 84.7 78.8 66.6 91.2 102 83.9 91.2 151

Fuel Oil 73.5 65.2 61.6 59.8 55.9 56.6 69.3 64.3 47.6 56.5 92.8

Notes: 

1. Data for 2000 are preliminary. 

2. Fuel oil is light fuel oil (No. 2 and No. 6). 

Source: Bureau of Labor Statistics, Producer Price Index.

To date, states representing over 50% of the U.S.

population have established target dates for

initiating retail competition in electricity

generation and marketing, although recently

several states have delayed implementation of

retail competition. 

B. Competition, in General, Tends to

Produce Price and Nonprice Benefits

for Customers

The comments outlined a variety of expected

price and non-price benefits for customers that

have motivated many states to move toward

both retail competition and increased

competition at the wholesale level. The primary

reason cited by many state commissions,

consumer advocates, and marketparticipants for

allowing customers to choose their electricity

supplier was the expectation that increased

competition would help to drive down high

retail rates in the relevant states toward the
5

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

national average.5 This would parallel

“[e]xperience in a variety of other deregulated

industries [,which] shows that competition and

deregulation tend to produce price reductions of

between 10 percent and 25 percent, along with

service quality improvements whose value to

consumers sometimes exceeds the value of the

price reductions.”6 

Suppliers noted that competition is more

effective than regulation in controlling the costs

of supplying electricity.7

 Competition provides

stronger profit incentives for the efficient

deployment of capital for generation

investments and eliminates the guarantee that

regulated firms have under traditional rate-base

regulation to recover their costs to procure

electricity, regardless of its price. One comment

suggested that one of the expected long-term

benefits would be that only efficient electricity

plants would be developed because the

developer would no longer be guaranteed

recovery (through ratepayer rates) of its costs

and that, as a result, uneconomic costs would be

eliminated from generation rates.8 Others

agreed that deregulation and competition tend

to produce prices that are more accurate signals

of resource availability.9

 Retail competition also

can improve efficiency by providing better price

signals and incentives to customers to make

investments in technologies that shift demand

for electricity to off-peak periods when it is

generally less expensive to produce electricity.

This is particularly important in the electricity

industry where average generation costs (and

related wholesale prices) to serve peak demand

periods are often much higher than those during

off-peak periods. 

The prospect that new gas-fired generation

induced by increased wholesale and retail

competition would produce electricity at prices

below average system costs (in light of

inexpensive natural gas prevailing at the time)

also fostered expectations that retail competition

would bring prices down.10 In addition,

electricity prices resulting from a competitive

generation market are expected to be lower than

they would be under traditional regulation or

lower in terms of inflation-adjusted prices (even

if nominal prices increase under retail

competition).11 Commenters suggested that

customers would obtain lower prices gradually

over time, and it was recognized that lower

prices would not instantly take hold.12

Nonprice benefits also were expected. For

example, many market participants suggested

that retail competition could provide an

environment in which competitive suppliers can

offer service innovations (e.g., “green” power,

risk management services to guard against fuel

price volatility, and energy efficient customer

equipment), as well as price reductions, to all

5

See, e.g., Allegheny at 2, ME PUC at 3, MI PSC

at 1, NJ Ratepayer at 1, PA OCA at 2, PA PUC at 2.

6Mercatus at 1, see also PA PUC at 2.

7

Enron at 2, Exelon at 6, ECA at 2-3 (suggested

that changes in wholesale markets and a drive toward

market-based pricing for generation would be the most

significant benefits of competition).

8ME PA at 5. 

9Mercatus at 2. 

10PA OCA at 3.

11Exelon at 6, NJ Ratepayer at 1, Shell at 3.

12ME PUC at 3, NEMA at 2, NYPSC at 2.
6

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

customer classes.13 Generally, regulated rate

structures do not permit utilities to profit from

offering these innovative services and, thus, they

have little incentive to develop and offer them.

Still others suggested that retail competition

could improve a state’s industrial economy by

improving the relative costs of operating in the

state.14

It is generally believed that benefits will be

available to all customer classes (i.e., industrial,

commercial, and residential),butmost comments

suggested that large customers will receive

benefits earlier than residential customers.15 To

ensure that rates paid by residential customers

would decline, manystates,includingCalifornia,

Massachusetts, New Jersey, and Pennsylvania

relied on regulation to provide rate reductions

for residential customers simultaneously with

the start of retail competition.16

Commenters suggested that benefits would

accrue to customers in urban, suburban, and

rural areas.17 Many states noted, however, that

their plans provide optional or slower phase-in

for customers served by rural cooperatives.18

Indeed, one comment suggested that the size of

the distribution company affects competitive

benefits because the cost of entry for alternative

generation service providers is generally the

same per utility regardless of the size of the

customer base. Thus, rural cooperatives, with

comparatively small customer bases, may be less

attractive for a new entrant.19

It also is important to note that the benefits of

retail competition and wholesale competitionare

likely to be mutually reinforcing. Neither

benefits customers as much when either is

implemented alone. In other words, to obtain

the full potential customer benefits of retail

competition, it also will be necessary for

wholesale markets to be competitive.

The following section answers commonly asked

questions about how the transition from

regulation to competition at the retail level takes

place.

C. Retail Competition Policy Issues

1. What is meant by retail electricity competition

programs? Retail electricity competition

programs allow electricity customers

(residential, commercialbusiness,andindustrial)

to choose their retail electricity generation

supplier (e.g., an independent power producer,

an electricity marketer, aneighboringutility now

offering services in the customer’s area, or an

unregulated generationaffiliate ofthe franchised

utility), rather than automatically purchasing

generation supply from the state-franchised

utility operating in the customer’s geographic

region. The franchised utility will still distribute

the electricity using its transmission and

distribution facilities. In some states, metering

13Cleco at 1, Enron at 2, Exelon at 7, NYPSC at 2,

Shell at 3.

14See, e.g., Allegheny at 2, ECA at 2, NYPSC at 2. 

15See, e.g., ICC at 3, MI PSC at 2, NYPSC at 2, PA

OCA at 4, PA PUC at 4.

16For a discussion of the effect of mandatory rate

reductions on entry, see Chapter IV. See, also, Section C.6

infra.

17See, e.g., ICC at 5, PA OCA at 4.

18See, e.g., ICC at 3, MI PSC at 1-2. 19PA OCA at 4. 
7

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

and billing are subject to competition, while in

others these services are combined with

distribution services. Wholesale electricity

markets, by contrast, are largely defined as

trades of generation supply that occur over

transmission lines betweenelectricity generators,

electricity traders, and entities that sell that

electricity to end-use customers (whether they

are traditional utilities or marketers). 

2. How is competition introduced into the retail sale

of electricity? States have typically enacted

restructuring legislation that directs the state

public utility commission to implement

competition through a series of regulatory

proceedings. In a small number of states, the

state commission already has sufficient authority

to order utilities to restructure without

additional state legislation. Each state

commission usually initiates a regulatory

proceeding on a utility-by-utility basis to

determine how retail competition will work in

each utility’s service territory. At the conclusion

of these proceedings, the state commission and

the utility frequently enter into a settlement

agreement that governs how retail competition

will be introduced. 

3. Which customers will be able to choose their

electricity supplier? Retail electricity competition

programs generally will allow customers in all

classes (i.e., residential, commercial, and

industrial) to choose their electricity supplier,

although not necessarily in the same time frame.

Some states have phased-in programs so that

industrial and commercial customers are

generally able to choose first, followed by

residential customers. State restructuring

legislation often exempts municipal utilities and

rural cooperatives from offering their customers

an option to choose their electricity supplier.

4. How is competition introduced if the utility still

provides regulated distribution and transmission

services? Before a state permits retail customers

to choose their electricity supplier, it unbundles

or separates the franchised utility into separate

parts responsible for different functions. The

first step is to unbundle or separate the utility’s

generation assets from its assets used to provide

transmission and distribution services. States

have either required the utility to divest

generation assets to a third party (e.g., Maine) or

to functionally unbundle (e.g., Pennsylvania

required utilities to establish unregulated

affiliates in which to place their competitive

generation services). If the latter route is chosen,

the state commission promulgates a “code of

conduct” that governs the relationship between

the regulated transmission and distribution

company and the unregulated generation

affiliate. States generally have unbundled each

utility on a utility-by-utility basis because of

varying local circumstances. The company that

remains after generation assets are removed is

labeled a “distribution utility.”

5. Once a utility is unbundled, how are prices set for

generation, transmission, and distribution services?

In most states, the state commission initiates a

regulatory proceeding to determine the

incumbent utility’s costs for generation,

transmission, distribution, and possibly for

metering and billing (if these two services are

subject to competition). These costs are then

expressed on a per kilowatt/hour(kWh) basis on

customer bills. If a customer chooses an

alternative electricity supplier, the distribution

utility no longer charges the customer the

unbundled cost of generation. Instead, the

customer is charged by the alternative supplier

for generation services. The unbundled cost of

generation is often termed the “shopping credit”
8

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

or “price to beat.” In other words, customers are

more likely to switch to alternative suppliers that

“beat the price” (i.e., offer generation services for

less than the unbundled generation cost) of the

distribution utility that often provides service to

customers who have not chosen an alternative

supplier (see question 6).

6. What happens to customers who do not choose an

alternative supplier? Most states have established

a “standard offer service” that supplies

customers who do not select an alternative

service provider or supplies those customers

whose competitive supplier has stoppedoffering

service. Often, but not always, the standard offer

service isprovidedby the franchised distribution

utility in the area. The price for standard offer

service is often fixed at (or below) the regulated

rate in place before the onset of retail

competition. The standard offer price and the

duration of the transition period during which

the standard offer service is mandated often are

related to terms of the settlement agreement

between the state commission and the utility

regarding recovery of the utility’s stranded costs

(see question 7). Most states have implemented

standard offer service as a consumer protection

measure during the transition to a fully

competitive retail market.

7. What are a utility’s stranded costs, and how are

they recovered? Stranded costs are those

generation costs authorized under regulation

that are not expected to be recovered as a result

of the decision to implement retail competition.

The theory is that in a competitive environment,

the utility’s expected revenue stream from its

generation assets may be smaller than the

revenue stream under regulation. Stranded

costs, or uneconomic costs, can arise from

circumstances such as idled generation capacity,

nuclear decommissioning costs, or abovemarket, long-term contracts requiredbyPURPA.

States have determined the value of each utility’s

assets and its potential stranded costs through

either an administrative proceeding, or, in the

case of divestiture, market valuations. In

addition, states have determined the length of

time over which stranded costs are to be

recovered from customers. For example,

Pennsylvania has generally approved a 10-year

stranded cost recovery period. During that

period, stranded costs are typically assessed on

all customer bills as a per kWh distribution

charge. Some states have revised their stranded

cost estimates (through a “true-up” proceeding)

based on actual experience. Where economic

growth and other factors result in more

utilization of a utility’s generation assets than

projectedunderregulation, true-ups can result in

reductions in historic costs that are classified as

stranded.

8. Do alternative suppliers have to be licensed to

provide services to customers? Yes. Supplier

licensing requirements are designed to ensure

that alternative electricity suppliers have

sufficient technical, financial, and managerial

resources and abilities to provide reliable service

to retail customers. States generally balance the

rigor of the standards to protect customers with

the increase in supplier cost and customer prices

that may be associated with compliance with the

standards. 

9. How do customers switch suppliers? Generally,

states have designed procedures to allow

customers to switch electricity suppliers. In

doing so, states often have to balance the interest

in protecting consumers from harmful practices

such as slamming (i.e., the unauthorized

switching a customer’s electricity supplier) with
9

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

the interest in creating a regulatory framework

that minimizes unnecessary burdens on retail

suppliers. Slamming and cramming (i.e., the

placement of unauthorized charges on electricity

bills) created a significant problem for many

consumers during the period of telephone

restructuring, and thus also have received

attention during electricity restructuring.

10. In a competitive environment, how are public

benefit programs handled? Public benefit

programs include low income assistance,

funding for renewable electricity research and

development, energy efficiency, or demand side

management programs. In a competitive

environment, some states have required the

distribution utility to provide these services and

to assess all customers through monthly

surcharges. In other states, general tax revenues

are used to support these programs. 

11. Can retail customers aggregate their demand?

Some states have adopted policies to allow

customers to aggregate their demand to bring

the expected benefits of buying electricity to

smaller customers and to reduce customer

acquisition costs for alternative electricity

suppliers (i.e., new entrants). 

12. What information are customers given so that

they can shop for the best supplier? Some states

have adopted uniform labeling requirements for

the disclosure of price, associated contract terms,

fuel source, and environmental characteristics of

the electricity that is sold. The purpose of

uniform labels is to ensure the ability of

consumers to make apples-to-apples

comparisons and avoid the situation where

consumers are left to decipher an offer that

claims a certain ‘percentage off’ the distribution

company’s standard offer price. Many states

have balanced this goal with the undesirable

impact of excessive standardization of labeling

requirements that may unduly restrict the

diversity of alternative services offered to

consumers.

13. What other issues must state policy makers

examine before implementing a retail choice program?

Many states have addressed environmental

protection, tax policy, and labor issues as part of

retail restructuring. These issues are not

addressed in this report.

D. Wholesale Market Issues

1. What features of wholesale electricity markets

affect retail competition programs? Two wholesale

electricity market features have particularly

important implications for retail competition

programs. The first is the set of price and access

conditions for transmission services that

wholesale customers pay to receive generation

from distant sources. These charges are similar

to highway tolls. The second is the operation of

wholesale markets for sales in which generators,

electricity marketers, distribution utilities, and

others buy and sell wholesale electricity. 

Wholesale Transmission Issues

2. How are transmission services priced? The

Federal Energy Regulatory Commission (FERC)

regulates the prices charged by transmission

owners and operators for the use of their

portions of the interstate transmission grid for

wholesale sales of electricity. States, rather than

FERC, regulate the price of transmission if the

transmission is bundledwithgeneration services

in a sale to an end-use customer (i.e., a retail

sale). Under cost-of-service regulation, FERC

generally requires transmission owners to base
10

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

their prices on the original total cost of their

transmission assets. Traditionally, users have

paid for transmission service along a “contract

path” from the seller to the buyer. However, the

actual transmission flows of electricity from a

generator to a distribution company do not

generally follow the shortest route between the

source and the destination, much less the

contract path for the transaction. Rather,

electricity flows along the paths of least

resistance on the transmission grid and may

cause congestion on portions of the transmission

grid that are not on the contract path. Hence, it

can be difficult to compensate transmission

owners accurately for both intended and

unintended use of transmission facilities using

conventional transmission rates. (See question 4

below.) 

3. Because much of the transmission grid is owned

and controlled by utilities that also own generation

assets, how do alternative electricity suppliers obtain

access to the transmission grid? FERC began

opening up the interstate transmission grid to

wholesale suppliers on a broad scale by issuing

Orders 888 and 889 in 1996. FERC’s main

objective in these orders was to ensure that all

users would have open access to the grid on

terms comparable to those on which the grid was

used by the transmission owners. 

In response to Orders 888 and 889, utilities in

several regions of the country (e.g., California,

New York, New England, and the Mid-Atlantic

states) establishedindependent systemoperators

(ISOs) that control and operate the interstate

transmission grid in those regions. Some states,

as part of their restructuring programs, have

required utilities to place their transmission

assets under independent control to ensure

nondiscriminatory access to the transmission

grid. 

In December 1999, FERC encouraged all

investor-owned utilities to place their

transmission assets under control of a regional

transmission organization (RTO) by December

15, 2001. FERC undertook this action in light of

concerns that Orders 888 and 889 were

insufficient to ensure that utilities would not

discriminate against independent electricity

suppliers. This process is ongoing. FERC has

required that the RTOs be independent of all

electricity suppliers. Each RTO is to operate the

transmission grid in a specific region on a

nondiscriminatory basis so that all electricity

suppliers have comparable access. The current

ISOs can be seen as predecessors to the four

region-wide RTOs that FERC recently adopted

as its objective for the Northeastern,

Southeastern, Midwestern, and Western regions

of the interstate transmission grid. 

Wholesale Market Operation

4. What is FERC’s role in regulating prices among

traders of wholesale electricity? FERChas authority

to regulate prices for wholesale electricity in

interstate commerce using a “just and

reasonable” standard. FERC’s jurisdiction

extends to most of the nation’s wholesale

electricity trades, with the exception of most of

Texas. The transmission grid covering most of

Texas is not interconnected with the rest of the

States (except by limited ties) and operatesunder

state jurisdiction. In most areas of the country,

FERC allows generators to sell at market-based

rates if FERC finds that competition is sufficient

to make market-based rates “just and

reasonable.” 

To determine whether to approve market-based
11

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

rates for a generator, FERC applies a "hub and

spoke" test. Under this methodology, FERC

examines the generating company'sshare of total

capacity that is directly connected to the local

demand or load area (the hub) or that can reach

the hub using the generating company’s

transmission system (if it has one). FERC

separately examines the generating company’s

shares in each load area connected to the initial

load area (the spokes). Generally, if the

generator's share is less than the 20 percent

threshold established by FERC in all of these

areas, market-based rates will be permitted.

Concern has been expressed that this

methodology is antiquated and prone to errors.

It focuses solely on the share of the individual

seller and not market concentration in properlydefined markets. It takes little or no account of

the important factors that determine the scope of

electricity markets, such as physical limitations

on market size including transmission

constraints, electricity prices, generating costs,

transmission rates, and varying supply and

demand conditions over time. In light of these

concerns, FERC has considered whether

remedial measures, such as price mitigation

measures or temporary price caps on wholesale

market trades, are necessary to ensure that rates

for sales of wholesale electricity are “just and

reasonable.”20

5. How do retail electricity suppliers obtain

generation services so that they can supply electricity

to their customers? Suppliers that serve retail

customers generally use a mix of methods to

obtain enough generation to provide electricity

to their customers. They can either generate the

electric power themselves, purchase it through a

mix of short and long-term contracts, or

purchase it on the spot market. In addition,

many suppliers use financial contracts to hedge

against the risk of volatile wholesale prices.

Most demand is met from supplies obtained by

ownership of generators or through longer-term

contractual arrangements between generators

and electricity retailers. California wasunique in

requiring electricity suppliers to rely primarily

on the spot market to meet demand. During

2001, most of California’s electricity demand has

shifted from spot market transactions to longerterm contracts between suppliers and retailers.

6. What products are traded in wholesale spot

markets? Restructured wholesale electricity

markets generally have been established to

mirror how electricity was dispatched under a

regulatory regime. Prior to restructuring,

wholesale markets were typically comprised of

several generation facilities that had differing

production costs due to differing design and fuel

requirements. During any given demandperiod,

electricity was dispatchedfromgenerationplants

in the order of their marginal costs, from low to

high. Visually what this means is that the

wholesale supply curve is an upward sloping,

stair-stepped curve, were each step represents

another type of generation facility. System

reliability was maintained through rules that

governed utility reserve practices. 

The new products that are bought and sold in

restructured wholesale markets are functionally

similar to the ones that vertically-integrated

utilities used to ensure reliable electricity service

when they were governed by regulation. For

example, most wholesale market operators

20See, e.g., FERC, Order on Rehearing of

Monitoring and Mitigation Plan for the California

Wholesale Electric Markets, Establishing West-Wide

Mitigation, and Establishing Settlement Conference,

Docket Nos. EL00-95-031 et al. (June 19, 2001).
12

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

maintain a spot market that facilitates trades for

real-time energy (i.e., a retail supplier will

purchase a certain number of megawatts for a

particular hour (e.g., Tuesday, 2 p.m. to 3 p.m.))

to meet expected demand that the retail supplier

cannot meet through generation facilities of its

own or through its longer-term contracts. 

Rules governing electricity reliability generally

require that additional generation capacity be

available in case unexpected demand

materializes or expected supply is unavailable.

Electricity suppliers and buyers can purchase

reserve generation capacity that will be available

immediately, within 10 minutes, or later. These

products provide backup supplies if for some

reason the electricity purchased is not generated

or a transmission line goes out of service

(through severe weather or overloading). Each

market has a somewhat different set of these

reliability products (or “ancillary services”)

based on prior operational history. Reserve

requirements are used, in part, because of the

lack of inventories that could be use to moderate

fluctuations in supply and demand. 

7. How do electricity spot markets operate? In

newly created wholesale spot markets in

California, New York, and in the New England

and Mid-Atlantic states, participants engage in

bid/ask transactions in markets for various

energy products (i.e., electricity and reserve

products). Buyers of electricity bid what

quantity they expect to need for each hour of the

next day in auctions organized by the market

operator (e.g., the ISO). Suppliers bid the

quantity and price at which they are willing to

offer electricity for the same hours the next day.

The market matches supplier quantity bids with

buyer quantity bids to arrive at the market

clearing price. Existing wholesale spot markets

generally do not allow buyers to bid prices, only

quantity.

To minimize costs of acquiring electricity,

electricity spot market demand in a region is met

by utilizing or "dispatching" generating units in

an order that is based on the plants’ bids in

hourly auctions. Generating units with the

lowest bids are dispatched first until all quantity

demanded for that hour is met. Generating units

with the higher bids are only dispatched during

peak demand periods when their electricity

output is needed to meet consumption.

Generally, all units dispatched are paid the price

of the generator with the highest bid that is

dispatched during the time period -- the market

clearing price.

8. How can market power be exercised in wholesale

electric power markets? Market power is the

ability profitably to maintain price above

competitive levels for a significant period of time

in a relevant market. Because electric power

cannot be practicably stored in large amounts,

short periods of time often represent distinct

product markets. Geographic markets tend to

vary over time depending on transmission

congestion constraints and the ability of local

demand to be met by distant generators. 

Numerous factors can influence the likelihood

that suppliers individually or collectively can

exercise market power in any of the relevant

markets in which they participate. Allegations

have been made that certain unilateral conduct

by generators have reflected the exercise of

market power. Whether any such exercises of

market power have taken place or raise antitrust

concerns is beyond the scope of this report. 
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

CHAPTER II COMPETITIVE WHOLESALE MARKETS ARE

IMPORTANT TO EFFECTIVE RETAIL COMPETITION PROGRAMS

A. Introduction and Summary

Most commenters agreed that for all of the

expected benefits of retail competition to be

realized, it is imperative that wholesale markets

also be competitive.1

 Competitive wholesale

electricity markets are more likely if the potential

for discrimination in transmission access and

market power in generation have been

addressed effectively.2 And as discussed in

Chapter I, the benefits of retail competition and

wholesale competition are likely to be mutually

reenforcing. Neither benefits customers as much

when either is implemented alone.

The Federal Energy Regulatory Commission

(FERC) has concluded that, even when vertically

integrated monopoly utilities have functionally

unbundled their generation assets from their

transmission assets, they have continuing

opportunities and incentives to discriminate

against competitors in access to their

transmission facilities and thus to impede

competitive markets.3 In addition to

discrimination against competitors seeking

access to their transmission facilities, vertically

integrated utilities may exercise their market

power at the transmission level by distorting the

competitive process throughcross-subsidization

in favor of their unregulated affiliates.4 Both

forms of behavior will likely reduce the degree

of competition facing the vertically integrated

utility’s generation assets. As a result, FERC has

required utilities to engage in efforts to place

control and operation of their transmission

facilities into Regional Transmission

Organizations (RTO) by December 15, 2001. This

process is ongoing and has yet to realize the full

benefits of nondiscriminatory access to the

interstate transmission grid.5 In addition, more

than a third of the comments contended that at

least some current wholesale electric power

markets are burdened by supplier market power

that prevents the benefits of state retail

competition plans from accruing to customers.6

1

See, e.g., Enron at 8, IURC at 4, MidAmerican at

7-8, Northeast at 4, and Shell at 17. 

2

Existing market power in generation may

warrant special attention because antitrust law does not

address existing market power, unless it is obtained

through mergers or anticompetitive acts and practices. 

Thus, antitrust law does not address existing market

power that may have arisen under regulation, when

merger reviews assumed that regulation would directly

curtail market power for the foreseeable future. In the

FTC July 2000 Staff Report, staff encouraged states to use

computer simulation analysis to assess existing market

power among electricity suppliers, and, prior to

implementing retail competition, to address existing

market power through structural remedies such as

divestiture of generation capacity to multiple buyers. 

FTC July 2000 Staff Report at 12.

3

FERC Order No. 2000, Regional Transmission

Organizations at 35, 70 (Dec. 17, 1999).

4

See FTC July 2000 Staff Report at 7, 15-16.

5

In July, FERC indicated that it favored the

formation of single RTOs in the Northeast and in the

Southeast. It has initiated a mediation of all parties

involved to assist in forming these RTOs. See e.g., FERC,

Order Provisionally Granting RTO Status, PJM

Interconnection, L.L.C., et al., Docket No. RT01-2-000

(July 12, 2001); FERC, Order on Compliance Filing and

Status Report, GridSouth Transco, LLC, Docket Nos.

RT01-74-002 et al. (July 12, 2001).

6Green Mountain at 5, ICC at 14, IURC at 4-7,

IECP at 5, ME PA at 3, MG at 13, MD OPC at 2-6,

MidAmerican at 5, MinnPower at 4, NEMA at 14,

NRECA at 14, Northeast at 3-4, Shell at 10-11, TAPS at 2-
14

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Competitionin wholesale electricity markets can

be increased in at least two ways. First, distant

electricity generators must be able to serve local

customers by using the interstate transmission

grid in an efficient manner. For this to occur,

there should be: a) independent and

nondiscriminatory, open access to the

transmission grid;7 b) efficient pricing of

transmission services; and c) regional siting of

new and upgraded transmission facilities to

enhance and upgrade the interstate transmission

grid. Second, competitors can site new

generation near the customer base to

deconcentrate electricity generation markets.

For this to occur, a) outdated impediments to

construction of efficient, new generationfacilities

should be removed, and b) impartial

interconnection policies, which govern how new

generation facilities interconnect to the

transmission grid, should be adopted. In

addition, state policies that reduce impediments

to distributed generation resources can also

increase competition faced by electricity

suppliers.8

On a related note, states should examine

whether retail competition alters the need for or

nature of rules governing electricity generation

reserve or capacity requirements to ensure

reliable service. Reserve requirements that are

based on a regulatory model, rather than one

that reflects the emergence of retail competition,

may inadvertently hamper wholesale, as well as

retail, competition among electricity suppliers

and marketers.

B. Effective Operation and Management

of the Transmission Grid Can Expand

Wholesale Electricity Markets

Antitrust experience and economic theory teach

that in certain situations enlargement of

geographic markets tends to reduce

concentration among suppliers, and thus reduce

the potential exercise of market power. Larger

wholesale electricity geographic markets can

enable retail suppliers and marketers to buy

generation services from a wider range of local

and distant sources (e.g., utilities with excess

generation, independent power producers,

cogenerators, etc.). Even if no new generation

facilities are built, operation and management of

the transmission grid that broadens the

geographic area in which competing wholesale

electricity suppliers can economically supply

power to wholesale customers increases the

choices available to those customers. Larger

geographic markets also tend to reduce the need

for high-cost peaking generation units, because

demand peaks in one area may not coincide with

those in other areas -- generation capacity from

an area not experiencing a peak period would be

available to supply areas that are experiencing

peak demand. 

Electricity can be transmitted at extraordinary

3, UWUA and the MUPHT at 19.

7

See FERC Order No. 2000, supra n. 3.

8

There are other federal statutes and policies that

may affect whether wholesale markets are fully

competitive, including, among others, the Public Utility

Company H olding Act, the Public Utility Regulatory

Policy Act, and the statutes governing the Tennessee

Valley Authority and other federal electric power

generators. The issues surrounding the effect of these

and other statutes and policies on retail electricity

markets, as well as whether, and how, these statutes

should be amended in light of retail competition, have

generated much discussion and debate. Some of those

issues are discussed at:

<http://com-notes.house.gov/cchear/hearings106.nsf/

main>.
15

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

speed over transmission lines with modest

incremental transportation costs. Wholesale

markets for electricity are thus capable of being

very large. This is likely to be important for

competitive markets because, unlike other

commodities, electricitycannotbe stored in large

quantities. As a result of this physical attribute,

inventories cannot dampen price volatility, as

they often do in other industries, by satisfying

part of demand when demand exceeds

production in a specific time period. Thus,

larger markets and access to a greater number of

suppliers can balance the lack of storage

capability and inventories. 

For an array of historical and operational

reasons, the U.S. transmission grid is balkanized

to various degrees. Control and operation of the

grid rested historically with localized regulated

monopolies. More recently, control has been

turned over to Independent System Operators

(ISOs) (e.g., California, New York, New England

states, and the Mid-Atlantic states). Some

portions of the grid are significantly congested

or overloaded at times, which impairs the ability

of distant suppliers to serve local demand.

The comments addressed three major policies

surrounding the operation of the interstate

transmission system in ways that affect state

retail competition programs. First, they noted

that discrimination in transmission access must

be curtailed so that distant suppliers can

compete against generation services supplied by

the transmission owner. In addition,

“pancaking” of transmission rates needs to be

eliminated so that wholesale traders have a

greater range of economic electricity trades

across the interstate transmission grid.9 To this

end, FERC has required transmission-owning

entities to engage in efforts to place control and

operation of their transmission facilities into a

Regional Transmission Organization (RTO) by

December 15, 2001.10 The RTOs are to provide

for the independent operation of the electric

power transmission grid.11 In this case,

independent operation of the transmission grid

means that its operation would be independent

from its owners’ interests in generation and

distribution.

The FTC continues to support legislation that

affirms FERC’s authority to order the

establishment of independent RTOs and to

integrate the transmission systems of state and

municipal utilities and rural cooperatives, as

well as those of federal electric utilities, into the

RTO formation process.12 Although the RTO

formation process is a FERC initiative, several

9

“Pancaked” transmission rates refer to the

transmission rates that wholesale buyers and sellers

must pay to multiple transmission owners to cross two

or more transmission systems to complete the trade. 

FERC has required that RTOs eliminate the use of

pancaked transmission rates. FERC Order No. 2000 at

331-32.

10Other benefits of regional control and

operation of the transmission grid (and hence larger

geographic markets) include regional transmission

pricing, improved congestion management of the grid,

and more effective management of parallel path flows. 

FERC, Order Provisionally Granting RTO Status, PJM

Interconnection, L.L.C., et al., Docket No. RT01-2-000

(Jul. 12, 2001) at 3.

11FERC Order No. 2000 at 152-53. 

12See Letter of the Federal Trade Commission to

House Commerce Committee Chairman Thomas Bliley,

Analysis of H.R. 2944 (Jan. 14, 2000). 
16

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

states have required transmission owners

operating in the state to participate in a fully

operational RTO as a prerequisite of retail

competition. This policy has assisted the

development of competitive markets.

Second, many of the commenters argued that in

states that have implemented retail competition,

distinctions (in terms of pricing and priorities)

for use of the transmission system must be

eliminated so that all uses of transmission

facilities are afforded comparable treatment.

Pricing distinctions have arisen between

wholesale and retail sales of electricity that

involve transmission because FERC regulates

wholesale sales of electricity whereas states

regulate retail sales of electricity. Pricing should

be comparable, regardless of who regulates the

transaction, or market participants will receive

inefficient signals to guide their behavior. In

addition, uses of the transmission system to

supply a distribution utility’s retail customers

have been exempt from FERC’s open access

requirement. In a competitive retail

environment,13 the market will provide

incentives for market participants to engage in

efficient sales of electricity such that there is no

basis for providing a distribution utility’s retail

customers with priority access to the

transmission system. Moreover, customers who

remain with the incumbent distribution utility

(and do not choose an alternative retail electricity

supplier) should not have more reliable service

than those customers that choose a new retail

supplier; such a system may skew competition

in favor of the incumbent distribution utility.

Third, commenters suggested that obstacles to

expansion, upgrade, and reconfiguration of the

electric power transmission grid should be

addressed in a rational and nondiscriminatory

manner. The comments also revealed that

although states have sufficient authority to allow

transmission improvements within a particular

state, many efficient transmission improvements

that would expand the geographic scope of

wholesale electricity markets are likely to be

outside the jurisdiction of a single state. Thus,

many of the comments favored a regional or

federal mechanism to site transmission facilities.

They suggested that such a mechanism could

ensure that expansion of the grid focuses on

effective ways to deal with bottlenecks in the

interstate transmission grid, assists the

promotion of competition, and avoids conflicts

over state boundaries.

1. Independent Operation of the

Transmission Grid is Necessary

for Effective Wholesale

Competition

Many commenters argued that the entire U.S.

electric transmission grid should be under

independent management and operational

control, with incentives to optimize throughput

of electric power over the grid.14 They reasoned

that independent operation eliminates the need

for regulators to specify elaborate rules for the

use of the grid by vertically integrated utilities

and their affiliates and to monitor their conduct.

Others suggested that because the movement of

electricity does not respect state boundaries, but

rather is based on the laws of physics, regional

13See Question 2, Wholesale Market Issues,

Chapter I, for a discussion of the complexities of

transmission pricing. Presumably, once RTOs are

operational, transmission will be priced efficiently. 

FERC Order No. 2000 at 332. 14See, e.g., NEMA at 14, TAPS at 2.
17

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

organizations to manage reliability, pricing,

congestion management, planning, expansion,

and interregional coordination are critical to

effective wholesale and retail competition

programs. 

To this end, many commenters endorsed the

formation of RTOs to operate the transmission

grid free from possible discrimination by

transmission owners that compete with other

suppliers of generation. One commenter

explained that RTOs can provide the open

access, non-discriminatory transmission

necessary for wholesale suppliers to compete

economically for sale to wholesale customers

(i.e., retail suppliers).15 Others noted that as

RTOs are developed, regionalism will continue

to grow in importance; they suggested that states

supportthedevelopment of cooperative regional

regulatory mechanisms to encourage nondiscriminatory, open-access transmission

services.16 The national association of electric

power suppliers stated that the establishment of

RTOs represents one of the next steps to

developing a seamless national transmission

system where all transmission usage is accorded

fully comparable treatment.17

Independent control of the transmission grid

also will eliminate the perception of bias that

unaffiliated generators may have when they

want to interconnect to the transmission grid.

Historically,throughregionalreliability councils,

incumbent, vertically-integrated utilities would

review applications for the interconnection of

new generation facilities to the grid.

Collaboration among utilities was required

because the new generation facility could

potentially cause congestion throughout the

grid, and thus adversely affect each utility’s

ability to maintain reliable service. With

independent operation of the grid, the ability of

transmission owners, who also own competing

generation assets, to use reliability as a guise to

prevent or delay the interconnection of new

competitors is reduced or eliminated. 

a. Current ISOs Have Assisted the

Development of Wholesale

Competition

Although no RTOs are currently operational,

FERC has authorized the formation of several

ISOs to control portions of the nation’s

transmission grid. The ISOs that are currently

operational include the California ISO, PJM

Interconnection(whichoperates the transmission

grid in Pennsylvania, New Jersey, Maryland,

Delaware, and the District of Columbia), ISO

New England (which operates the grid in Maine,

Vermont, New Hampshire, Massachusetts,

Rhode Island, and Connecticut), and the New

York ISO. In addition, the Texas commission has

ordered the formation of an ISO to operate in

most of Texas (ERCOT). The ISOs are

independent, non-profit entities that operate the

transmission grid on a nondiscriminatory basis.

ISOs can be seen as predecessors to fully

functioning RTOs, which are required by FERC

to have certain characteristics and perform

various functions. 

It has been the Pennsylvania commission’s

experience that a functioning and competitive

retail market cannot be successful without a

functioning and competitive wholesale market

15Northeast at 4.

16NARUC at 17.

17EPSA at 11. 
18

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

that is operated independently from the

utilities.18 The Pennsylvania commission

explained that as it implemented its

restructuring legislation, new suppliers seeking

to operate within Pennsylvania informed the

commission that utilities either refused to

supply, or demanded prohibitive prices for,

installed capacity credits that were necessary for

operation.19 The Pennsylvania commission

concluded that an independent PJM was needed

to provide entrants with confidence to do

business in Pennsylvania. The New Jersey

Ratepayer has indicated that, in fact, PJM has

had a substantial positive effect on the

development of competition.20 The existence of

wide regional coverage under a single tariff

allows retail suppliers to use a large number of

competing wholesale supply sources without

payment of multiple transmission charges, and

it also provides for easy access to services such

as load balancing.21 Similarly, the New York

commission noted that there was “a surge in

retail access participation following the opening

of the New York ISO in November 1999.”22 

By contrast, the lack of an operating regional

transmission grid operator appears to have

delayed the development of competitive

wholesale markets in the Midwest. The

Michigan commission stated thattheuncertainty

surrounding the development of an RTO in the

Midwest “has likely inhibited movement

towards a competitive market.”23 The Illinois

commission stated that an entity that wishes to

serve retail customers in the state must obtain its

power within a relatively limited geographic

market, because the cumulative cost of additive

transmission rates often makes it economically

infeasible to import power over long distances.

It further asserted that development and early

operation of a properly designed and configured

RTO for the Midwest will be critical to the

success of Illinois’ retail competition program.24

A utility that is the distribution utility in certain

areas and an alternative supplier in other areas

in the Midwest further claimed that the lack of

RTOs has already harmed retail competition in

many areas by making transmission access more

difficult, especially in areas that do not have an

established power pool.25

b. Market Design and Congestion

Pricing Must Be Addressed 

Despite the praise for independent operation of,

and nondiscriminatory access to, the

transmission grid, many commenters suggested

that wholesale competition is not yet effective

due to flaws in the design of wholesale

generation markets and in congestion pricing

regimes. Flawed market designs have

reportedly contributed to higher wholesale

power prices and greater price volatility in 18PA PUC at 39-40, PA OCA at 20

19Installed capacity is a reserve generation

capability product some grid operators believe is

necessary for the reliable operation of the grid. It is

discussed more extensively in Section C.3 infra.

20NJ Ratepayer at 9.

21Exelon at 27.

22NYPSC at 13.

23MI PSC at 10. 

24ICC at 22, see also Exelon at 27.

25MidAmerican at 7.
19

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

California,26 which have, in turn, raised retail

suppliers’ cost of business to unprofitable levels,

driving them out of the retail business.27 The

MD OPC also raised questions about whether

some electricity suppliers may be withholding

capacity, either unilaterally or collectively, in an

effort to increase wholesale prices.28 In addition,

some commenters noted that consistent market

rules among wholesale markets are needed,

especially among neighboring markets. Another

commenter indicated that unless RTOs are

sufficient in size and scope, arbitrage based on

differences in rules among RTOs will occur to

the detriment of retail customers.29 For example,

one commenter maintained that California’s

efforts to remedy reliability and pricing

anomaliesduring the recent turmoil in wholesale

markets in the West were frustrated by the

different rules governing wholesale market

operations in the West.30 Other commenters

suggested that volatility in wholesale prices, as

well as their high level, increases the risk of

participation in retail markets substantially, and

thus has an adverse effect on retaining

significant numbers of retail suppliers, even in

states touted as “successes.”31

Flawed congestion pricing regimes also have led

to less than efficient use of the transmission grid.

Transmission costs include both a charge for the

use of the system as well as a charge for

congestion caused by each specific transaction

over the grid. Accurate congestion charges are

important both to obtain efficient use of the grid

and to provide accurate signals for investments

in expanding the grid or in siting generation.

FERC has approved use of locational marginal

pricing (LMP) of grid congestion in several ISOs.

This pricing regime appears to be working well

in providing for the efficient operation and

expansion of the grid in the context of the ISO

market rules in place.

32

There appears to be a consensus that states can

provide critical support for the development of

competitive wholesale markets by ordering all

transmission owners to participate in fully

operational RTOs prior to initiating retail

competition. RTOs will facilitate the regional

sale of electricity, thus enlarging the spectrum of

choices available to retail electricity suppliers for

sources of generation.

26MD OPC at 3. For example, FERC has

determined that the mandatory buy/sell requirement, as

well as wholesale market rules that produce incentives

to underschedule expected demand with the ISO, have

contributed to the “dysfunctional” wholesale markets in

California. See FERC, Order Directing Remedies for

California Wholesale Electric Markets, Docket Nos.

EL00-95-000 et. al (Dec. 15, 2000) at 4-5. See also

Appendix A, California Profile, for further discussion of

wholesale market operations in California.

27Id. at 1.

28Id. at 3. 

29MG at 8.

30FERC recently addressed the interdependence

among wholesale spot prices in the Western Interconnect

in its June 19, 2001 order addressing wholesale market

conditions in California. FERC, Order on Rehearing of

Monitoring and Mitigation Plan For The California

Wholesale Electric Markets, Establishing West-Wide

Mitigation, And Establishing Settlement Conference,

Docket No. EL00-95-031, et al. (June 19, 2001).

31NRECA at 14, see also MidAmerican at 5.

32See Comment of the Bureau of Economics and

of Policy Planning of the Federal Trade Commission,

Federal Energy Regulatory Commission, Docket Nos.

EL00-95-000 et al. (Nov. 22, 2000).
20

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

2. Efficient, Comparable Pricing of

Transmission Services Enables

Markets to Work More

Effectively

Many commenters suggested that efficient and

comparable transmission pricing is essential to

robust wholesale competition. Currently, FERC

requires owners and operators of wholesale

transmission facilities to provide

nondiscriminatory, open-access transmission

services to third parties at rates comparable to

those of the owner’s own uses of the

transmission facilities.33 FERC’s open access

policy applies to two types of transmission sales:

(1) wholesale sales of unbundled transmission

services (i.e., when transmission services are sold

by and between wholesale suppliers separately

from generation services); and (2) retail sales of

unbundled transmission services (i.e., when

transmission services are sold independent of

generation to retail customers). 

The open access requirement, however, does not

apply when the owner of the transmission

facilities (i.e., a distribution utility) is providing

bundled service (when transmission and

generation supplies are sold together) to its retail

customers (“native load”). States continue to

regulate the price of bundled retail sales. This

policy is on appeal to the U.S. Supreme Court in

New York et al. v. FERC (00-0568) and Enron

Power Marketing Inc. v. FERC (00-0809).34

Under state retail competition programs, the

standard offer service, which states typically

require distribution utilities to provide to

customers that do not choose an alternative

supplier, is comparable tonative loadobligations

and, therefore, is potentially exempt from FERC

open access requirements.

Many commenters suggested that unless there is

comparable pricing of interstate transmission,

regardless of whetheritisbundled or unbundled

with a retail sale of energy, wholesale

competition will not be successful.35 For

example, some commenters noted that a

bifurcated approach can result in bundled and

unbundled market participants not facing the

same price signals for the cost of transmission

services.36 As a result, according to one

comment, a bifurcated approach (state control of

bundled retail sales and FERC control of other

uses of transmission) “will continue to make it

difficult to establish the conditions to support

broad regional power markets. A bifurcated

approach to transmission jurisdiction results in

inefficient transmission use which leads to less

liquidity in transmission markets.”37 Others

suggested that a bifurcated approach leads to

balkanizationand inefficiency in the operation of

33See FERC Order Nos. 888, F.E.R.C. Stats. &

Regs. (CCH) ¶31,036 (Apr. 24, 1996) (Promoting

Wholesale Competition Through Open Access NonDiscriminatory Transmission Services by Public Utilities;

Recovery of Stranded Costs by Public Utilities and

Transmitting Utilities), and Order No. 889, F.E.R.C. Stats.

& Regs. (CCH) ¶31,594 (Apr. 24, 1996) (Open Access

Same-Time Information System and Standards of

Conduct). For transmission owners that are members of

ISOs, FERC has approved an ISO-wide tariff to be used

in that region.

34See FPSC Comment for a discussion of the

importance of clarifying federal and state jurisdiction in

restructured electricity markets.

35EPSA at 11, MidAmerican at 9, TAPS at 5.

36Exelon at 29. 

37ICC at 27.
21

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

the grid.38

By contrast, some states suggested that they

should continue to set transmission rates for

individual retail customer classes (each of whom

has peak usage of the transmission system at

different times of the day and different seasons

of the year). These commenters expressed

concern that cost shifting and disruptive shifts in

tax revenues could result absent separate

transmission tariffs for each customer class.39

The issue of whether states or FERC should have

jurisdiction over the pricing of the transmission

component of bundled retail sales is moot in

those states that have introduced retail

competition and have an operating ISO in place.

In these states, transmission services, regardless

of whether they are used in bundled or

unbundled retail sales of electric power, use the

ISO’s transmission tariff. For example, the

Maine commission conceded jurisdiction to

FERC over the pricing of transmission services

and has unbundled transmission and

distribution rates so that the transmission

component is updated annually based on FERCapproved rates for ISO-New England.40 In

Pennsylvania, all retail load, whether it is a

bundled service provided by the utility as the

standard offer provider or an unbundled service

provided by the utility or an alternative

generator supplier, is served under network

transmission service supplied under the PJM

tariff.41 

In those states where an ISO is not yet operating,

some have indicated that they will use the

approved FERC tariff rates for the transmission

component of bundled retail sales. For example,

the Michigan commission requires the use of

FERC tariffs for the transmission component of

retail rates.42

Thus, in states that have moved to retail

competition and have an ISO in place, all

transmission services, whether bundled or not,

are priced under the ISO’s tariffs, which ensures

that there is comparability between wholesale

and retail transmission pricing and access

policies. As Shell explained, retail sales of

bundled energy and transmission services will

continue to be regulated by the states, but the

charges for the transmission will be a direct passthrough of the RTO transmission charges

approved by FERC.43 This policy appears to

ensure nondiscriminatory rates and treatment

for all users of transmission access and to avoid

pancaked rates, which can deter entry.

Finally, in a retail environment, the provider of

standard offer services should not be provided

preferential treatment with regard to

transmission of wholesale generation.44

According to the comments, when access to the

transmission grid is based on nondiscriminatory

rates, rather than on artificial preferences, the

grid operates more efficiently. The states that

have moved toward retail competition in New

38MinnPower at 5.

39NARUC at 34, see also PA PUC at 46.

40ME PA at 21. 

41Exelon at 29, PA PUC at 39-41.

42MI PSC at 11.

43Shell at 19.

44Once RTOs are operational, presumably they

will be using market mechanisms to manage

transmission congestion to ensure efficient transmission

pricing. FERC Order No. 2000 at 332.
22

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

England, New York, Texas, and the Mid-Atlantic

region indicated that no preferentialtreatment in

access to the transmission system is extended to

providers of standard offer service.45

 

In those states that do not yet have an operating

ISO, some preferential access to transmission

may still be afforded the utility’s native load

obligations, which may adversely affect the

competitiveness of the wholesale market. For

example, in Michigan, to the extent that utilities

have long-term firm contracts, utility native

loads receive preferential treatment to

transmission resources. Michigan’s program

treats the utility’s native load as default

services.46 Illinois law requires the standard

offer provider to be the incumbent utility.

Because this is retail bundled service, it is not

subject to FERC tariffs. Although there is no

universal agreement that this leads to

“preferentialtransmissiontreatment,” the Illinois

commission noted that “when substantial

amounts of transmission capability are retained

outside the otherwise-applicable open access

transmission tariffs,” there are opportunities to

benefit an unregulated affiliate’spower salesand

power trading business.47

 

3. Regional Transmission Siting

The third area that can affect effective wholesale

markets involvesobstacles to efficient expansion,

upgrade, and reconfiguration of the electric

power grid. Increases in generation capacity and

upgrades in transmission systems are alternative

ways by which market supply can be increased.

Efforts to reduce congestion on transmission

lines can expand geographic markets, allowing

distant generation to compete economically with

local generation and, thus, mitigating localized

market power in generation. 

Expansion, upgrade, and reconfiguation of the

power grid presents a unique problem in

electricity markets. As one commenter

explained, the existing transmission lines were

originally built as a series of back-up lines to

enhance reliability of largely self-sufficient local

franchised monopolies. Now, however, these

facilities are increasingly called upon to carry

regional transfers on a continual and expanded

basis. Upgrades have not kept pace with the

increase in demand for transmission services,

and this will become more of a problem in a

competitive market.48 As wholesale transactions

have increased and the grid has become more

congested, transmission service has increasingly

been denied or curtailed for reliability reasons.49

This reduces the effectiveness of distant

generation as a constraint on potential market

power in a local area.

The ability of any individual state, however, to

remedy transmission constraints is limited. For

example, the Illinois commission explained that

transmission constraints are not state-specific,

but regional in scope, and that if there are

transmission constraints outside of Illinois that

45Allegheny at 7, ME PA at 21, ME PUC at 8,

MidAmerican at 10, NYPSC at 21, PA PUC at 46, TX

PUC at 16. 

46MI PSC at 12. 

47ICC at 27. 

48ECA at 7.

49TAPS at 6 (TAPS members have seen the

results of this situation in foreclosed, cancelled, or

disrupted transactions, and, consequently, far fewer

responses to requests for proposals to provide distant

generation.).
23

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

affect distant suppliers reaching Illinois

customers, there is little the Illinois commission,

acting alone, can do about them.50 Another

commenter pointed out that “no state is an

electrical island.”51 Texas may be an exception,

because the wholesale transmission grid that

covers most of Texas is not interconnected with

the rest of the country (except in limited

circumstances). But as a general matter,

individual states acting alone are unable to

remedy or to address those transmission

shortages or constraints that may affect a state’s

electricity supply, but which occur outside a

state’s boundaries.52 Some commenters pointed

out that such problems also have larger

implications. For example, any local siting

decisions in California that do not adequately

address transmission shortages in that state have

potential ramifications not only for the regional

markets of the western United States, but also for

the economy more generally.53

Several states have had difficulty addressing

transmission shortages when siting for new

transmission lines required the cooperation of

neighboring states. For example, New York,

Wisconsin, and West Virginia have all recently

had difficulty obtaining approval from

neighboring states to build new transmission

lines.54 Others have noted that “practical

experience” suggests that states may not be able

to resolve all of the issues associated with

transmission siting, particularly when nonjurisdictional utilities (e.g., a federal power

agency) are involved, or when bottlenecks occur

in neighboring states.55

Few states systematically studied whether there

were any transmission constraints before

implementing retail competition,56 although a

number of states indicated that they knew of

likely transmission constraints.57 Indeed, one

state suggested that, in retrospect, greater

coordination between the actions of federal and

state governmental entities would have been

useful in the identification and resolution of

issues related to transmission constraints,

especially prior to the introduction of wholesale

open access.58

Another state commission explained that the

current situation, in which transmission rates are

set by a federal agency and construction is

authorized by a state agency, will need to

change.59 Others noted that regional markets,

which transcend state boundaries, are part of the

answer to achieve fully competitive wholesale

markets. “[T]ransmission improvements

designed to remedy constraints must be

designed on a regional basis, as single state

attempts may result in constraints in other

regions, or be far more expensive or difficult to

50ICC at 28.

51MinnPower at 6.

52Enron at 9.

53NEMA at 17.

54EEI at 6-7, TAPS at 7-8.

55MI PSC at 13.

56Allegheny at 7 (Maryland), ICC at 28 (Illinois),

PA PUC at 47 (Pennsylvania), NJ Ratepayer at 11 (New

Jersey).

57ME PUC at 8, MI PSC at 12, NYPSC at 22.

58ICC at 28.

59ME PUC at 8. See also TX PUC at 18.
24

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

accomplish than a regional approach to such

improvements.”60 The Illinois commission

believes that within the state it has authority to

address transmission constraints, at least under

some circumstances, but a centralized approach

that operates on a regional or national level may

well be the most effective way to create an

efficient transmission system.61

There seems to be a near consensus that a new

authority, beyond existing state authority, is

necessary to address transmission constraints.

At least a regional, if not a federal, solution is

required. For example, one commenter stated

that a new regulatory model for siting and

approving interstate transmission projects is

necessary if consumers are to fully enjoy the

benefits of retail and wholesale electric

competition.62 A regional body should be

empowered to judge the need for such projects,

and such body should be required to give certain

deference to local issues, including those of all

affected entities. The process should be clearly

delineated for this purpose.63

Some commenters favored a federal role in siting

oftransmission, while others suggested that such

a role was unnecessary. For example, some

argued that there is a clear need for siting

approval and federal eminent domain authority

for transmission projects needed for regional

reliability and vigorous competition.64 With the

advent of competition, some commenters believe

a role for FERC in transmission line siting may

be useful in counteracting any state’s tendency

toward parochialism.65 Other commenters

argued that federal jurisdiction over electric

transmission is essential if RTOs are to function

as truly regional entities.66 In addition, some

believe a federal right of eminent domain is

necessary where a state has been unable

expeditiously to site facilities deemed essential

through a regional transmission planning

process.67 NEMA said that there must be better

recognition in local siting decisions of the

regional economic impacts of inadequate energy

supplies.68

Exelon stated that the arguments in favor of

federal jurisdiction over interstate transmission

siting are as strong or stronger than the

arguments in favor of the existing federal

authority over interstate natural gas pipeline

siting.69 Although FERC has authority to order

construction of transmission facilities, it has no

authority to approve siting of new transmission

facilities.70 The Pennsylvania commission

supported FERC being able to make “need”

determinations regarding proposedtransmission

improvements, whether or not such

improvements cross a state line, because in

today’s regional markets, relatively small

60PA PUC at 47.

61ICC at 28. 

62ECA at 8.

63Id., TX PUC at 18.

64Enron at 9, MidAmerican at 9.

65Allegheny at 7.

66NEMA at 16.

67MinnPower at 4. 

68NEMA at 17.

69ICC at 28, see also Exelon at 30.

70Exelon at 30. 
25

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

transmission improvements may have a large

effect on the operation of the interstate grid.71

EEI described how the ability to upgrade and

build new transmission facilities is impeded in

virtually all areas of the country. No federal

agency has eminent domain authority for

electricity transmission as FERC does to site

natural gas pipelines.72 EEI stated that federal,

state, and local decision makers must cooperate

to site transmission that an RTO determines will

benefit a region. In EEI’s view, if cooperation is

not possible, FERC should have eminent domain

authority to build transmission as a backstop.73

Other commenters suggested, however, that

there have been no experiences to date that

demonstrate a need for federal jurisdiction in

looking at increased transmission needs.74

Moreover, some commenters held that the

reasons for the federal right to site natural gas

pipelines are different than those for the federal

right to site electric transmission lines. For

example, the Maine commission stated that

electric transmission facilities are substantially

different from natural gas transmission facilities

in that electricity generation plants can be

substituted for construction of long linear

transmission facilities that create visual and

environmental disturbances.

75 The Maine

commission articulated the view that because

generation and transmission are substitutes, it is

unfair to allow citizens of one community to

drive the need for construction of a transmission

facility by refusing to allow a generation plant

that can meet the need more economically in

their community.76 If federal authority is

extended to cover construction of transmission

facilities, the Maine commission believes,

authority must also include the authority and

responsibility to examine such situations and

when warranted, to override local opposition to

construction of new generation.77

On balance, the jurisdictional approach to

transmission siting authority should reflect the

regional nature of wholesale electricity markets.

This has become even more important in light of

FERC’s recently announced preference for only

one RTO to operate in each of the Northeastern,

Southeastern, Midwestern, and Western areas of

the country. Thus, a regional entity, such as an

RTO or other multi-state organization, should

have the authority to site transmission upgrades,

including the right of eminent domain.

Otherwise, a federal authority, that considers

state issues, should have such siting authority.

C. Increased Generation Capacity Also

May Address Market Power Concerns

Several approaches may be appropriate in

different circumstances for addressing market

power arising from concentrated ownership and

control of generation resources in any given

market. Which approach is efficient in a

particular case depends on all pertinent benefits

71PA PUC at 55.

72EEI at 7.

73Id. at 9.

74NYPSC at 22. 

75ME PUC at 8. The Michigan commission noted

electric generation, transmission, distribution and

distributed generation are at least partial substitutes for

one another. MI PSC at 13. 

76ME PUC at 8.

77Id. at 8-9.
26

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

and costs. In any event, an important approach

to reducing market power problems is to

eliminate outdated barriers to construction and

expansion of generating capacity. 

The comments discussed two ways to foster the

expansion of generation capacity in wholesale

electricity markets.78 The first method is to

facilitate prompt and low-cost interconnection of

new generation capacity and ensure that this

additional capacity can be sold on

nondiscriminatory terms. The second method is

to facilitate the use of customer-owned or

controlled distributed resources that act as

substitutes for centralized supplier generation

facilities.79 Self-generation of electric power

during peak-demand periods also would reduce

the load supplied by the distribution grid during

peak-demand periods. 

States have sufficient authority to implement

interconnection policies and rate designs that

will give accurate incentives to the development

and installation of centralized and distributed

resources. Coordination of these policies and

rates nationwide could help to reduce

transaction and administrative costs to speed

these technological developments. To this end,

FERC has announced recently that it will soon

“evaluate the importance of standardized

interconnection procedures.”80

1. Generation Siting and Adequate

Generation Capacity

One of the main sources of the electricity

imbalance in California has been the welldocumented lack of additional generation (and

transmission) capacity being built in California

as retail demand for electricity has increased in

California.81 This lack of additional capacity

(which has been exacerbated by the legal and

practical difficulties in siting new generation)82

has contributed to the high wholesale prices,

reliability problems, and financial difficulties of

the providers of standard offer service in

78Other methods to expand generation capacity

not discussed here include substitutes for electricity

generation such as the development and installation of

energy storage technologies and conversion from

electric-powered equipment to equipment powered by

alternative energy sources (e.g., refrigeration and

compressors fueled by natural gas, which is more

practicable to accumulate and store during off-peak

demand periods). See CAEM at 11.

79 Distributed resources generally refers to onsite

generation. The most prominent and long-established

form of onsite generation is co-generation facilities that

provide both heat and electricity in large industrial

settings. More recently, advances in generation

technology have led to development of microturbines

and fuel cells. On-site solar, wind, and geothermal

generators are other forms of distributed resources. Onsite internal combustion emergency generators (common

in hospitals and other institutions where electric power

interruptions may be particularly costly) and energy

storage devices may also be included in the definition of

distributed resources.

80 FERC, Order Provisionally Granting RTO

Status, PJM Interconnection, L.L.C., et al., Docket No.

RT01-2-000 (July 12, 2001) at 18.

81FERC, Market Order Proposing Remedies For

California Wholesale Electrics, Docket Nos. EL95-00-000,

et al. (Nov. 1, 2000). The efficient amount of new

capacity that is necessary to meet peak demand,

however, as discussed in Chapter III, should be

informed by appropriate price signals that reflect the

prices of obtaining wholesale electricity in peak periods. 

82The state’s permitting process for power plants

reportedly takes three times as long as in Texas. 

Mercatus at 11. See also, Appendix A, California Profile,

regarding recent and planned capacity additions in

California.
27

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

California.83

Whether a state with retail competition has

sufficient in-state generation to meet peak

demand in the state will be irrelevant if

transmission lines into the state are not

congested and generation capacity is available

outside the state.84 With a regional grid and

available generation capacity, the relevant

market is larger than the state, so the relevant

supply and demand relationships are regional as

well. As one state commission explained,

comparing in-state capacity with in-state peak

load is irrelevant because, in competitive

markets, generation is owned by unregulated

generators who can locate inside or outside the

state and sell to whomever they wish.85

Many of the states that have implemented retail

competition have eliminated, or do not require,

a certificate of need before a new non-utility

plant is constructed. When generation services

were considered monopoly services, state

commissions often required a utility to show that

there was a “need” for the new generation asset

prior to including its costs in the regulated rate

base of the utility, which would be recovered

through the utility’s captive customers.

Marketers contended that states should relieve

merchant power plant developers of the

requirement to obtain a certificate of need. They

argued that rules and policies that promote the

development of merchant power plants provide

numerous benefits, including lower-cost plants,

environmental improvements(asnewerfacilities

replace older generation assets), reduced

incumbent utilities’ vertical and horizontal

market power, and provision of liquidity needed

to support robust wholesale trading.86

According to EPSA, the shifting of risk from

utility ratepayers to merchant power investors

under retail competition suggests that, with

respect to development projects financed by new

entrants, certificates of need are obsolete.87

For example, in the New England Region, the

Maine Public Advocate noted that, to date, 1,600

MW of new gas-fired combustion turbine

capacity is being brought on line without any

state commission involvement.88 The Maine

commission noted that development of new

generation has exceeded load growth within

Maine.89 In the mid-Atlantic region, all three

states (Pennsylvania,NewJersey, and Maryland)

have eliminated the need requirement.90

 Some

states noted that if the applicant wishes to obtain

the right to exercise the power of eminent

domain in connection with the project, a

certificate of need is still required.91 In

83State siting requirements based on

environmental issues may present obstacles to siting

new generation facilities in any state. Such issues,

however, are beyond the scope of this report.

84In-state capacity is relevant if transmission is

constrained, if entry is impeded in areas outside the state

that would otherwise supply the state, or if demand

simultaneously peaks in the state and in surrounding

areas.

85ME PUC at 9.

86EPSA at 9.

87Id. at 10. 

88ME PA at 22.

89ME PUC at 9.

90NJ Ratepayer at 11 (New Jersey), Allegheny at

7 (Maryland), and PA OCA at 22 (Pennsylvania).

91Allegheny at 7 (Maryland), PA OCA at 22.
28

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Pennsylvania, however, the commission retains

limited authority to review plants fueled by

nuclear energy, oil or natural gas to determine

whether existing coal-fired plants could be

operatedincompliance with environmental laws

or whether new coal-fired plants could be

economically constructed and operated, so as to

obviate the need for construction of alternative

types of facilities.92 And overall in PJM, 17,000

MW of capacity are at a stage that gives

confidence they will come into service by 2004 –

4,200 MW are already under construction,

construction is set to begin on another 9,100 MW,

and 3,700 MW consist of upgrades to generation

stations that are already operating.93 In general,

PJM’sFERC-approved tariff contains a model for

analyzing regional electric generation needs,

determining procedures for evaluating

individual proposals, and defining queues for

proposed projects.94

In the Midwest, since passage of the competition

act in Illinois, 6,600 MW of new generation has

been built without a need requirement. It is

expected that 3,600 MW will come online in 2001

and 7,500 MW in 2002, with 3,600 MW of that

currently in a definitive stage.

95 In Michigan, no

new generation was built from 1990-98, but since

legislation was enacted in 2000, many merchant

plants have announced and started

construction.96 California also has adopted

accelerated plant siting procedures, and new

generation plants are coming on line. (See

Appendix A, California Profile).

The Texas commission noted that since the Texas

Legislature deregulated electric generationatthe

wholesale level in 1995, there has been a

“building boom for new power plants in

Texas.”97 Since 1995, 27 new power plants have

been built without any showing of need, totaling

over 9,300 MW of new capacity, and an

additional 27 power plants are under

construction, which will add 14,000 MW of new

capacity within the next three years.

There seems to be a consensus that in a state

with retail competition, state siting of generation

is still workable, but it should not include a

requirement that utilities demonstrate such a

facility is needed to meet native load

requirements.98 Furthermore, the comments

suggested that federal jurisdiction over

generation siting is unnecessary.99

2. The Special Case of Distributed

Resources (Generation) Owned

by Retail Customers 

Many commenters suggested that increased use

of distributed resources can help constrain

supplier market power, particularly if customers

can easily interconnect their distributed

resources with the distribution grid.100 Two

92PA PUC at 48. 

93Exelon at 4.

94PA PUC at 48.

95Exelon at 4.

96MI PSC at 13.

97TX PUC at 16.

98MidAmerican at 9.

99Allegheny at 7, Cleco at 7, MI PSC at 13, ME

PA at 22, NYPSC at 23. But see ME PUC at 8.

100Commenters suggested that the definition of

distributed resources will determine how widespread
29

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

cases illustrate this point. First, when a customer

installs onsite generation that also is

interconnected to the grid, that customer’s

demand for electricity from the grid is likely to

become more price sensitive. Increased price

sensitivity of demand for power from the grid

can materially reduce market power of

incumbent generators. Moreover, because the

distributed generation is connected to the grid

and produces more electricity than is consumed

by its owner, it becomes a competing source of

supply, not only for the owner, but also for other

retail customers. Second, even in the case where

the distributed generation is not interconnected

to the grid, its existence reduces the total

demand for electricity from the grid, and thus

may increase incentives for retail suppliers to

compete on price for remaining customers.

Commenters suggested, however, that there are

several difficulties in the effective deployment of

distributed resources.101 These include (1) retail

tariffs that limit or prohibit such installations; (2)

standby rate design structures that remove

economic incentives; (3) the lack of

interconnection standards ensuring access to the

grid; and (4) problems encountered in siting

distributed generation.102

Most of the states that have implemented retail

competition are involved in efforts to identify

any technical, regulatory, and business practice

requirements that appear to impede the

interconnection of distributed resources to the

distribution grid.103 Other state commissions

have approved a proposal to standardize and

streamline technical requirements for

interconnection to utility facilities.104 NEMA

agreed and suggested that standard

interconne ction contracts, standard

interconnection requirements and standardized

approval processes are needed for

interconnection. 

3. Reserve Requirements

Many states and FERC have struggled with how

to ensure adequacy of generation reserves in

competitive wholesale and retail markets. The

primary concern is over whether there is

sufficient generation to meet retail demand. This

is particularly acute in electricity markets

their deployment is. If the definition includes large

combustion turbines or very small internal combustion

generators that operate independently of the grid for

back up purposes, distributed resources are already

quite prevalent, but their extended use may be limited

by environmental concerns. If the definition is limited to

small onsite wind generators, and photovoltaics (PV),

there are many facilities, but little total generation

capacity. Other technologies, fuel cells and

microturbines are in early stages of commercial

production and because of cost or connection standards

are not a significant presence on the grid at this point in

time. NRECA at 17. Onsite electricity storage devices

are also a development that can shift demand from peak

to off-peak periods. These devices are classified as

distributed resources, but not as distributed generation.

101Regulators in Texas, California, and New York

have taken steps to develop and implement distributed

generation connection standards that will remove much

of the discretion that distribution companies have had in

the past concerning the terms and conditions for

connecting customer-owned generation to the

distribution grid. See Comment of the Staff of the FTC

Bureau of Economics, Public Utilities Commission of the

State of California, Docket No. R.98-12-015 (Mar. 17,

1999).

102Enron at 10, Exelon at 34, MidAmerican at 10,

NRECA at 18, NEMA at 20, and Shell at 21.

103PA PUC at 54, ME PUC at 10.

104NYPSC at 26, TX PUC at 19.
30

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

because of the lack of inventory to meet

unexpected demand. Alternative suppliers have

asserted that state efforts to address these issues

have reinforced, rather than mitigated, the

advantages incumbents already have and, thus,

have impeded efficient entry into retail (and, by

extension, wholesale) markets. 

Prior to restructuring, states required utilities to

develop plans for new generation sufficient to

meet expected growth in demand. Utilities also

engaged in generation reserve sharing, which

acted as an insurance product if unexpected

demand materialized. Reserve sharing allowed

the utilities to have enough reserve capacity

available if for some unpredictable reason (e.g., a

storm or unplanned generation plant outage),

the utility did not have the generation to meet

the volume of electricity demanded. A number

of commenters suggested that in competitive

markets, reserve sharing among competitors,

outside of contractual arrangements, may not

work.105

One of the products that is now traded in

wholesale electricity markets that serve some

states with retail competition programs is an

“installed capacity” (ICAP) product.106 The

wholesale markets in the Northeast require all

suppliers that serve retail customers to have

surplus generating capacity under contract, as

insurance for each wholesale trade they make. If

an alternative supplier or marketer owns no

generation, it can purchase installed capacity

credits from others (in an organized market) that

have more than they need to satisfy the reserve

generation requirements. ICAP is designed to

provide a steady revenue stream to help cover

the fixed costs of owning a generator, and these

payments encourage developers to build new

generation.

One commenter claimed that, because

price-responsive demand in wholesale electricity

spot markets is absent, some markets have

created installed capacity products that allow

incumbent generators to be paid twice for the

same product (i.e., one payment for the energy

from the plant and a second from having the

plant actually “in the ground,” even if all of the

capacity has been purchased).107

 This commenter

further asserted that a separate capacity market

is justified only in areas where there are

impediments to a price-responsive demand.108

Another commenter stated that a marketwithout

a reserve sharing mechanism or insurance

equivalent can impede participation by smaller

suppliers when prices and penalties for

nondelivery rise. According to this view, in such

a market, the higher reserve margins required of

smaller competitors burden their participation

because they disproportionately raise the smaller

suppliers’ costs. This commenter argues that

ICAP has not worked well, and that utilities

terminate reserve sharing agreements as they get

bigger and rely on their own self-insurance,

creating difficulties for new competitors.109

Policies that may once have been necessary to

ensure adequate generation reserve capacity

105See, e.g., ME PUC at 9.

106See Chapter III for a complete discussion of

how wholesale electricity markets operate.

107ELCON at 8.

108Id., see also Chapter III for a discussion of

importance of price-responsive retail demand.

109TAPS at 9-10.
31

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

when regulation governed the electricity

industry may be inappropriate in competitive

markets. Accordingly, states may wish to

evaluatewhether policies that govern generation

reserves in electricity markets may inadvertently

be hampering competitive retail and wholesale

markets. 

D. Conclusions

• For all of the expected benefits of retail

competition to be realized, it is imperative

that wholesale markets be competitive.

Effective wholesale and retail competition

will mutually reinforce each other, thus

combining to bring benefits to retail

customers. If more distant generators

cannot compete effectively with local

generators, or electricitymarketers cannot

obtain generation services, because of

problems obtaining transmission service,

and there are entry barriers to building

new generation, local generators may be

able to exercise market power.

• As wholesale and retail markets become

regional, governing policies and

jurisdictional approaches also must move

in that direction for wholesale and retail

competition to be successful.

• Independent and nondiscriminatory,

open access to the transmission grid is

essential for effective wholesale

competition. Independent operation of

the transmission grid not only ensures

nondiscriminatory service and rate

treatment, but also helps to ensure

impartial interconnection rules for

electricity generators to connect to the

transmission grid.

• In states that have implemented retail

competition, transmissionservicesshould

be priced the same, regardless of whether

transmission services are bundled with

generation services in wholesale or retail

sales or whether transmission services are

sold separately in wholesale or retail

sales. Providers of standard offer service

should not have preferential access to the

transmission grid in markets with retail

competition. Transmission pricing

should include a congestion component.

Locational marginal pricing is an

appropriate approach for pricing

transmission congestion in an efficient

manner unless an alternative is shown to

be superior.

• A regional entity with state involvement,

or FERC, should have transmission siting

authority. The entity would have the

power of eminent domain. Such an entity

could be the RTO that will manage the

transmission grid in any one region,

provided its scope is broad enough and it

is subject to state involvement and FERC

oversight. 

• States generally have sufficient authority

over generation siting; however, with the

emergence of retail competition and the

regional scope of wholesale electricity

markets, states should eliminate “need”

requirements for generation siting. In

addition, uniform procedures across

states governing how new generation

capacity interconnects with the

transmission grid may ease the addition

of new generation capacity by reducing

interconnection costs.
32

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

• Interconnection standards and retail

tariffs relevant for distributed resources

(including distributed generation) should

be streamlined and made as uniform as

practicable on a regional or national basis.

• States may wish to evaluate whether

policies that govern generation reserves

in electricity markets may inadvertently

be hampering competitive retail and

wholesale markets. 
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

CHAPTER III SUPPLY AND DEMAND: THE SOUND OF ONE HAND CLAPPING 

A. Introduction and Summary: Retail and

Wholesale Customer Response Is

Diluted Or Missing From Electricity

Markets

Nearly every retail electricity market is missing

one of the important components of effective

market operation: variable pricing and rate

information that allow customers to adjust the

quantitiesthey consume in response to rapid and

substantial changes in wholesale prices of

obtaining electricity. Variable pricing and rate

information are important for a well-functioning

market. Like other markets, electricity markets

are comprised of groups of sellers and buyers

seeking exchanges at mutually agreeable prices.

Sellers respond to increasing prices by bringing

more goods to the market, and to decreasing

prices by bringing less. Buyers, on the other

hand, respond to increasing prices by buying

less, and to decreasing prices by buying more.

Out of the interactions of these two groups

emerge a price and output level for which the

quantity supplied equals the quantitydemanded

(the so-called “equilibrium”).1

Almost all retail customers in states that have

implemented retail competition programs are

charged average rates for electricity generation

and marketing that are fixed during the

transition period when standard offer service is

mandated.2 Fixed prices based on average costs

do not reflect the differing prices of obtaining

electricity at differing demand levels during the

course of the day and over the year as supply

and demand conditions change. Most state retail

competition plans do not facilitate the offering of

variable pricing to customers through the use of

real-time ortime-differentiated price information

and rates that would allow them to save money

by reducing their consumption when wholesale

prices are high (or by increasing their

consumption when wholesale prices are low).

As a result, electricity suppliers have increased

incentives to raise prices to wholesale buyers

above where they otherwise might be. This is

true becausewholesale buyers cannot respond to

higher prices by reducing their purchases as long

as their retail customers have diluted or nonexistent price signals to induce them to reduce

consumption when wholesale prices rise.3 It is

insufficient to provide accurateprice signals only

to wholesale buyers (i.e., retail suppliers), and

notretail customers, because a wholesale buyer’s

demand at any point in time is directly derived

from retail demand of its customers. The direct

relationship between wholesale and retail is

strong because electricity cannot be stored

practicably in large quantities. If retail

customers instead face prices that reflect the

retail suppliers’ prices for obtaining electricity in

1

See generally EEI at 10-11. 

2Under traditional state retail rate regulation,

customers pay prices averaged over an extended period,

often a year or more. In most states that have

implemented retail competition, rates for standard offer

service, which is offered to customers who have not

chosen an alternative supplier, are even further removed

from actual wholesale price variations than traditional

retail rates, because they are based on regulated rates at

the time the state introduces retail competition. See

Chapter IV for further discussion of how fixed standard

offer service prices can affect retail competition.

3Although accurate retail prices can assist in

addressing potential supplier market power, the

discussion in Chapter II regarding large geographic and

product markets, as well as the policies discussed in

Chapters IV and V regarding standard offer service

pricing and lowering barriers to entry also address

potential supplier market power concerns.
34

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

wholesale markets, equilibrium will more likely

be reached in retail markets. Indeed, one

commenter suggested that “the most significant

shortcoming nationally has been the consistent

implementation of market mechanisms on the

supply side without creation of needed checks

and balances of load response mechanisms.”4

One of the principal benefits of minimizing

impediments to entry of retail suppliers

(discussed further in Chapters IV and V) is that

some retail suppliers are likely to offer real-time

pricing and other innovative services to retail

customers. Variable pricing is likely to provide

significant system benefits (e.g., reduced peak

load consumption, lower prices, and greater

reliability) by giving customers timely and

accurate price signals to shift or reduce loads on

the grid during periods when wholesale prices

are high.

States have valued providing customers with

stable bills as a consumer protection measure

during the transition period to competition.5

Because variable pricing is absent, however,

neither retail customers nor retail suppliers can

react to price signals to govern their

consumption. Consequently, the market is not

brought into equilibrium because retail

customers do not adjust their consumption of

electricity to reflect the true price of supply. In

other words, demand peaks may not be as high

if retail customers paid the equilibrium price to

obtain the electricity in the time periods when it

is consumed. 

The absence of accurate price information based

on real-time usage also occurs in wholesale spot

markets that support retail electricity markets.

In wholesale electricity spot markets in

California, New York, New England and the

Mid-Atlantic states, buyers generally are able to

participate in the market only to the extent of

bidding quantities they need and then letting

supply conditions set the price, rather than

bidding both quantity and corresponding prices

at which they will purchase their electricity

supplies.6

 And, as discussed above, wholesale

market demand at any given time is derived

from retail customers’demand at that same time.

Thus, it is important for states to adopt policies

that will facilitate retail pricing that reflects realtime wholesale price changes. As a result, there

would be less need for the consideration of price

caps on wholesale sales of electricity, because

market participants will be able to adjust their

consumption according to the prices for

wholesale power.

B. Policies ThatIncreaseTransparency of

Market Signals in Retail Electricity

Markets Are Vital to Effective

Competition

Generally, retail customers are not charged

prices that reflect the changing prices of

obtaining electricity from wholesale markets at

various times of the day and over the course of

the year. As demand increases during the day,

generation prices increase as more costly

electricity is produced to meet peak demand.

For example, nuclear power plants (which have

low marginal costs per unit of electric power

produced) are dispatched first to meet demand.

The last generationunitsdispatchedare typically

older, oil or gas-fired peaking plants with high

4MG at 7, see also IECP at 12-15.

5

See, e.g., PA PUC at 50-51. 6NRECA at 16.
35

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

marginal costs. 

To date, none of the states that have

implemented retail competition has permitted

appreciable demand-side participation based on

variable pricing and rate information that

reflects real-time prices to obtain electricity from

wholesale markets under various demand

conditions.7 Retail customers generally see only

a price that reflects the wholesaler’s average

price to obtain electricity, which can be based on,

for example, a 12-month average.8

 In addition,

prices for standard offer service in most states

are fixed during the transition to competition.9

Thus, customers are not charged variable prices

that mirror changing wholesalepricesduring the

day to guide their consumption decisions. Not

surprisingly, then, customers have little

incentive to consume more electricity during

those hours of the day when it is less expensive

for their retail supplier to obtain electricity or to

reduce electricity consumption during those

hours of the day when it is more expensive for

their retail supplier to obtain it. Many states

have valued providing customers with stable

electricity bills, at least during the transition

period, rather than exposing customers to

potentially volatile wholesale prices, despite the

fact that this decision may not produce a fully

competitive market.10

Average retail prices also diminish incentives to

invest in new technologies and equipment (e.g.,

real-time meters, programable home appliances

to operate at non-peak demand periods, and

energy storage devices). Such devices, used in

conjunction with variable pricing, provide both

the incentive and the opportunity to shift some

consumption of electricity from peak periods to

off-peak periods. Average prices also mask

incentives to install onsite generation equipment

for use during peak demand periods (or

whenever high wholesale prices make onsite

generation attractive). Also, due to the use of

average prices at the retail level, electricity

suppliers with market power may be able to

exercise it more readily at the wholesale level,

becausewholesale demand is derived from retail

demand and retail customers have little

incentive to consume less electricity when

wholesale prices increase.11

The approach that supplements variable pricing

best by providing the most accurate, timely, and

useful price information at the retail level is

usage informationbased on real-time metering.12

Usage information based on time-of-day

metering also would improve the accuracy of

price signals, but is unlikely to be as effective as

real-time metering in light of the fact that timeof-day metering still involves averaging of

extreme variability in wholesale prices. Both

types of metering allow the meter to record the

time period when electricity was consumed in

addition to how much electricity was consumed.

Real-time meters use two-way electronic

linkages between customers and suppliers that

7

ELCON at 26-28.

8AREM at 13.

9

Exelon at 32, New Power at 4. Standard offer

service is the service that states have generally mandate

that distribution utilities provide to retail customers that

do not choose an alternative supplier. It is discussed

extensively in Chapter IV.

10See, e.g., PA PUC at 50-51.

11MD OPC at 8-9.

12MidAmerican at 10, NEMA at 18.
36

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

allow the retail supplier to charge prices that

echo changes in wholesale prices. These meters

are commercially available, but may be

expensive to install on a customized basis; their

operating costs, however, may be lower than

traditional meters, because real-time meters are

generally “read” remotely through an electronic

link rather than manually. Per unit costs are

generally substantially lower if installation of

real time meters is undertaken for an entire area.

Real-time meters may be appropriate

particularly for large users of electricity, such as

industrial or commercial customers, which

account for the majority of the nation’s electricity

demand.13

Time-of-day meters are generally less expensive

to buy than real-time meters and also can

provide more accurate price signals than most

existing meters, but to a much lesser extent than

real-time meters. Time-of-day meters record

how much electricity was used during a discrete

time period (e.g., between 7 a.m. and 6:59 p.m.)

over a billing cycle. 

Variable pricing, based on the time-of-day use, is

similar to pricing for long distance telephone

service. For example, long-distance prices

during week nights and weekends are generally

cheaper than rates for service between 7 a.m. and

7 p.m., Monday through Friday. Similar

customer offers could be made by retail

suppliers if customers had access to time-of-use

meters to record their electricity consumption

patterns.

Several electricity suppliers suggested that

“customers should be encouraged to replace

existing, antiquated meters with advanced

meters that measure usage electronically on a

real-time basis.”14 Customers who choose

alternative electricity suppliers might then be

able to reduce their total electric bill by shifting

consumption to off-peak periods. This would

benefit not only the customer, but would also

improve reliability for the whole system by

reducing peak loads and might reduce overall

system costs by reducing the need for high-cost

peak generation.

Very few customers have real-time or time-ofday meters.15 In addition to cost considerations,

this may reflect the fact that very few states have

opened up metering services to competition.

Some states, such as Massachusetts, have

determined that subjecting metering services to

competition would not be in the public interest.16

Alternative suppliers have contended, however,

that if metering services are not open to

competition, they cannot offer creative service

offerings, such as variable pricing, that retail

competition can provide.17 

Other stateshave indicated that they determined

to mandate the use of average prices (rather than

time-sensitive prices) for standard offer service

as a consumer protection measure during the

transition period.18 These states decided that

13NYPSC at 24-25.

14Shell at 20.

15Exelon at 32.

16Massachusetts Department of

Telecommunications and Energy, DTE 00-41, Legislative

Report (Dec. 29, 2000).

17AREM at 12, New Power at 8-9, NEMA at 6,

Shell at 11-12 (incumbent control of metering and billing

is problematic).

18PA PUC at 50-51.
37

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

customers should be insulated from market

signals through the use of average prices for

standard offer service, although transparent

market signals likely would reduce customer

usageduringpeakdemandperiods and, thereby,

reduce average costs of acquiring electricity for

standard offer service customers. The

underlying goal of such a policy appears to be to

ensure rate stability to customers during the

transition period. It does not necessarily follow,

however, that exposing customers to variable

prices and real-time metering is necessarily

incompatible with stable customer bills.19

 With

variable retail pricing that reflects underlying

real-time wholesale prices, retail prices

sometimes will be higher than the average price

and sometimes lower. The aggregate bill

rendered under variable pricing could be higher,

lower, or the same as the bill for the same

individual customers under average pricing.20 A

customer’s bill will tend to be lower to the extent

that the customer consumes less electricity than

average when the real-time price is high. And

some customers may be able both to consume

more total power and pay less in total when they

shift consumption from high price hours to lowprice hours. 

Until customers have the ability to participate

effectively in retail markets through variable

pricing in conjunction with sufficient and

transparent price information, retail markets

cannot operate efficiently, and thus are less likely

to be fully competitive. Wholesale markets also

are more likely to fall short of being fully

competitive because of market power problems.

Variable pricing and installation of real-time or

time-of-day meters along with time-sensitive

rates are two measures that can increase the

demand-side responsiveness in retail (and

wholesale) electricity markets.

C. States That Have Implemented Retail

Competition Programs Have Not Yet

Permitted Retail or Wholesale

Customers to Participate Effectively in

Wholesale Electricity Markets

None of the restructured wholesale markets

(California, New York, New England and the

Mid-Atlantic states) allow retail or wholesale

buyers toparticipate through flexible supply and

pricing requests in wholesale electricity spot

markets, although as discussed below, these

markets are starting to allow such participation.

Some commenters suggested that the rules of

currently restructured wholesale spot markets

favor supply increases, rather than demand

reductions or shifts in consumption timing, as

the initial response to capacity shortage

situations.

21

 Comparable rules do not exist

across the board to provide the same incentives

19Testimony of Severin Borenstein, United States

Senate Committee on Governmental Affairs, Hearing on

Economic Issues Associated with the Restructuring of

Energy Industries (Jun 13, 2001) at 16-19. Other things

remaining constant, real-time pricing and average

pricing will yield the same revenue to a utility over a

regulatory ratemaking cycle and averaged over all

customers, if the regulated rate is based on the real-time

price averaged over the rate making cycle.

20Id. The effect of average pricing is to protect

customers that impose higher costs on the system

(disproportionately using electricity during peak

demand periods, for example) from paying for the

incremental costs they impose on the system. 

Conversely, customers that impose lower costs on the

system (disproportionately using electricity during offpeak periods, for example) are prevented by average

pricing from being rewarded for consuming less during

periods when wholesale prices are high. 21ELCON at 9, IECP at 13.
38

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

and opportunities for demand reductions or

other demand-side responses during capacity

shortage periods. Enhanced demand-side

response can be expected to moderate wholesale

spot market prices and price volatility, as well as

improve reliability for electricity.22

 

Some industrial users claimed that the lack of

demand-side response has occurred because

FERC has left development of demand

responsiveness to the states and to the market

operators, because it did not recognize the

important role of retail demand price sensitivity

(elasticity) in curtailing market power in

wholesale markets.23 Others asserted that efforts

to institute demand-side measures have been

opposed by generator s an d

transmission/distributioncompanies thatbenefit

from inflexible demand.24 For example,

Industrial Customers contended that the

governance structure of wholesale market

operators does not contain sufficient numbers of

end-use customers, resulting in demand-side

response policies being given short shrift by

market operators dominated by suppliers and

transmission owners.25

Commenters suggested that increasing the

elasticity of demand bid into wholesale spot

markets would be a critical short-term measure

to moderate market power that may be exercised

in such markets.26 To understand how this

would work, it is important to understand how

wholesale spot markets operate. 

Electricity is bought and sold at the wholesale

level in hour (or smaller) blocks of time.

Restructured wholesale electricity spot markets

in New York, New England, and the MidAtlantic states generally trade two types of

products: energy and ancillary products, which

are used to ensure reliable operation of the

transmission grid. For example, each wholesale

market operator (the ISOs in New York, New

England, and the Mid-Atlantic states) maintains

a spot market that facilitates trades for energy

(i.e., a supplier will purchase a certain number of

megawatts for a particular hour (e.g., 2 p.m. to 3

p.m.) to meet expected demand because the

supplier cannot generate enough electricity itself

to meet that demand). In addition, these markets

facilitate trades, on an hourly basis, of ancillary

products that ensure reliable operation of the

transmission grid. For example, “spinning

reserves” are used to ensure that if additional

generation capacity is needed to meet a supply

shortfall, it can be brought onto the system in a

short amount of time. 

In these three markets, energy and ancillary

products are generally traded on a spot market

for day-ahead and hour-ahead power needs.

The energy and ancillary product markets in

each of these areas are largely served by the

same generating units. The result is that the

rules for pricing, bidding and settlement for any

one market can affect the price and quantity bid

into any of the other markets. In addition to

operating the spot markets, the ISOs in New

York, New England and the Mid-Atlantic states

also operate and control the transmission grid in

the area.

22IECP at 13.

23ELCON at 26, IECP at 13.

24ELCON at 27, IECP at 13-15, MG at 11.

25IECP at 13-15.

26ELCON at 27, IECP at 12.
39

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

In California, the California legislature created

two institutions to operate wholesale markets.

The first was the California ISO, which is

responsible for operating, and ensuring the

reliability of, the major part of the transmission

grid in the state, as well as for managing auction

markets for real-time energy and for certain

ancillary products.27 

The second institution was the Power Exchange

(PX), which was independent of the ISO, and

operated auction markets for day-ahead and

hour-ahead energy. The California PX has filed

for bankruptcy following FERC’s decision to

remove the requirement that the major IOU’s in

California use the PX’s spot market to buy and

sell all their electric power.28 At the time of this

writing, California power purchases are

predominantly arranged through longer-term

contracts with substantial state involvement. 

In each of these four regional spot markets, it is

generally the case that purchasers can submit

bids only for the amount of electricity they

would need to satisfy their retail demand

obligations. They are unable to bid varying

quantities and prices. Rather, they can bid only

quantities, and they must pay the price at which

the market clears for the quantity that they bid.

Suppliers, by contrast, bid the amount and price

for which they are willing to sell electricity. 

If wholesale buyers, whether they are large retail

users or retail suppliers that serve retail

customers, were able to bid the prices they are

willing to pay for varying amounts of generation

supply at wholesale, a significant amount of

demand might be curtailed or shifted to other

time periods when wholesale prices increase.

This will not occur, however, until retail demand

is more price-responsive, because wholesale

demand is nearly entirely derived from retail

demand. 

There are two possible ways to allow retail

suppliers and large retail customers to

participate in wholesale spot markets. The first

method requires the operators of the wholesale

spot markets to redesign auctions that occur in

the market to allow suppliers and customers to

bid variable price and quantity data for each

given time period. This would entail

modification of the current auction rules and the

corresponding software used to conduct the

auction. Rather than redesign the auction

process, the second method allows retail

customers to participate in wholesale spot

markets as “suppliers.”

29 It is likely that only

27Ancillary products in California include

spinning reserve, non-spinning reserve, regulation

reserve, and replacement reserve. Each of these four

products is used to various degrees to ensure that if

additional generation capacity is needed to meet a

demand shortfall, the electricity can be brought onto the

system in a short amount of time. For example, spinning

reserve may be available on shorter notice that nonspinning reserve.

28 FERC, Order Directing Remedies for

California Wholesale Electric Markets, Docket Nos.

EL00-95-000 (Dec. 15, 2000). 

29Such participation relies on the concept that a

reduction in consumption by a retail customer is

equivalent to an increase in generation by a wholesale

generator. In this capacity, the supplier or customers

acts as though it is a supplier in a wholesale spot market. 

For this to work, the operator of the wholesale spot

market must establish a baseline of consumption for

each participating retail customer so that the supply bid

into the wholesale market to reduce retail consumption

can be quantified. The opportunity to bid in reductions

in consumption on a real-time basis and to receive

wholesale market rates for such reductions gives the

customer incentives equivalent to real-time pricing. The
40

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

large, sophisticated retail customerswill actually

participate in wholesale electricity spot markets.

A benefit of a “price-responsive” demand will be

that it effectively caps the market price at the

level at which load is willing to be interrupted.

In other words, price-responsive demand

bidding cannot prevent the possibility of

capacity withholding by generators, but it can

reduce the effect of any such withholding on the

market price, and thus reduce the profitability of

withholding and incentives to withhold

generation.30

 

Increased use of interruptible contracts, by not

only electricity suppliers, but also by large retail

customers, also may facilitate demand-side

responsiveness to price changes. Similarly,

policies that allow participation in wholesale

markets by large retail customers allow these

customers to manage directly their load

requirements in response to real-time wholesale

electricity prices.31

A number of wholesale spot markets have just

begun, or are about to begin, to allow wholesale

suppliers and large retail customers to bid as

suppliers into regional wholesale markets for

electricity.32 For example, the PJM ISO, which

serves the Mid-Atlantic states, is trying to

develop and implement a system to allow priceresponsive demand to be bid into the energy

market.33 The Pennsylvania commission also has

recently approved a large retail customer

demand-response tariff for one of the utilities

operating in the state.34 

ISO New England is experimenting with an

“Enhanced Load Response Program” that

responds to fluctuations in the wholesale spot

prices of the regional market.

35

 In addition,

FERC recently approved a demand-side bidding

plan that allows ISO New England to

compensate large retail customers in the region

for interrupting load during power shortages.36

The New York commission has approved tariffbased programs thatprovide incentives to curtail

load due to potential shortages. It is now

working with NYISO to implement such

programs in cases of high prices or supply

disruptions.37 In addition, some states have

approved some load curtailment programs that

allow large customers to curtail usage in

benefit of this approach is that the market operator does

not have to rework the auction process (rules and

software) as extensively as under the first option.

30MD OPA at 8. See also Stephen J. Rassenti,

Vernon L. Smith, and Bart J. Wilson, “Demand-Side

Bidding Will Control Market Power, and Decrease the

Level and Volatility of Prices,” manuscript, University of

Arizona (Feb. 2001). Even if demand is not pricesensitive, it is important to note that in situations where

the unilateral and coordinated exercise of market power

are unlikely, efficient short-term equilibrium pricing

should still prevail without real-time retail pricing.

31NYPSC at 24-25.

32EEI at 10. 

33MD OPA at 8. 

34Pennsylvania PUC, Docket No. R-00016402

(May 24, 2001); Electric Power Daily (May 29, 2001).

35ME PUC at 9.

36Electric Power Daily (May 17, 2001).

37NYPSC at 24-25.
41

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

exchange for financial incentives.38 

Large retail customer participation in wholesale

markets, coupled with variable retail pricing,

would benefit all retail customers, because the

average price paid by all customers decreases as

peak demand is reduced. These programs

increase system reliability, mitigate the potential

for price spikes during periods of peak demand

and supply scarcity, and increase the

opportunity for retail suppliers to add value to

commodity reselling, as well as indirectly reduce

the environmental impacts of electricity

production.39 Moreover, real-time, demand-side

participation by wholesale buyers and large

retail customers of electricity can potentially

mitigate existing electricity supplier market

power and increase incentives to attract

customers by lowering prices. 

D. Conclusion

• So far, neither retail nor wholesale

markets for electricity generation

encourage effective demand-side

responses. Generally, retail customers do

not have price information and timesensitive rates that reflect the changing

price of obtaining electricity at various

times of the day and over the course of

the year. Prices are likely to be lower and

reliability is likely to improve if more

customers have time-sensitive rates and

timely and accurate price information.

With these things, customers can make

better consumption and investment

decisions that determine an efficient

market equilibrium for electricity

services. Increasing the price sensitivity

of demand also will help to constrain

existing or potential market power in

generation. This is true because a price

increase will be less profitable for

generators if it is passed through and

retail buyers respond by reducing their

consumption by a significant amount.

• Real-time meters, which use two-way

electronic linkages between customers

and suppliers to allow the retail supplier

to charge prices that echo changes in

wholesale prices,provide retail customers

with instantaneous information about

prices, and record not only the amount of

electricity used, but when it is used

(especially for industrial and large

commercial customers). State policies

that eliminate barriers that limit the

ability or incentive of electricity suppliers

to offer variable pricing through the use

of real-time meters are likely to increase

the demand-side response. Real-time

pricing will help alleviate market power

concerns and reduce the fluctuations in

quantity demanded. Seasonal and timeof-day pricing differences also will

increase the demand-side response, but

not as effectively as real-time metering

and pricing.

• In conjunction with variable pricing for

generation services, retail suppliers

should be permitted to offer competitive

metering and billing services to their

customers. Such competition would

encourage the development of innovative

new services (e.g., real-time pricing).

38ICC at 30, MI PSC at 14, NJ Ratepayer at 12,

NYPSC at 24-25, PA PUC at 51-52. 

39See, e.g., EEI at 10-11.
42

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

• At present, in most organized wholesale

spot markets, retail electricity suppliers

bid only quantities, not prices. This

characteristic should be modified to

permit buyers to bid a variety of

combinations of price and quantityso that

wholesale prices arenot established solely

by sellers’ supply offers. Because

wholesale supplier demand is derived

from retail demand levels, this policy will

be most effective when retail customers

are provided accurate and timely price

information and real-time rates so that

they can adjust their consumption

according to price changes. These

varying levels of retail demand can then

be passed on to retail suppliers so that

they can participate in wholesale spot

markets in a more effective manner.

Currently, most wholesale spot markets

do not allow retail customers to

participate directly as suppliers at all.
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

CHAPTER IV STANDARD OFFER SERVICE PRICING HAS A SUBSTANTIAL

EFFECT ON ENTRY OF NEW RETAIL SUPPLIERS

A. Introduction and Summary

Economic theory and antitrust experience

emphasize the nature of entry conditions as an

important aspect of effective competition.

1

 Entry

conditions are particularly important when

structuring a transition from state-franchised,

local monopolies to a competitive marketplace.

Some means must be chosen to facilitate the

long-run, efficient entry of entities to compete

with the incumbent in both generation and retail

marketing. One option would be to break up

existing generation assets to form two or more

generation companies, as the United Kingdom

eventually chose to do. At the retail level, states

generally have relied on new entry by electricity

marketers or utilities expanding beyond their

franchised territory to reduce concentration in

existing electricity markets in the U.S. Some

states such as California, Maine, Massachusetts,

and New York have ordered or encouraged

utilities to divest generation assets to obtain a

market-based assessment of stranded costs,2

 but

these divestitures have generally not required

that a utility sell its assets to more than one

company. Other states, such as Texas, have

limited the market share that any one generation

company can hold in a region. 

Entry is at the heart of an effective transition to

full competition. As discussed below, however,

there are significant entry barriers that can

impede entry into retail electricity markets.3

Without actual entry,

4

customershave no choices

among competing prices, and incumbents have

few incentives to broaden or improve the

services they offer. As discussed in Chapter I,

many states have initiated retail competition

with the expectation that competition, prompted

by entry from new competitors, will bring both

competitive pricing and new services to

customers, such as real-time pricing, as

discussed in Chapter III.

Retail entry in a local area can occur by means of

an unregulated affiliate of a distribution utility,

new generation facilities being built in the area,

generation from distant facilities that is

transmitted through transmission lines (e.g.,

1

There is an extensive empirical and theoretical

literature on entry and entry barriers. Text treatments

include, for example, Dennis Carlton and Jeffrey Perloff,

Modern Industrial Organization, (2nd Ed., Scott,

Foresman & Co., 1994); Douglas F. Greer, Industrial

Organization and Public Policy 3rd Edition, Chs. 9-10

(New York: Macmillan, 1992); F.M. Scherer and David

Ross, Industrial Market Structure and Economic

Performance 3rd Edition, Chs. 10, 17 (Boston, Houghton

Mifflin, 1990). The Department of Justice and Federal

Trade Commission Horizontal Merger Guidelines also

focus on entry and its implications for competition. 

2Divestiture establishes a market-based

assessment of the value of generation assets. This value

can then be subtracted from the undepreciated book

value of the divested assets to establish the level of

stranded costs, if any, associated with these generation

assets.

3

Several entry barriers are discussed in this

chapter, including the problem of nondiscriminatory

access to transmission, which also was discussed in

Chapter II. Certain retail supplier requirements, the

inherent difficulties of educating consumers about

available choices in retail electricity markets, and any

cross-subsidization between regulated and unregulated

operations of the distribution utility also pose entry

barriers. These issues are discussed in Chapter V.

4

Potential entry also may constrain prices if it is

timely, likely, and sufficient as described in the

Horizontal Merger Guidelines.
44

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

incumbent utilities expanding outside of their

franchise territory), or generation resold by

electricity marketers. Construction of new

generation does not occur instantaneously, so

retail entry by distant generators and electricity

marketers may take place quicker if they have

nondiscriminatory access to the transmission

system. Lack of such access, as discussed in

Chapter II, creates a barrier to retail entry. 

Comments suggested that the state policies that

most significantly affect entry into local retail

markets include how standard offer service is

priced and how standard offer service providers

and other suppliers can obtain necessary

supplies to meet their obligations. Standard

offer service is provided to customers who do

not select an alternative generation service

provider or whose supplier has exited the

market.5

 In most states, the price that the

distribution utility must charge for standard

offer service is established by regulation and

“fixed” – that is, it generally does not vary with

increases or decreases in wholesale prices. The

distribution utility is not permitted to offer a

price lower or higher than the regulated

standard offer service price, and thus the

distribution utility’s price remains regulated,

even as new entrants are allowed to compete

against its price. In most states, unregulated

affiliates of the distribution utility may offer

generation services that compete with the

standard offer service. States have generally

linked the duration of standard offer service to

the time period during which incumbent utilities

are permitted to recover their stranded costs.

A key policy decision affecting competitive

performance in retail electricity markets is how

the generation portion of standard offer service

is priced.6 Many states denote this as the “price

to compare” or the “shopping credit.” The

shopping credit is the main component of the

standard offer service price. The shopping credit

is important because it is the price that new

suppliers, including unregulated affiliates of the

distribution company, must compete against if

they are to attract customers. It also represents

the amount that the customer avoids paying

when the customer chooses an alternative

generation service provider, because the

customer now pays the alternative electricity

supplier’s charges for generation services.

Industry participants refer to the difference

between the price to compare (or shopping

credit) and the entrant’s costs as “headroom.”

Thus, large headroom, which represents

prospective profit margins, is a primary

incentive for alternative retail suppliers to enter

the market. 

There are several reasons why the magnitude of

headroom may be insufficient to attract entry of

a supplier that is at least as efficient as the

supplier of standard offer service. First, in many

states, the shopping credit is fixed regardless of

wholesale prices; this may shift so much risk to

5We have used the term “standard offer price” to

include the costs of generation, transmission and

distribution services. Some states have termed the firm

that provides standard offer service as the default

service or provider of last resort. In some states, the

term “provider of last resort” applies only to service for

customers whose designated alternative service provider

has exited the market. Green Mountain at 3, n. 1.

6

The state will continue to regulate the price for

transmission and distribution services, regardless of

whether a customer chooses an alternative electricity

supplier or is provided service by the standard offer

service provider. Often states have capped the rates for

transmission and distribution services during the

transition period. 
45

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

suppliers that entry is unattractive at that price.

Second, the shopping credit may not fully reflect

the avoided costs of the standard offer supplier.

Third, licensing and otherregulatorycosts facing

newsuppliers may be high enough to discourage

entry (these issues are discussed in Chapter V).

Recent wholesale price increases in many cases

have eliminated the margin betweenanentrant’s

wholesale costs for electricity and the shopping

credit, thus eliminating headroom. The common

result appears to be a lack of entry by alternative

retail suppliers in some states such as Arizona,

Maine, Maryland, Massachusetts, New Jersey,

and Ohio, and some exit of earlier entrants in

other states such as Pennsylvania. High

wholesale prices also have causedsome standard

offer service providers (e.g., certain of the

distribution companies in California and

Pennsylvania) to make unprofitable sales of

standard offer service.

It is unclear at this time whether the policy

choice of providing standard offer service has

yielded significant consumer benefits.7 Because

the shopping credit continues to be a regulated

price that does not necessarily reflect underlying

wholesale prices (see Chapter III), it is doubtful

that this price truly reflects a competitive market

price for generation services. Thus, effective

competition may not yet have taken hold in any

state, because the price against which retail

suppliers are competing is artificial. In light of

these issues, during the transition period, states

may wish to engage in pilot programs that test

various methods of ensuring that customers

have reliable and competitive electricity service.

Such programs could provide valuable

information to states about how best to structure

the movement from the current transition period

to full competition once stranded costshavebeen

fully recovered.

B. The Price of Standard Offer Service

Can Significantly Affect Entry

One of the most critical policy decisions states

make in implementing retail competition plans

is how to ensure that electricity is provided on a

stable basis to customers that do not or cannot

choose an alternative electric power supplier.

All states that have implemented retail

competition programs have developed a

standard offer service for residential and small

commercial customers to ensure this policy goal

is met. Often the price for standard offer service

is fixed so that residential customers have access

to this essential service during the transition

period at a price no higher than they were

paying before retail competition began. In most

states, but not all, during the transition period

the standard offer service is provided by the

franchised distribution company in the area. 

Standard offer service has typically been

structured to resemble the pre-restructuring rate

design that was used by the utility. In other

words, when states have unbundled generation

services from transmission and distribution

services, they have done so in a manner that

preserves historical rate design. This generally

has preserved relative rate differences between

classes of customers.8

7Allegheny and ELCON note a more general

concern that standard offer service will insulate

customers from price signals to such an extent that

markets will not be able to develop. Allegheny at 5,

ELCON at 22. 8

See ME PA, Attachment at 4.
46

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

1. Policy Elements Affect the

Pricing of Standard Offer

Service

The comments suggested that competitive

market performance in retail electricity markets

is dependent on how the shopping credit is

priced. This price is important because it is the

price that new suppliers must compete against if

they are to attract customers.9 The policy

challenge that states face is how to establish the

shopping credits at levels that encourage entry

by efficient suppliers to provide effective

competition to standard offer suppliers (usually

the incumbent distribution utility) without

setting the level so high as to encourage

inefficient entry or to make service unaffordable

to those customers who are unable to secure

service elsewhere. 

Although there was general agreement among

commenters that the shopping credit should

equal the costs that the distribution company (or

other supplier of standard offer service) avoids

when a customer selects an alternative service

provider, there were many disagreements as to

how to calculate avoided costs. In general,

alternative suppliers favored more inclusive

definitions of avoided costs. For example, the

National Energy Marketers Association urged

that standard offer prices equal the utility’s fully

embedded costs, including cost differences

between classes of customers (such as those

reflecting differing usage profiles). Alternative

suppliers emphasized that failure to include all

of a utility’s avoided costs in calculating the

shopping credit results in alternative suppliers’

customers paying twice for the same services.10

Comments from the association of investorowned utilities, the Edison Electric Institute

(EEI), focused on the opposite concern. It

contended that excessive shopping credits

subsidize inefficient entry. EEI stated that the

correct approach is to establish shopping credits

equal to the costs the utility avoids (i.e.,

incremental avoided cost) when a former

customer selects an alternative service provider.

EEI suggested that some states deliberately

established shopping credits in excess of this

level.11 By contrast, Exelon, a firm that includes

both a distribution utility subsidiary, with

franchise areas in Pennsylvania and Illinois, and

a subsidiary that is a new entrant in other states’

retail markets, favored a broader formulation for

the shopping credit that would include customer

acquisition and administrative costs.12

Many comments pointed out that setting a

shopping credit too low creates a deterrent to

9

Suppliers also may attract customers by

offering superior service or distinct products.

10AREM at 8-10, Green Mountain at 3-4, NEMA

at 6-8, New Power at 3-4, and Shell at 11-13 and 15. For

example, New Power suggested that if an alternative

electricity supplier bills its customers for generation

services, the utility should be required to reduce its

billing fees to distribution customers in light of the fact

that these costs no longer are used to support the

customer that has chosen an alternative supplier. New

Power noted that the same is true for a utility’s costs to

support customer call centers, the utility’s cost of

procuring power, and certain transmission costs -- none

of which are used by the customer that has chosen an

alternative supplier. New Power at 3. See generally

NAFC at 5-27 (how cross-subsidization distorts the

competitive process).

11EEI at 3.

12Exelon at 21.
47

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

efficient entry.13 This result is especially the case

where the shopping credits are set at fixed price

levels during the transition period.14 Where

retail prices that efficient entrants are able to

charge are below wholesale prices, for example,

there is no incentive for otherwise efficient

entrants to enter. Entrants offering services

comparable -- but not superior -- to those

available at the shopping credit rate may not be

able to attract customers due to customer inertia,

unless they offer a discount off the shopping

credit rates.15

 Thus, the level of the shopping

credit serves as a cap on the prices entrants are

likely to be able to charge.16 

By contrast, several commenters identified

Pennsylvania as the best example of a successful

customer choice program and attributed this to

greater initial headroom for entrants.17 Ample

headroom also is at the core of the

overwhelming customer interest in the retail

competition pilot programs in Texas, where full

retail competition does not begin until January 1,

2002.18

Comments identified three policy decisions as

having significant effect on pricing of the

shopping credit. These include whether to pass

through increases and decreases in wholesale

energy prices to retail customers, the length of

the stranded cost recovery period, and initial

price reductions for certain customer classes.

The cost of wholesale electricity, along with

other wholesale market issues, is discussed in

Section D, infra.

a. Pass Through of Fuel and Other

Costs of Generation

The first of these policy decisions is whether

changes in fuel and other costs of generation

should be passed through the shopping credit to

customers. During the first six months of 2001,

substantial increases in fuel costs (other than

coal) have been experienced nationwide, and

these fuel price increases have been reflected in

wholesale electric power price increases.19 In

13Allegheny at 5, AREM at 8-9, Cleco at 4, EEI at

13, Enron at 6-7, Green Mountain at 4, IURC at 3-4,

Mercatus at 13-14, MI PSC at 7, MidAmerican at 5,

NARUC at 9, NEMA at 7, NJ Ratepayer at 8, New Power

at 3-4, NYPSC at 13, PA OCA at 18, RPPI at 19-20, Shell

at 10-11, and TX PUC at 11.

14California had a maximum transition period of

four years whereas the duration of Pennsylvania’s

transition period varies by utility and are approximately

8 to 10 years. ME PA, Attachment at 9-10, 13-14.

15Allegheny at 5-6, Enron at 5-7, Exelon at 20,

ICC at 18, MI PSC at 7, ME PA at 14, NJ Ratepayer at 6-7,

and Shell at 10-13. See generally NAFC at 7-8 and 12,

(analogizing regulated below cost rates for standard

offer service as government authorized predation).

16See, e.g., EEI at 13, ELCON at 22, MidAmerican

at 5, NARUC at 9-11, NJ Ratepayer at 8, and New Power

at 3-4. A notable exception may be electricity produced

from renewable resources for which some customers

may be willing to pay a premium.

17See, e.g., Allegheny at 5, Enron at 6, Exelon at

21-22, Mercatus at 10, 12-14, and RPPI at 4-8. As

discussed above, initial success in Pennsylvania is at risk

due to wholesale price increases coupled with regulated

fixed standard offer prices. CAEM at 3-6.

18TX PUC at 11.

19For example, Atlanta Gas Light reports that

wholesale gas prices for the winter of 2000 were $4.44

per million BTU (British Thermal Units) compared to

$2.39 a year earlier. 

<www.atlantagaslight.com/faq.html> Other generation
48

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

states where the shopping credit is fixed at a set

price level,20 increased wholesale prices have

eroded or eliminated any incentive to enter21

because headroom has been eliminated. In

addition, the standard offer service provider has

been required to sell electricity unprofitably.

When the existing retail competition programs

with fixed standard offer prices were being

developed, the trend was toward lower

wholesale prices. If that trend had continued,

the deterrence to entry and the financial

difficulties of distribution utilities providing

standard offer service likely would not have

been as severe. 

Commenters characterized capped or fixed

shopping credits under current circumstances as

“regulated non-market-based rates.”

2 2

Commentersnotedthat capped shopping credits

have squeezed entrants’ margins and caused

some alternative service suppliers to withdraw

from the market or go bankrupt in affected

states.23 

The statistics on customers and load served by

alternative service providers for the individual

states reflect this squeeze on headroom – at first,

the statistics showed growth in customers and

load served by alternative service providers, but,

after wholesale prices rose significantly, the

number of customers served by the alternative

suppliers declined as the gap between their

rising prices and shopping credits shrank and

often turned negative.24 In Pennsylvania, for

example, which set relatively high shopping

credits for residential customers, switching

statistics show a steady increase in customers

served by alternative suppliers up until

wholesale prices increased significantly in early

2001.

costs have increased as well, e.g. pollution credits in

California. 

20Commenters reported that standard offer rates

are fixed in most states. Exceptions are: Maine, where

standard offer service is bid out (ME PUC at 6);

Massachusetts, where increases in fuel and purchase

power prices are passed through to consumers (ME PA,

Attachment at 5-6); New York, where rates are adjusted

for costs through a rate making process of less than 11

months (NYPSC at 15-16); and Texas, where standard

offer service providers can adjust their rates based on

changes in natural gas prices. TX PUC at 15. The

Michigan and Texas restructuring statutes allow the

state commission to relax caps on standard offer service

rates if it determines that effective competition is taking

place. MI PSC at 8-9, TX PUC at 3.

21See, e.g., MidAmerican at 5.

22See, e.g., Enron at 5-6, MidAmerican at 5. 

Rhode Island and Massachusetts reportedly have

increased standard offer rates recently to better reflect

increases in wholesale prices. RPPI at 8-9. 

23 Exits of alternative service providers have

occurred in several states. Allegheny at 5, CAEM at 4,

Exelon at 20, MidAmerican at 5, PA PUC at 29, NJ

Ratepayer at 6, and NYPSC at 13. No withdrawals have

yet occurred in Maine. ME PUC at 5. Two withdrawals

are pending in Illinois. ICC at 15. One alternative

service supplier dropped much of its load, but did not

exit in Michigan. MI PSC at 7.

24See Appendix A, Pennsylvania Profile for

statistics showing the percentage of residential demand

(load) that is served by alternative suppliers on a

company-by-company basis.
49

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Table 1. Pennsylvania Switching Activity

Number of Residential Customers served by Alternative Supplier

Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01

 316,367 356,865 383,557 408,414 429,670 444,154 459,029 473,852 454,818 350,914

% of Residential Customers served by Alternative Supplier

Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01

6.8% 7.6% 8.3% 8.7% 9.1% 9.6% 9.7% 11.2% 9.8% 7.3%

Note: PECO figures exclude residential customers assigned to competitive discount services.

Source: Pennsylvania Public Utility Commission

In Massachusetts, switching statistics for

residential customers illustrate the difficulties

caused by a squeeze on headroom and a low

shopping credit. Not only has there been little

residential customer switching, but the

customers that did switch started to return to the

standard offer service provider in early

2001.Recognizing the squeeze on headroom

caused by rising fuel prices, the Massachusetts

commission increased, effective July 1, 2001,

certain utilities’ standard offer service rates. 

 

Table 2. Massachusetts Switching Activity

Number of Customers Served by Alternative Suppliers

Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01

1,278 1,831 1,854 1,944 2,041 2,439 2,793 3,028 1,017 1057

% of Customers Served by Alternative Suppliers

Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01

< 1% <1% < 1% <1% < 1% <1% < 1% <1% < 1% <1%

Source: Massachusetts Division of Energy Resources

Negative headroom has caused entities with

standard offer service obligations to experience

financial difficulties. For example, GPU Energy

is the standard offer provider in its Pennsylvania

franchised service territory. As wholesale prices

have increased, many customers that had chosen

alternative suppliers have returned to the GPU

standard offer service, because alternative

suppliers’ prices were more expensive than

standard offer service. GPU has been squeezed

because the standard offer is fixed, but its

demand is increasing while its costs to purchase

power have increased.25

Very low levels of residential customer

switching have occurred in Arizona, Maine,

Maryland,Massachusetts, New Jersey, andOhio,

25PA PUC at 44, ME PA, Attachment at 16. See

Section D, infra, for a discussion of how GPU, and other

distribution companies, acquire generation services in

wholesale markets. 
50

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

in part, due to scant headroom available to

potential alternative electricity suppliers.26

Moreover, although most states do not keep

statistics on the number of alternative service

providers actually providing service in the state,

many comments noted that as headroom has

been squeezed, fewer and fewer alternative

suppliershavebeenproviding or offering service

to customers.27

The more general issue raised by fixed rates for

shopping credits is the proper allocation of fuel

and other generation cost risk.28 A fixed retail

price shifts much of the risk to suppliers. When

generation costs increase while standard offer

retail prices remain fixed, the results consistently

have been a lack of entry, the exit of some

suppliers, and financial difficulties for the

providers of standard offer service.29 As

observed in California, when the credit

worthinessofthe standard offer service provider

is eroded by rising wholesale costs and fixed

retail prices, generators may be reluctant to sell

to that firm in the wholesale market on credit.

This can create supply reductions for standard

offer service that further threaten reliability for

all retail customers.

If retaining efficient suppliers in the market is

valued as a policy goal, both increases and

decreases in the standard offer service provider’s

avoided costs, particularly changes in their costs

to procure wholesale electricity, should be

allowed to be passed through in the shopping

credit. When a standard offer service provider’s

costs change greatly and rapidly, any retail

regime with fixed prices will be strained. In the

last year, state retail competition programs that

do not allow pass through in standard offer

prices of major cost changes have been

problematic for both standard offer providers

and alternative service providers.

An additional issue that complicates the pricing

of standard offer service is that, like precompetition regulated rates, standard offer rates

typically do not vary over the course of the day

or season.30 By contrast, wholesale prices often

26California also had very low levels of customer

switching activity. In California, suppliers had little

incentive to seek retail customers because they might

well make more money selling into the Power Exchange

(PX) if their costs were less than the PX price. By selling

into the PX directly, the supplier incurred no customer

acquisition costs. These incentives do not exist in other

markets because California was the only state that

required all electricity sales to be made through the PX. 

See Appendix A, California Profile for a further

description of the PX.

27Allegheny at 5, AREM at 8-13, Enron at 6,

Exelon at 20, Mercatus at 14, NJ Ratepayer at 6, New

Power at 2, and NYPSC at 13.

28IURC at 3-4, NEMA at 12. A special case of

other generation cost risks is the substantial increase in

installed capacity (ICAP) payments recently instituted

by FERC in New England. Suppliers with contracts at

fixed rates that are now required to make far larger

ICAP payments than expected at the time these contracts

were signed may face financial difficulties similar to

those resulting from unanticipated wholesale price

increases in California. ME PA at 13-14. See Chapter II

for a discussion of installed capacity payments.

29See, e.g., EEI at 13. 

30Real-time metering or time-of-day metering is

generally required if time-of-use, rather than average,

pricing is used to charge for electricity supply. Average

pricing generally masks price signals that consumers

need in order to make economic consumption and

investment decisions. See Chapter III for a discussion of

why it is critical for customers to obtain accurate and

timely price information to help ensure competitive

retail markets.
51

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

fluctuate substantially over bothday and season.

One commenter suggested, however, that it may

be harmful to residential customers at this time

to pass through increases in wholesale prices,

because retail customers do not have the ability

to reduce their total electric bills payments by

shifting consumption to lower-priced periods.31

(See additional discussion in Chapter III.)

Moreover, the disconnectbetweenstandardoffer

prices and wholesale prices is likely to provide

incentives for customers to use the standard offer

service when wholesale prices are high and use

alternative suppliers (with rates closely related

to wholesale prices) during other periods.32

Several states have adopted rules to discourage

this type of switching. The rules typically

require that a customer returning to standard

offer service continue with that service for at

least a year.33

In sum, efficient entry will be deterred by

standard offer programs that cap retail prices in

the face of rising wholesale prices. Permitting

standard offer service providers to pass on

increases in the prices of obtaining electricity in

wholesale markets can alleviate much of this

concern.

b. Stranded Cost Recovery

The second policy choice that affects the

competitive effect of the shopping credit is the

length of the stranded cost recovery period.

Stranded costs are those costs authorized under

regulation that are not expected to be recovered

as a result of the decision to implement retail

competition. The theory is that in a competitive

environment, the utility’s expected revenue

stream from its undepreciated generation assets

may be smaller than the revenue stream under

regulation.34

Stranded costs, or uneconomic costs, can arise

from uneconomic investments, nuclear

decommissioning costs, or above-market, longterm contracts, such as, some of the contracts

required by the Public Utility Regulatory Policy

Act (PURPA). In the mid-1990s, when natural

gas was inexpensive, there was an expectation

that new, independently-owned gas-fired

generation would have costs low enough to be

able to sell electricity at prices below average

system costs, thus increasing stranded costs for

incumbentutilities.35 In the current environment

of rising wholesale prices, stranded cost

obligations may be reduced substantially, if not

eliminated, because generation assets once

thought to be uneconomic may not be so, if

wholesale prices for generation services remain

high.36

31MD OPC at 9. 

32As noted earlier, Allegheny and the ELCON

raised a general concern that standard offer service will

insulate customers from price signals to such an extent

that markets will not be able to develop. See, n. 7, infra.

33Allegheny at 5 (regarding Pennsylvania), NJ

Ratepayer at 7, ME PA at 15. New York reports that it

allows utilities to require a one year commitment from

returning customers, but not all New York utilities do so. 

NYPSC at 14.

34In Texas, utilities were encouraged to reduce

the amount of stranded costs prior to the start of retail

competition. TX PUC at 4.

35PA OCA at 3.

36Even if wholesale prices rise no faster than

natural gas fuel prices, generation assets once thought to

be stranded (often coal-fired generators) can become
52

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Most states have used, on a utility by utility

basis, either administrative proceedings or

market valuations (divestiture) to determine the

value of generation assets that will be stranded

by competition. Often these proceedings have

resulted in a settlement agreement between the

state commission and the utility. For example, in

Pennsylvania, two utilities voluntarily divested

generation assets, and the net proceeds were

applied to offset stranded costs.37 In one case,

the proceeds reduced the length of the stranded

costs recovery period.38 Likewise, in New Jersey,

California, and Texas, stranded cost amounts

that were to be recovered from customers were

stranded costs net of divestiture proceeds.39

Administrative determinations of stranded costs

may either be final or subject to later adjustments

based on actual prices (“true-ups”).40

To recover stranded costs from customers, state

commissions determine a stranded costrecovery

charge (expressed on a per kWh basis) based on

the total amount of stranded costs divided by the

length of the recovery period. This charge is

then assessed on customer bills and is

nonbypassable, meaning that customers, even if

they switch to an alternative supplier, are still

assessed the stranded cost recovery charge. It is

often called the “transition charge.” Assuming

the same total stranded costs amount, a longer

recovery period will result in a smaller transition

charge per billing period, and a shorter

transition period will result in a higher transition

charge. The length of the stranded cost recovery

period also is often linked to the length of the

utility’s obligation to offer standard offer service

to retail customers.41

The level of the transition charge can affect retail

entry during the transition period in two ways,

depending upon whether a state caps a

customer’s entire bill or caps only the shopping

credit. First, if a state decides to cap the entire

bill on a per kWh basis (i.e., the price per kWh

will stay the same prior to, and during, the

transition period to retail competition), then the

amount of the transition charge affects the level

of the shopping credit and the headroom

available for new entrants. When a state

unbundles generation costs from transmission

and distributioncosts, the unbundled generation

costs represent both the uneconomic costs

(which are recovered through the transition

charge) and economic costs (which are the basis

for the shopping credit). Because of the inverse

relationshipbetween the shopping credit and the

transition charge, the lower the transitioncharge,

the higher the shopping credit and, vice versa,

the higher the transition charge, the lower the

shopping credit. And, as previously discussed,

a lower shopping credit may squeeze available

headroom for entrants. By capping customer

bills, a higher transition charge may even result

in the utility offering a below-cost price for

economic because natural gas often is the fuel used by

the generation plants that set the market clearing price

for wholesale electricity (see Chapter I, Wholesale

Questions 6 and 7). For older, coal-fired plants, fuel

prices have not increased nearly as much, thus making

operation of these plants more profitable than

envisioned before natural gas prices rose relative to fuel

prices (see Chapter I, Table 2).

37Allegheny at 7. 

38PA PUC at 42.

39NJ Ratepayer at 9-10, TX PUC at 13.

40FTC July 2000 Staff Report at 50-51.

41See, e.g., Profile of Illinois’ Retail Competition

Program, Appendix A.
53

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

standardoffer service. Below-cost standard offer

prices will eliminate headroom and,

consequently, discourage efficient entry. 42

Second, if the state caps only the shopping credit

during the transition period, the level of the

transition charge will affect the percentage

savings that alternative suppliersmight offer. To

illustrate this point, described below is a sample

bill of a customer who is receiving standard offer

service from the distribution utility (i.e., the

customer has not chosenan alternative supplier).

The alternative service provider typically offers

a discount from the shopping credit. If an

alternative energy provider offered a 12 percent

discount, the total generation charges for 500

kWh would fall by $3.36 (12% x $28). This

reduction would represent a reduction on the

entire bill of approximately 6.3% ($3.36/53.50),

given the $7.50 (or $.015 per kWh) transition

charge. If the state had decided to recover

stranded costs over a shorter time period such

that the transition charge was $15 (or $.030 per

kWh), total charges would rise to $61. The 12%

discount on generation would fall from 6.3% to

5.5% ($3.36/$61.00) of the total bill because the

total customer bill includes other components

that dilute the percentage off of the alternative

supplier’s discount. Thus, a given discount

offered by an alternative supplier represents a

greater proportional savings to customers and a

relatively greater inducement to switch suppliers

if the transition charge is lower and the recovery

period is longer. Conversely, a shorter stranded

cost recovery period increases the amount of the

stranded cost recovery surcharge and makes the

alternative service provider’s discount less

significant in percentage terms of the total bill.

42See FTC July 2000 Staff Report at 52-54.
54

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

A shorter recovery period for stranded costs

eliminates the distortion of stranded cost

recovery from the market earlier and thus allows

competition to proceed sooner, assuming the

standard offer period ends at the same time the

stranded cost recovery period ends. For

example, in California, state law required a

stranded cost recovery period of not more than

four years for the three investor-owned utilities

in the state.43

 Pennsylvania, by contrast,

negotiated settlements with each of the investor

owned utilities that allowed for variable

recovery periods of generally 10 years.

Pennsylvania’s approach of accepting a

43San Diego Gas and Electric (SDG&E)

completed recovery of its stranded costs before

wholesale electricity prices increased, and thus was able

to offer lower retail prices to its customers for several

months before wholesale prices soared (while the other

two major California distribution utilities were still

charging rates that included a substantial stranded cost

recovery component). ME PA, Attachment at 10-11. 

When wholesale prices did increase dramatically,

SDG&E passed these along to customers, as it would

have under traditional cost of service regulation. The

California Legislature subsequently enacted a rate

ceiling, retroactive to June 1, 2000. The ceiling defers

costs over 6.5 cents/kWh to be recovered in subsequent

periods. See Appendix A, California Profile. 

ABC Electric Company

John Customer Account Number: 123456

Kilowatt Lane Customer Class: Residential

Anytown, USA

To: March 2, 2001 24500 – Actual Reading

From: February 2, 2001 24000 – Actual Reading

Kilowatt Hours (kWh) billed for 30 days 500 

Distribution Company Energy Charges:

Customer Charge ($.016 per kWh) 8.00

Distribution and Transmission Charge

($.020 per kWh)

10.00

Transition Charge ($.015 per kWh) 7.50

Total Distribution and Transmission Charges 25.50

Generation Charges: Shopping Credit: $.056 per kWh

Generation Charges ($.056 x 500 kWh) 28.00

Total Generation Charges 28.00

 NEW CHARGES 53.50
55

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

prolonged period for recovering stranded costs

increases the shopping credit relative to other

billing elements. Pennsylvania’s higher

shopping credit appears to have helped produce

the largest increase in alternative supplier entry

among the states with retail competition

programs.44

c. Initial Rate Reductions 

The third policy element concerns the effect on

entry caused by state-mandated rate reductions

for certain customer classes that are not based on

cost reductions for supplying standard offer

service. These typically occur when a state

institutes the transition to retail competition.

Such rate reductions can affect the level of the

shopping credit, and, consequently, the amount

of available headroom for new entrants. For

example, the California, Massachusetts, Ohio,

and Texas restructuring laws mandated rate

reductions, whereas rate reductions in

Pennsylvania and New York were negotiated as

part of the settlement agreements for each of the

utilities in those states. The rate reductions

generally were applied to the price for total

service, not just the generation portion of

electricity services (although some states, such as

New Jersey, only applied the rate reduction to

the transmission and distribution portions of a

customer’s bill). 

The magnitude of initial rate reductions varied

both between states and within some states.

Massachusetts, for example, set an initial rate

reduction of 10%, which applied to all customer

classes. By contrast, other states’ rate reductions

vary by customer class, utility or both. New

York customers, for example, received different

rate reductions, ranging from 2% to 25%, based

on both customer class and utility service area.

Rate reductions in Illinois vary from 5% to 15%,

based only on utility service area.45

Some commenters suggested that rate decreases

were necessary to provide “consumers

immediate relief from the above-average electric

rates they were paying and eliminated some of

the price disparities being experienced

throughout Pennsylvania prior to the onset of

retail competition.”46 Others suggested that the

rate reductions were to provide consumers with

the benefits of competition similar to those larger

customers were obtaining.

47 By contrast, Enron

suggested that most states have tried to

guarantee short-term price decreases through

mandatory rate reductions with no concern for

the effects of these decreases on retail entry.48 A

related concern is that mandatory rate

reductions can mask whether increased

competition in this industry produces benefits

similar to those in other regulatory reform

efforts.

In a period of declining fuel costs and wholesale

electricity prices, as was expected when states

implemented retail competitionprograms, it was

anticipated that initial rate reductions in

standard offer service could be repaid by

slowing future rate decreases, rather than by

44Allegheny at 5, Enron at 5-7, Exelon at 21-22,

Mercatus at 10, 12-14, and RPPI at 5-8.

45See also Exelon at 25, ICC at 19. New York

reduced individual utility rates prior to implementing

retail competition programs. NYPSC at 16.

46PA PUC at 37.

47Exelon at 3.

48Enron at 2.
56

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

raising future rates. In Massachusetts and

California, the rate reductions were financed

through the use of debt financing, with plans to

repay these loans through surcharges on retail

customers’ utility distribution charges at a later

date.49 These charges would be paid by all

customers, regardless of whether the customer

had switched to an alternative supplier. If

increases in wholesale electricity prices, such as

those in early 2001, persist or return, this

“painless” repayment option is less likely to be

available. 

Initial rate reductions on standard offer service

provide lower prices to all customers at the onset

of retail competition, even if the customer does

not search for an alternative supplier.50

Commenters noted that initial cuts in standard

offer rates undermine customers’ incentives to

search actively for an alternative supplier and,

thus, may deter the establishment of effective

competition in retail markets.51 Initial rate

reductions for standard offer service that are

unrelated to cost reductions for such service may

impede entry by firms that are at least as efficient

as the standard offer supplier. Moreover, unlike

what incumbent utilities are permitted to do in

some states (e.g., Massachusetts), entrants cannot

place a surcharge on a customer’s distribution

charges at a later date to recover the amount of

revenue lost due to the low-priced offers on

generation services that are necessary to compete

with reduced standard offer prices.

C. States Should Consider How to Move

Beyond Standard Offer Service to

Allow Competitive Markets to Develop

Most states have set a deadline for standard offer

service (and stranded cost recovery) to expire.

Thus, sooner or later, states will need to consider

whether to adopt mechanisms other than

standard offer service to ensure the provision of

reliable electricity to customers. It may be

appropriate for states to consider pilot programs

now to explore alternative mechanisms,

especially in light of the difficulties of

determining the appropriateshoppingcredit and

price for standard offer service. It also may be

appropriate for states now to consider other

ways to price standard offer service.52 Several

electricity suppliers favored curtailment of

standard offer service programs after a short

period of time.53

 

49Id. at 3.

50Enron at 5-6, Exelon at 25, ICC at 18-19,

Mercatus at 13, MI PSC at 9, NEMA at 12-13, NJ

Ratepayer at 8, New Power at 4, PEPCO at 6, and Shell

at 16.

51Allegheny at 6, Enron at 5-6, Mercatus at 13,

ICC at 19, MidAmerican at 7, and NJ Ratepayer at 8. 

Customer inertia tends to make these incentives critical

for entrants in attracting customers. EPSA at 4, Kenneth

Rose, Electric Restructuring Issues for Residential and

Small Business Consumers, National Regulatory

Research Institute (June 2000) <http://www .nrri.ohiostate.edu/staffpages/kenrose.html> at 9-10, Shell at 16. 

Allowing below-cost rates for standard offer service near

the onset of customer choice may reduce new entry as

well, because it reduces customer searches for

alternative suppliers at just the time when media

coverage and state customer education plans are likely

to make potential customer more attentive to entrants’

offers. See FTC July 2000 Staff Report at 54.

52Some commenters observed that industrial and

large commercial customers generally do not need access

to standard offer service. AREM at 4-5, Exelon at 23,

and MidAmerican at 6.

53Allegheny at 5, Cleco at 4, EPSA at 4,

MidAmerican at 6, and NEMA at 9.
57

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

By contrast, the Electricity Consumers Resource

Council suggested that standard offer service

(with accompanying vesting of generation

capacity) is needed until hedging services are

available to customers.54 Other commenters

favored an ongoing standard offer program,

expressing the concern that some customers

would not be attractive to generators at prices

comparable to regulated prices.55 Particular

concern was expressed about maintaining

standard offer service programs for rural and

other low-load areas that may not attract enough

generation entrants to provide effective

competition.56 

Despite these reservations, there may be

alternative methods to ensure that all customers

are able to obtain reliable electricity services at

just and reasonable prices. Many states,

including California, Maryland, Massachusetts,

and New Jersey, assigned the obligation to

provide standard offer service to the utility

holding the distribution franchise in each

geographic area. Another method may be to

allow the distribution company to auction off the

obligation to provide generation services to

standard offer customers. Maine adopted a

program whereby non-choosing customers are

aggregated, and the right to supply these

customers is auctioned by the state.57 Although

Pennsylvania initially assigned standard offer

service to the local distribution utility, it has

subsequently allowed the distribution utility to

auction off some of the standard offer service to

alternative suppliers.58 Ohio has developed a

similar approach. 

Another approach to standard offer service

would be to prohibit an unregulated affiliate of

the standard offer service provider from offering

services in competition with standard offer

service in that franchise territory. For example,

in Texas, utilities are required to separate their

business activities into three units: a wholesale

generation company, a transmission and

distribution company, and a retail electricity

company. After retail competition begins,

customers who do not choose an alternative

supplier will remain with the retail electricity

company affiliated with the incumbent

transmission and distribution company serving

the area. These customers will be provided with

standard offer service, the rate for which is

regulated by the Texas commission. The retail

electricity company, however, is prohibited

during the first 36 months of retail competition,

or until its standard offer service loses 40 percent

of the demand from residential or small

commercial customers, from offering, on an

unregulated basis, retail electricity services

below the standard offer price.59

54ELCON at 29.

55ECA at 6-7, ME PA at 16, and NRECA at 11-13.

56NRECA at 12-13. The Maine commission

expressed a similar concern, based on its experience in

bidding out Maine’s standard offer service, that high

unit transactions costs may discourage generation

entrants from serving areas with small loads. ME PUC

at 5.

57Maine adopted this approach in the belief that

an incumbent providing the preponderance of standard

offer service will use its monopoly leverage to

undermine customer choice. ME PUC at 5.

58PA OCA at 18.

59TX PUC at 3.
58

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

An alternate approach may be not to provide a

standard offer service at all, as was done in the

Atlanta Gas Light natural gas customer choice

program.60 A state could require customers to

choose an alternative electricity supplier by a

date certain and provide consumer education

programs to facilitate the selection process.

Under this plan, the unregulated generation

affiliate of the incumbent utility would be vying

with alternative electricity suppliers and

marketers for these customers, but not with the

utility itself.61 There are multiple ways to handle

those customers that do not choose an

alternative supplier during the transition period.

For example, these customers could be assigned

to new suppliers based on the new suppliers’

percentage of customers that choose the new

supplier during the transition period.62

Alternatively, the state could aggregate nonchoosing customers and auction the

responsibility to provide generation services to

them similar to the Maine program. 

At this point, it is unclear which method

provides consumers the most favorable

benefit/costs relationship, since the majority of

states have allowed the distribution utility to

provide standard offer service. It therefore may

be appropriate for states to consider pilot

programs that test alternative ways to handle

customers absent a standard offer service

provider. Pilot programs can help clarify the

costs and benefits of alternate programs as well

as safeguard against widespread problems if

difficulties arise. 

D. Alternative Suppliers and Standard

Offer Service Providers Should Be

Able to Acquire Wholesale Electricity

Through A Variety of Market-Based

Means

Several commenters noted that in retail electric

power markets, suppliers (whether they are

standard offer service providers or alternative

suppliers) should be able to procure power in

wholesale markets through a variety of

procurement methods. Several comments

suggested that California’s requirements that

providers of standard offer service sell and

purchase all of their requirements through a

wholesale electricity spot market were flawed

and prevented providers from hedging against

the risk that wholesale prices would rise.63 These

requirements raise the costs of doing business.

Suppliers should have the option to use a mix of

contract types and purchase methods to acquire

the necessary supplies and to hedge against

volatile wholesale spot market prices.64 It is the

job of wholesale suppliers to manage price risk

60Under the Atlanta Gas Light customer choice

program, the company “worked with the Georgia Public

Service Commission and marketers to transition

customers to a new deregulated environment. By

October 1999, all our customers in . . . Georgia [have]

either chosen or been switched over to a natural gas

marketer.” Atlanta Gas Light now functions only as the

owner and operator of the gas delivery system in its

former Georgia franchise area. 

<www.atlantagaslight.com/faq.html>, Green Mountain

at 3.

61As noted in Section B.1.b infra, during the

stranded cost recovery period, states may wish to guard

against the possibility that unregulated affiliates of the

incumbent utility could offer generation services at

prices that would deter retail competition. For a more

complete discussion of this possibility, see FTC July 2000

Staff Report at 52-57.

62Green Mountain at 3, Shell at 14.

63See, e.g., CAEM at 11, RPPI at 18-19.

64CAEM at 12-13.
59

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

effectively in wholesale markets through

bilateral contracts and other financial tools.65

1. Providers of Standard Offer

Service Need to Use Varying

Methods to Secure Necessary

Electric Power

In California, utilities were the providers of

standard offer service. After divesting nonnuclear and non-hydro generation to establish

stranded cost recovery levels, as required by

state law, they were also required to sell output

from their remaining generation facilities and

purchase all of their demand through the Power

Exchange (PX).66 State law also restricted the

utilities’ ability to enter into buyback (vesting)

contracts from the generation assets that they

divested and discouraged them from entering

into long-term power contracts or otherwise

hedging their exposure to the spot market.67

This has since been changed pursuant to state

legislation and FERC order, in light of extensive

criticisms of the earlier restrictions.68

By contrast, in New York, regulated suppliers

(i.e., providers of standard offer service in New

York) use a mix of procurement means to

acquire necessary supplies. Bilateral contracts,

transition (also termed vesting or buy back)

contracts with new owners of divested

generation, independent power producer

contracts, and self-owned generation and spot

market purchases are all used to fulfill supply

obligations.69 Likewise, in Texas, suppliers have

“broad latitude” in how they acquire energy to

serve their customers.70

 Commentersmaintained

that the ability to use various procurement

methods permits suppliers tomanage effectively

risk.71

In Pennsylvania,mostgeneration was either sold

to third parties, or moved to unregulated

affiliates of regulated distribution companies.72

Of the two utilities that divested generation,

Duquesne used an “all requirements” contract

with buyers of its plants to supply energy at

fixed prices to meet its standard offer service

obligations. The other utility, GPU, expected to

rely on power purchase contracts, up to an

expected peak demand, to meet its obligations as

the standard offer service provider. GPU,

however, underestimated demand for standard

offer service, thus forcing it to make spot market

purchases for a portion of the power it supplied

to standard offer customers. The spot market

prices often exceeded the regulated standard

offer price.73 In Pennsylvania, if a utility that has

a standard offer service obligation incurs

significant increases, outside of the utility’s

control, in the prices of either fuel for utility

generation or purchased power, it can apply for

a rate increase to cover these cost increases. GPU

65EPSA at 8-9.

66CAEM at 14.

67Exelon at 5.

68See FERC, Order Directing Remedies for

California Wholesale Electric Markets, Docket Nos.

EL00-95-000 (Dec. 15, 2000); 2001 Cal. Legis. Serv. 1sr Ex.

Sess. Ch 4 (A.B. 1)(West).

69NYPSC at 19.

70TX PUC at 15.

71See, e.g., EPSA at 9.

72PA PUC at 43. 

73PA OCA at 22, PA PUC at 44.
60

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

has applied for such an increase.

74 In New

Jersey, utilities may use a market mechanism of

their choice.75 In Maryland, the distribution

utility that sold all of its plants has a contract

with the plants’ purchaser for all of the utility’s

standard offer supply requirements.76

In states without an operating ISO, the situation

is slightly different. In Illinois, state law

required use of buy-back contracts for the output

of the plants that utilities with standard offer

obligations sold. This requirement applies

through the end of 2004.77 In Michigan, the

utilities can decide which market mechanisms to

use, and the trend has been for the two major

utilities to meet demand by acquiring more

generation from out-of-state suppliers.78

2. Jump Starts to Competition

Several utilities, as part of their individual

settlements with state commissions to introduce

competition, agreed to programs to “jump start”

competition to encourage customer switching

activity. These programs provide an alternative

to divestiture of incumbents’ generationcapacity

or de novo entry as means to make existing

capacity available to retail entrants. In Illinois

and Ohio, franchised-distribution utilities have

agreed to provide alternative suppliers with

contracts for a specific amount of generation

capacity at fixed prices along with associated

transmission services. 

For example, in Illinois, incumbent utilities, as

long as they are recovering stranded costs from

customers, are required to offer to sell capacity

to certain customers at prices that recover only

the administratively determined value of

generation assets that were used for assessing

the level of the utility’s stranded cost exposure.

In other words, the stranded cost recovery

assessments of a utility’s generation assets

provides the basis for requiring incumbents to

offer to sell electricity at rates that recovers the

lower value of the utility’s assets.79 

The Illinois commission reported that

approximately 40 percent of customer switches

occur on this basis in Illinois.80 In Ohio, the

market, to date, has not shown much customer

switching activity beyond the capacity that was

74ME PA, Attachment at 18. The Pennsylvania

commission has since allowed GPU to defer $300 million

in wholesale power costs that it could not recover

through standard offer service rates from the beginning

of 2001 through 2005. GPU is prohibited from passing

such costs through to retail customers, but the

commission has allowed GPU to carry them on its books

through 2010. Should wholesale power prices drop, the

gains will be used to offset and reduce deferred costs. 

Unrecovered costs at the end of 2010 must be written off. 

Pennsylvania Public Utility Commission, Docket Nos. A110300F0095, et. all, Settlement Agreement (June 14,

2001)

<http://puc.paonline.com/agenda_items/2001/pm0614

01/GPU_Settlement.doc>.

75NJ Ratepayer at 10. 

76Allegheny at 6.

77ICC at 26.

78MI PSC at 10-11.

79See Illinois Profile, Appendix A. Ohio has a

similar “jump start capacity” provision that provides

entrants with a specific amount of capacity from

incumbent utilities at fixed prices. Shell at 3-4. See Ohio

Profile, Appendix A.

80ICC at 15.
61

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

reserved for this program (an exception is

substantial switching under Ohio’s demand

aggregation program).81 

These programs make it difficult to tell whether

the state’s retail competition program has

succeeded in establishing competitive retail

markets outside of the set-aside capacity

provision. As a transition mechanism while the

utility is collecting stranded costs, however, they

do allow entrants to acquire immediate capacity

while they build their own generators or make

other supply arrangements.

E. Conclusions

• Effective retail competition, and the

subsequent consumer benefits of retail

competition, are much more likely with

actual entry. State policies that eliminate

barriers to entry to allow for the long-run,

efficient entry of entities to compete with

the incumbent will assist the development

of retail electricity markets. There are a

number of entry barriers that impede the

efficient entry of alternative retail

electricity suppliers.

• Most states have required the existing

distribution utility to continue to offer

service (“standard offer service”) at fixed,

regulated rates to customers that do not

choose a new supplier or whose supplier

exits the market. Often the duration of

this service is coterminous with the time

period during which the state allows the

utility to recover its stranded costs (those

generation-related costs that are

uneconomic in a competitive

environment). In some states, the price

for standard offer service has become a

retail entry barrier.

• States should design standard offer

service policiesthat provide entrants with

sufficient incentives to offer service and

do not, unintentionally, create a barrier to

entry. Ensuring that standard offer

service providers can pass on changes in

fuel costs and wholesale electricity prices

will aid this goal.

• Initial rate reductions for standard offer

service, which are not based on cost

reductions, tend to distort entry decisions

and reduce incentives for retail customers

to search for alternative suppliers. If rate

reductions are applied to total rates, this

effect may be severe. Rate reductions for

standard offer service that are financed

through deferred charges paid by all

distribution customers may result in

below-cost prices for standard offer

service and, consequently, reduce

incentives of alternative service providers

to enter.

• States may wish to implement pilot

programs that test alternatives to

standard offer service, in light of the

difficulties in establishing an appropriate

standard offer price and the dampening

effects that inappropriately-priced

standard offer service can have on

incentives for suppliers to enter retail

electricity markets.

• Requiring incumbent utilities to provide

generation capacity to retail suppliers at

81This may be due in part to the absence of an

operating ISO in these states that would provide greater

assurance of nondiscriminatory access to transmission

for other generation sources.
62

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

prices that reflect the value of generation

assets as determined administratively

when assessing the level of the utility’s

stranded costs, may mask whether the

underlying market is conducive to

support retail competition. As a

transition mechanism while stranded

costs are being recovered, however, these

programs may allow entrants to start

serving customers while they make

longer-term supply arrangements.
Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

CHAPTER V CONSUMER PROTECTION POLICIES AND RETAIL

ELECTRICITY COMPETITION PROGRAMS

A. Introduction and Summary

States have considered a variety of policy

approaches to ensure that consumers are

protected as competition develops in retail

electricity markets. States have balanced these

policy choices with the objective of encouraging

long-run, efficient entry into these markets. In

other words, the challenge has been to develop

policies that adequately protect consumers but

that do not impose unnecessary burdens that

deter new entry by retail electricity suppliers,

including geographic expansion by incumbents

outside of their franchise territories. Some

requirements may be unnecessary because, at

least to some extent, as competition gets

underway,marketforceswillprovide companies

with incentives to meet the states’ objectives.

Relevant consumer protection policies include

retail electricity supplier requirements and the

informational needs of consumers. 

In addition, the participation in competitive

retail markets by unregulated affiliates of

distribution utilities has caused states to create

rules governing distribution utilities’

relationships with their unregulated affiliates

and the affiliates’ competitors. To date, the

significance of these policies for effective

competition has been masked by the

overwhelming effect on retail markets of

standard offer pricing policies and rising

wholesale prices. Nonetheless, such policies

may become more important later as retail

competition develops.

Retail Electricity Supplier Requirements. There

was widespreadagreement in the comments that

states will enhance the probability of obtaining

competitive retail electricity markets by avoiding

unnecessary requirements on retail electricity

suppliers. For example, licensing requirements

can provide important consumer protections

against fraudulent firms, but these protections

should be weighed against the effect of the

requirements on the ability of suppliers

profitably to enter new markets. Some

commenters suggested that the implementation

of uniform business rules among states that

govern supplier licensing and customer

switching canreduce supplier costs and facilitate

the entry and geographic expansion of new retail

suppliers.

Consumer Information. Some states have

developed programs intended to provide

consumers with easily understandable

information that enables consumers to make

informed comparisons about new options in

retail electricity markets. The challenge has been

to design these programs so that retail suppliers

still have the flexibility to differentiate their

products. Policies that encourage accurate,

timely and comparable information about prices

and services can make it easier for customers to

participate in competitive retail markets.

Information policies targeted to consumers may

come in several forms, including: enforcement

of truthful and nondeceptive supplier

advertising, standardized disclosures

(“labeling”) of price and service information by

retail suppliers, and consumer education

programs.

Distribution Utility Behavior. Numerous

commenters expressed views about rules

restricting the behavior of regulated distribution

utilities that also sell electricity through

unregulated operations in competition with

other retail suppliers. Most states have
64

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

established rules or codes of conduct intended:

(1) to prohibit cost-shifting that burdens

ratepayers with costs that should be borne by the

unregulated operations of a distribution utility,

and(2) to safeguard against discrimination in the

provisionofmonopolyutilityfranchise functions

(i.e., delivery of power via its distribution lines).

If distribution utilities subsidize their

unregulated retail affiliate by shifting affiliate

costs to the utility, and thus to ratepayers,

competitive markets can be impeded. In

addition, any preferential access to distribution

services also would provide the utility’s affiliate

with cost advantages not related to legitimate

efficiencies. By virtue ofits continued ownership

and operation of the distribution lines, the utility

is uniquely positioned with respect to certain

competitively significant inputs (e.g., customer

usage information and customer referrals) that

are not practically obtainable from other sources

by unaffiliated retail suppliers. For competitive

retail electricity markets to develop, it is

imperative that incumbent distribution utilities

treat all retail suppliers impartially with respect

to access to those assets.

States’ efforts in these areas are described in

Appendix A for a sampling of states that have

introduced, or are about to introduce,

competition into retail electricity markets. The

effectiveness of many of the measures, however,

is difficult to assess because state retail

competition is nascent, and many wholesale

market issues have not yet been resolved.

B. Minimizing Direct Entry Costs

Associated with Desired Consumer

Protections

An important aspect of retail competition policy

is the cost imposed on electricity suppliers by the

compliance requirements of different states.

Commenters noted that electricity is now traded

in commodity markets that span beyond state

boundaries, and thus rules governing supplier

entry and customer switching also should

account for the regional nature of the product

being sold. To this end, the Illinois and Maine

commissions reported efforts to harmonize

billing rules with other states,1 while the Texas

and Pennsylvania commissions noted their

efforts to provide uniformity throughout their

states.2

 One commenter noted that some degree

of harmonization occurs through information

consultation and interaction among utilities,

suppliers, and regulatory personnel.3

 

Alternative retail suppliers and others widely

viewed a lack of state uniformity in regulatory

practices, including supplier licensing and

customer switching rules, as sources of

substantial costs that unnecessarily reduce

headroom and entry incentives.4 Several other

state-imposed requirements were also

mentioned by one or more commenters.5 At the

same time, many states believe that certain

policies are necessary to serve important

consumer protection and other public policy

objectives such as increased system reliability.

1

ICC at 16, ME PUC at 7.

2

TX PUC at 11, PA PUC at 13.

3

 ME PA at 14.

4AREM at 15-18, Cleco at 3, Green Mountain at

5, MidAmerican at 5, NEMA at 8, New Power at 2-7,

Reliant Ex. A at 3, and Shell at 10. The importance of

headroom is discussed in Chapter IV.

5

These additional restrictions include, for

example, Maine’s requirement that 30% of generation be

from renewable sources. ME PA at 13.
65

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

1. Supplier Licensing

Most, if not all, states that have moved toward

retail competition have developed some type of

licensing or certification program for suppliers.

States have required suppliers to meet certain

technical standards andtoprovide some proof of

financial soundness in order to obtain a license

or certificate. In many cases, states have

imposed bond requirements on retail suppliers

ranging from $25,000 to $300,000. For example,

Maine requires a retail supplier to furnish a

surety bond or an irrevocable standby letter of

credit for an initial security of $100,000. Illinois

maintains bonding requirements in varying

amounts from $30,000 to $300,000 depending

upon the types of customers the supplier intends

to serve. New Jersey requires a surety bond of

$250,000 for an initial supplier license.6

There is a range of views on the need for

supplier licensing. In general, licensing

requirements for retail electricity suppliers are

intended to ensure that companies have

sufficient technical, financial, and managerial

resources and abilities to supply generation

services reliably. According to some

commenters, licensing requirements can allow

states to assure customers a standard of stability

and accountability for all those firms operating

in the state.7

 These requirements can also

provide a mechanism for identifying,

disciplining, and, if necessary, excluding

competitors with a history of deceiving or

abusing consumers.8

 At least one state has taken

enforcement action for violation of its licensing

requirements.9 

Other commenters opposed licensing and

supported the use of existing state law (e.g.,

contract law) to protect customers instead.

Many commenters who opposed or expressed

reservations about licensing requirements

contended that such requirements unnecessarily

increase industry costs and result in higher

consumer prices.10 One supplier generally

supportedreasonable licensing requirements but

opposed bond or letter of credit and in-state

office requirements on the grounds that such

restrictions put small firms at a disadvantage

and create barriers to entry.11

Several commenters suggested that if there is

supplier licensing, it would be best if state

licensing requirements are uniform among the

states.12 Uniformity would reduce compliance

costs, but serve the stated goal of ensuring that

companies have sufficient technical, financial,

and managerial resources and abilities. Uniform

standards, however, may impose more

restrictions on entry than some states may

prefer.

6

See generally State Profiles, Appendix A. 

7AARP 2-3, ECA at 6; see also NYPSC at 9-10

(description of New York’s licensing requirements).

8UWUA and the MUPHT at 26.

9NY AG at 5. The state obtained a criminal

fraud conviction of an individual who was collecting

"deposits" for electric service without proper

authorization. In another case, an individual was

conducting an illegal pyramid scheme based in another

state.

10NEMA at 4-5, New Power at 4-5, and Shell at

7-8.

11Green Mountain at 8-9.

12EPSA at 3, Green Mountain at 5-6, and New

Power at 6.
66

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

2. Customer Switching Requirements and Protecting ResidentialCustomers from “Slamming”

and “Cramming” in Competitive

Retail Markets

The commenters highlighted the balance that

states must achieve in creating a regulatory

framework that minimizes unnecessary burdens

on retail suppliers, while protecting consumers

from harmful practices such as unauthorized

switching of a customer’s electricity supplier

(“slamming”) and placement of unauthorized

charges on electric bills (“cramming”).

Slamming and cramming created significant

problems for many consumers during the period

of telephone restructuring. Such problems have

not been seen as a significant problem in

electricity regulatory reform.13 For example, the

Pennsylvania Office of Consumer Advocate

indicated that in retail electricity markets,

although early slamming complaints were

common, the complaints were due to procedural

problems or administrative error, and that

intentional slamming as seen with the

telecommunications industry has been

uncommon.14

The apparent scarcity of unauthorized customer

switching may be because states that have

implemented retail competition have required

suppliers to verify a customer’s choice in some

way. In most of the states with retail

competition programs, verification must be

either in writing, by telephone recording, or by

an encrypted Internet transaction. In many

cases, states require verification of telephone

transactions by an independent organization. In

some states, the distribution company must send

customers a confirmation letter regarding a

switch request received from a supplier.15 Some

states, however, impose less stringent

verificationrequirements if customers initiate the

transaction. State requirements usually include

a period of time (anywhere from three to 14

days) for customers to cancel their service with

a new supplier. Suppliers that conduct

unauthorized switching can be subject to the

payment of costs associated with the switch,

financial penalties, and license revocation.16

To ease burdens and ensure uniformity across

states, several commenters supported state

13In recent months, however, the FTC staff has

learned of complaints about intentional slamming by

alternative suppliers of natural gas. 

14PA OCA at 8-9.

15PEPCO at 5. In many states, the supplier has

the responsibility for notifying the distribution utility of

the customer’s intent to switch. In Pennsylvania and

New Jersey, for example, after a supplier has received a

customer’s authorization for a switch, the supplier will

notify the distribution utility of the switch. After

receiving a switch notification, the distribution utility

will send the customer a confirmation letter to inform

the customer that it has received the switch request from

the supplier. After receiving the verification letter from

the distribution utility, the customer generally has a

“right of rescission” period in which he can cancel his

choice without penalty. Both Maryland and

Pennsylvania customers have a 10-day right of rescission

period; New Jersey customers have 14 days to terminate

an unwanted switch. Each state has different

requirements for supplier authorization of a customer

switch. Until recently, New Jersey had a “wet

signature” requirement, under which a supplier had to

receive a customer’s written signature in order to

authorize a switch. New Jersey customers are now also

allowed to sign up online. Both Maryland and

Pennsylvania customers have the option of authorizing a

switch in suppliers in writing, by phone or over the

internet. See generally State Profiles, Appendix A.

16E.g., Green Mountain at 6.
67

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

adoption of the procedures governing how

electricity suppliers enroll and switch new

customers set forth in the Uniform Business

Practices for the Retail Energy Market

document.17 One supplier, Reliant Energy,

supported a federal standard for slamming and

cramming protection because, in its view, a

federal standard would benefit both consumers

and industry through less complicated state

compliance requirements and simpler

transactions.18

By contrast, several other commenters statedthat

the regulation of slamming and cramming is best

left to the states.19 In addition, a few commenters

supported some of the state regulations already

in place.20 AARP suggested that complaint

procedures adopted in Maine, Massachusetts,

and Pennsylvania are particularly effective for

protecting consumers because they hold the

consumer harmless until the dispute is settled.21

C. Consumer Information

As competitive retail electricitymarketsdevelop,

consumers face a wide variety of price offers,

contract terms, and environmental or service

claims. Consumers must receive accurate,

nondeceptive, and easily understandable

information through advertising and other

means, so they can make informed choices about

service and providers. To the extent that

consumers incur costs to switch suppliers – e.g.,

termination fees for long-term contracts – prior

understanding of prices and fees can reduce

these costs. In addition, consumers have no

ability to verify some of the quality

characteristics of electricity that may have value

for them, such as fuel source content. State

policies in this area include enforcement of

nondeceptive advertising, use of standardized

labels indicatingprice and quality characteristics,

and consumer education programs.

1. Advertising

To date, the amount and type of advertising for

retail sales of electricity in affected states has

varied widely.22 Some suppliers may be

reluctant to commit resources to advertising

until they can assess all of the elements of the

17See, e.g., EPSA at 3, NEMA at 3-4, New Power

at 6, and Green Mountain at 5-6. The Uniform Business

Practices for the Retail Energy Market (UBP) project is a

private process designed to reach a consensus on

business and operational practices needed for the

restructured electricity market. The purpose of the

project is to identify best business practices from the

range of early market experiences and to encourage

states to adopt these practices. The UBP document is

available at www.eei.org. The Gas Industry Standards

Board (GISB) is engaged in a similar project for the

natural gas market. 

18Reliant Ex. A at 2.

19Allegheny at 4, ICC at 9, NYPSC at 8, PA PUC

at 20-21, and Shell at 6-7.

20AARP at 6, NJ Ratepayer at 3, and PEPCO at 5.

21AARP at 6.

22E.g., PA OCA at 13 (Pennsylvania “was the

initial focus of a lot of advertising”), Exelon at 20

(extensive advertising in Pennsylvania; in Illinois, where

residential customers are not yet eligible to select an

energy supplier, marketing efforts primarily focused on

commercial and industrial users through direct mail,

telemarketing, and personal visits, with some mass

media (print and television) to build brand awareness),

ICC at 13 (little advertising so far), ME PUC at 7 (some

supplier advertising targeting medium and large

customers), NJ Ratepayer at 5 (some supplier

advertising, largely in the print media), and Allegheny at

3 (little supplier advertising in Maryland).
68

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

state’s regulatory restructuring program.23 Inthe

advertising that has appeared, suppliers

generally have attempted to differentiate their

products by price or environmental (“green

power”) claims.24 

The Commission’s general principles about

advertising apply to price, environmental, and

other claims about retail electricity service. That

is, such advertising claims must be truthful and

mustbe substantiated with appropriate evidence

at the time they are made.25 The Commission’s

Guides for the Use of Marketing Claims (“Green

Guides”), which were developed for

environmental claims about any type of product,

and the National Association of Attorneys

General (NAAG) Environmental Marketing

Guidelines for Electricity, also provide guidance

for electricity marketers.26 In at least one state,

there has been some enforcement activity for

inaccurate and misleading statements. The

Pennsylvania Attorney General has reviewed

suppliers’ claims about price and environmental

aspects, and sought remedial action from a

number of suppliers.27

2. Standardized Labeling

To facilitate consumers’ ability to make

meaningful comparisons in retail electricity

markets, policy makers have considered

mandatory disclosure of standardized terms,

prices and relevant attributes of electric power --

similar to nutrition labeling on food or energy

efficiency labels on appliances.28 Most states

require electricity suppliers to include some sort

of fact label in terms of service documents,

certain forms of advertising, and periodic bill

mailings. Although the required content of the

label varies from state to state, examples of the

required information include: pricing, contract

terms, generation sources, air emissions, and

23See Shell at 10.

24Allegheny at 3, Exelon at 20, and ICC at 13.

25See generally FTC July 2000 Staff Report, Section

VIII.A at 58-68 (discussing in detail the Commission’s

general advertising principles and how they relate to the

electricity industry); see also FTC, Advertising Retail

Electricity and Natural Gas: A Power-ful Opportunity for

Suppliers (Dec. 2000) (business education publication).

26The FTC has taken the position in its Green

Guides that claims of general environmental benefit

should not be prohibit per se, but should be avoided or

qualified as to a specific attribute, unless the marketer

can substantiate all the implications of the broad claim. 

16 C.F.R. Part 260. The staff sees no reason to treat

general environmental claims for electricity differently. 

FTC July 2000 Staff Report at 60-63 (discussing Green

Guides’ application to environmental claims for

electricity).

27Exelon at 20. The Commission staff has

received some complaints about advertising claims by

suppliers of natural gas, including allegedly deceptive

claims about prices, rebates, and additional service and

termination fees. The staff anticipates that similar issues

are likely to arise with new entrants to the retail

electricity markets. 

28Some consumer research indicates that

consumers have difficulty comparing competing

products when suppliers are allowed to present

whatever information they choose about the product in

whatever format they choose. In addition, research

conducted for the Maine and New Hampshire Public

Utility Commissions suggests that consumers have an

overwhelming desire for mandatory disclosure of price

and fuel mix information in a standardized format. 

Regulatory Assistance Project, Information Disclosure for

Electricity Sales: Consumer Preferences from Focus Groups

(Mar. 19, 1997); National Council on Competition & the

Elec. Indus., Synthesis Report: A Summary of Research on

Information Disclosure (Oct. 1998) (both documents

published at www.rapmaine.org).
69

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

renewable energy claims.29 In some cases, states

require suppliers to include the fact label in ads

that contain claims about price, cost

competitiveness, or environmental quality. In

lieu of providing the information in ads, states

often allow the supplier to furnish a toll-free

number or website from which consumers can

obtain the label information. Finally, some

states, such as Maryland and New Jersey,require

suppliers to refer to the official “price to

compare” (i.e., the generation price) rather than

the price that includes franchise distribution and

transmission charges if the suppliers make price

comparisons to the standard offer in their

advertising.30

Several commenters supported standardized

labeling requirements on the basis of their view

that the requirements would benefit competition

in the marketplace. One commenter argued that

standardized labeling can improve consumers’

ability to shop comparatively (by facilitating

“apples-to-apples comparisons”) and decrease

suppliers’ customer acquisition costs.31

Similarly,the National AssociationofRegulatory

Utility Commissioners (NARUC) supported

initiatives “leading to minimum, enforceable

uniform standards for the form and content of

disclosure and labeling that would allow retail

and wholesale consumers to easily compare

price, price variability, resource mix and

environmental characteristics of their electricity

purchases.”32 AARP supported state

requirements, adopted in Connecticut, Maine,

Massachusetts, and New Jersey, that suppliers

disclose the price and associated contracted

terms of electricity at the marketing and

advertising stage; AARP suggested such contract

terms be mandated in all direct mail solicitations

and conspicuously disclosed in all mass market

media advertising.33 

A few commenters warned, however, that

excessive standardization, such as requirements

for uniform terms and conditions of supplier

offers, could restrict the diversity of alternative

services offered to consumers.34 If mandatory

requirements are too broad, it may be difficult

for firms to develop innovative marketing or

advertising for their product, and thus harm

competition. According to Shell, “labeling

creates a homogeneous marketplace among

competitive suppliers stifling innovation.”35

29For example, although Massachusetts, New

York and New Jersey all require fuel source and air

emissions data, each state also has state-specific labeling

requirements. Massachusetts requires suppliers to

provide price information and labor practices

characteristics in addition to the environmental

information. In New York, air emissions must be shown

relative to the New York State average. New Jersey has

stringent standards that require suppliers to indicate the

extent to which they have supported energy efficiency

measures. In addition, if a New Jersey supplier makes

claims that its energy is more “environmentallyfriendly,” that supplier has to disclose its generation

sources and fuel mix in the label. See State Profiles,

Appendix A.

30See Maryland Profile and New Jersey Profile,

Appendix A.

31PA PUC at 17-18.

32NARUC at 5.

33AARP at 7. 

34ICC at 8; see also Shell at 6. Similarly, labeling

requirements may need to be modified to accommodate

real-time pricing. See discussion in Chapter III.

35Shell at 6.
70

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

Shell expressed concern that labeling

requirements would limit the types of products

suppliers would be able to offer. For instance,

Shell indicated that labeling requirements in

some states would preclude firms from offering

“weatherized” bills that are based on a fixed

annual price rather than a per kilowatt price.36

Many commenters addressed whether states

should require environmental disclosures, such

as the source mix for the energy. An alternative

is to rely on market incentives for suppliers to

make environmental claims. According to Green

Mountain, a supplier specializing in sales of

electricity from renewable sources, the market

has not clearly demonstrated nor has research

establishedthat “environmental disclosure labels

are relied upon, or even read and understood, by

consumers who weigh the benefits and options

of the competitive market.”37 As previously

discussed, some commenters (e.g., NARUC)

supported such labeling requirements. 

Other commenters, however, raised concerns

with mandatory environmentaldisclosures. One

trade association expressedconcern that labeling

requirements in some states discriminate

unfairly against certain power sources, such as

nuclear power.38 Another commenter suggested

that standard labels would be difficult to

implement because many alternative providers

purchasing energy on the spot market do not

know the source of the power.39 An electricity

supplier suggested that burdensome reporting

requirements, such as fuel source mix and

environmental impact, may have a

disproportionate adverse effect on companies

with small margins, and cause them to leave the

market.40

States can structure their environmental labeling

requirements in ways that reduce the burden on

suppliers who do not wish to make

environmental claims or cannot determine the

source of their electric power.41 Some states

allow the use of “default” labels in certain

circumstances. One type of default label allows

a supplier to list the environmental

characteristics of the regional or system average,

rather than the environmental characteristics of

the supplier’s specific product.42 Depending on

how the system average is calculated (e.g.,

whether it would include all electricity produced

or only that electricity not specifically identified

on suppliers’ labels), this form of default labeling

36Id.

37Green Mountain at 10. Green Mountain stated

that it “encourages any tool designed to educate

consumers with regard to renewable energy,” but

indicated that more research is needed to understand the

effect of environmental disclosure labels on consumer

decision-making. Id. 

38NEI at 2-3 (stating that information about

managed waste material should not be included on an

environmental impact label).

39ME PA at 8.

40New Power at 5.

41Note that mandatory disclosure of

environmental characteristics has the effect of forcing

suppliers to make environmental claims for their

products. Not only must suppliers determine and

disclose the environmental characteristics, they must

also be prepared to substantiate them.

42Michigan, for example, requires its suppliers to

provide information on average fuel mix, average

emissions, and average high level nuclear waste of the

electricity products purchased by a consumer, as well as

the regional average fuel mix and emissions profile. See

Michigan Profile, Appendix A.
71

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

may not convey accurate information about

suppliers’ products. In addition, if the supplier

is allowed to use the label when it is not

purchasing its electricity from the regional

exchange, the information on the label may not

accurately reflect the source of the supplier’s

purchases. An alternative default labeling policy

would allow suppliers affirmatively to indicate,

on the required label, that they are not providing

information about the environmental

characteristics of their products (e.g., “no

information supplied”).

Still another alternative environmental labeling

policy might be to require suppliers to use a

standard environmental label only if they make

environmental claims.43 This “triggered”

approach would reduce the costs on suppliers

that do not make environmental claims. It

would also provide consumers with specific

information about those products that are

marketed as “environmentally friendly.” At the

same time, however, it may be very difficult in

some cases to determine whether or not a

supplier is, in fact, making an environmental

claim in its advertising (i.e., if the supplier uses

imagery or subtle references). In many cases,

this may create uncertainty and confusion for

both suppliers and regulators. 

Although many states have addressed labeling

issues, the states have not universally

coordinated their efforts.44 According to Exelon,

different states employ inconsistent terminology

and labeling requirements.45 In some regions,

such as New England, however, states have

coordinated their labeling efforts to develop a

common standard. In addition, a joint

undertaking of state utility regulators has

developedamodelinformationdisclosure policy

for implementation by the states.46

A few commenters suggested that a federal

energy labeling requirement may be useful

because it may help avoid consumer confusion

and reduce supplier labeling costs, especially

when power is being sold across state lines.47

Reliant supported national standards for

supplier labeling, so “suppliers serving multiple

states would be able to reduce transaction costs

for compliance of supplier labeling and

disclosure and pass these savings on to the retail

customers.”48 In addition, the Commission has

supported the use of standardized labels to

provide important information to consumers as

they participate in retail electricity markets.49 

By contrast, another commenter suggested that

the federal government should refrain from

43New Jersey requires suppliers who make

environmental claims to use a “claim label” that displays

the characteristics of the product that the supplier

intends to provide. New suppliers who do not make

such claims can use a default label that displays historic

averages for the region. Existing suppliers in New

Jersey who do not make environmental claims must use

a historical label that displays averages for that supplier

over the past 12 months. See New Jersey Profile,

Appendix A.

44NJ Ratepayer at 3. 

45Exelon at 13.

46NARUC at 6. The model policy was developed

after a major research effort and can be accessed at the

National Council on Competition and the Electric

Industry website: www.ncouncil.org.

47ME PUC at 4-5 and MinnPower at 8.

48Reliant, Ex. A at 1.

49See Bliley Letter.
72

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

setting a mandatory national standard and

should instead “foster a cooperative interstate

effort to elaborate the variety of characteristics

which can be labeled.”50 The Michigan

commission indicated that it would support

model standards, but not federal mandates.51

3. Consumer Education

States, utilities, and others have employed a

variety of methods to bring information to

consumers, including: websites, telephone and

brochure offerings, speaking engagements, bill

inserts, and news coverage. Most commenters

stated that education programs, when properly

conducted, can have a positive effect on retail

competition, as a supplement to private

advertising to educate consumers about the

movement to retail competition. State

administered education programs can provide

consumers with some information that suppliers

may not necessarily have the incentive or ability

to provide accurately in their own marketing

efforts.

Two states have taken surveys of public

awareness levels and, in one case, the number of

customers who shopped, to measure the success

of the state’s education program and reassess

informational needs as the program unfolded.52

The Pennsylvania survey found that, after the

first year of its public education program, 94

percent of customers were aware that they could

choose a supplier. Accordingly, in the second

year, the state shifted the public education focus

to details of “how to shop.”53

Some commenters suggested that education

efforts should not be limited to early stages of

the transition to retail competition, but should be

continued as themarket develops, because many

consumers may choose to wait before they

participate.

54 Moreover, consumer education

plans that simply raise awareness about

competition but fail to provide “nuts and bolts”

information may not equip consumers with the

informationthey need to participate effectively.55

Several retail suppliers argued that consumer

education programs should be funded through

a competitively neutral mechanism and

implemented by an independent third party.56

These suppliers opposed the implementation of

education programs by the utilities. Instead,

several claimed that the education efforts should

be coordinated by state utility commissions and

run by professional consultants with input from

all stakeholders. Several states have charged

their public service commissions with the

responsibility for consumer education and the

commissions have, in turn, established advisory

50PA OCA at 8.

51MI PSC at 4.

52PA PUC at 15-17, NYPSC at 5. 

53PA PUC at 16. 

54ECA at 5 and Green Mountain at 7. Maine has

addressed this concern by reserving a portion of its

consumer education funding for later use. See ME PA at

7.

55AARP at 5 and NJ Ratepayer at 2-3.

56Green Mountain at 6-7, MidAmerican at 2, and

NEMA at 3. The NJ Ratepayer Advocate noted that

New Jersey’s consumer education program was not very

successful due to control by the incumbent utilities. NJ

Ratepayer at 3.
73

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

boards consisting of consumers and suppliers.57

D. Restrictions on Distribution Utilities’

Behavior

Many commenters were concerned about the

competitive effects in retail electricity markets of

policies that govern how a distribution utility is

able to participate in retail markets through

unregulated affiliates.58 Certain kinds of

discriminatory treatment of electricity suppliers

by the distribution company or cost-shifting

from the affiliate to the utility can have a

significant adverse effect on the development of

competitive retail markets. Policies in this area

may also affect whether consumers form an

accurate understanding of the unregulated

affiliate’s identity and position in the market.

1. Cross-Subsidization

If regulated utilities subsidize their competitive

affiliates by shifting affiliate costs to the

distribution utility, and thus to ratepayers,

efficientresource allocationandthedevelopment

of competitive markets can be impeded. If some

of the affiliate’s costs are paid by the utility (and

added to the utility’s rate base), ratepayers will

have subsidized the affiliate, and the affiliate will

have a cost advantage relative to independent

suppliers that is not due to legitimate

efficiencies. This kind of cost shifting distorts

retail electricity markets. Such anticompetitive

cross-subsidization can occur, for example,

through the use of accounting methods that do

not accurately allocate costs. Thus, a key policy

issue is how best to ensure that such behavior

does not occur.

2. Discrimination in Access to

Distribution Lines, Customer

Referrals and Customer

Information

A regulated distribution utility, by virtue of its

continued ownership and operation of the

distribution lines, controls certain kinds of

competitively significant inputs that cannot be

practically duplicated by other entities. Access

to distribution utilities’ lines, to deliver retail

electricity, is clearly essential to retail suppliers.

In addition, the utility is uniquely positioned as

a first point of contact with customers, to make

referrals to specific retail suppliers. Another

valuable asset controlled by utilities is certain

types of customer information (e.g., customer

usage data). Competitive markets require that

unaffiliated retail suppliers have the same access

rights to these services as the utility’s affiliates.

(Access to some services may be denied to all

suppliers, including affiliates.) Numerous

comments expressed concern that, without

safeguards, the distribution utility might not be

impartial toward independent suppliers.59

57PEPCO at 2-5 (citing to the process in

Maryland and the District of Columbia) and MI PSC at 3.

58New Power at 7, NARUC at 6-7, Enron at 6,

Green Mountain at 7-8, NEMA at 5, PGCG at 5, IURC at

1-3, EEI at 14-15, PA OCA at 15, ACCA at 2-6, CFCRM at

3-6, and NAFC at 2-22. Commenters’ concerns covered

both retail electricity markets and markets for nonelectricity products – e.g., electric appliances or natural

gas – in which a regulated electric utility might compete

through unregulated affiliates. In the area of retail

electricity markets, there is also a concern about the

utility’s provision of standard offer service that

competes with unregulated retail supplier electricity

products. Green Mountain at 7-8.

59Green Mountain at 7-8, NARUC at 7, NEMA at

5, ACCA at 2-6, New Power at 7, EEI at 14, and IURC at
74

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

3. Policy Approaches

One possible approach would be to prohibit the

distribution utility from participating in the

unregulated retail market. This would remove

the opportunity to engage in the kind of crosssubsidization and discrimination discussed

above. But this prohibition also would prevent

the realization of any economies of scope that

otherwise might exist.60 Another possible

approach would be to allow distribution

companies to participate in the retail electricity

market, but only through requiring separate

operations of the utility and its unregulated

affiliate(s).61 Such separation can entail

requirements thattheutilitynot share employees

or assets with its affiliate, and may even require

financial separation whereby the unregulated

affiliate’s creditworthiness is determined

without reference to the traditional utility’s

assets or regulatory status. These rules are often

included in “codes of conduct” adopted by states

to govern the relationships among utilities, their

unregulated affiliates, and other market

participants. Rules requiring financial

separation may be difficult enforce,62 leading

some states to impose more structural-type

restrictions on the utility’s participation in retail

markets.63

Codes of conduct also contain rules intended to

address concerns about discrimination by

distribution utilities. Some commenters

advocated that these rules should include bans

on certain activities, such as joint marketing

between a distribution utility and its energy

affiliate.64 Many states, including Arizona, New

Jersey, and Texas, prohibit distribution utilities

from engaging in joint advertising with their

affiliates.65

4. Affiliate Use of the Distribution

Utility’s Name and Logo

Many states have addressed the competitive

effects of allowing an unregulated affiliate to use

the same or similar name and logo of the

regulated distribution utility.66 Commenters

generally analyzed this issue in terms of either

the potential for cross-subsidization and

discrimination by distribution utilities67 or the

procompetitive and informational benefits that

2.

60EEI at 14.

61Shell at 8-9, ACCA at 5-6, NARUC at 6-8 &

Appendix F.

62OCC (attachment titled “Responses to

Questions of Chairman Bliley by the Ohio Consumers’

Counsel”) at 5 and IURC at 3. Also, there are

disagreements regarding the proper compensation for

transactions between a regulated utility and an

unregulated affiliate. Compare EEI at 15 (incremental

cost) with NARUC at Appendix F and NAFC at 18-22

(market value). 

63For example, Maine’s restructuring legislation

prohibits more than a 33% market share of utility

affiliates in the utility’s service territory. ME PA at 11.

64Shell at 8-9.

65The notable exception is Ohio, which, in

addition to allowing joint advertising and marketing, has

placed only limited restrictions on the affiliate’s use of

the name and logo of the distribution utility. See State

Profiles, Appendix A. 

66See, e.g., Md. Pub. Serv. Commn, Re: the

Investigation into Affiliated Activities, Promotional Practices

and Codes of Conduct Of Regulated Gas and Electric

Companies, Order no. 76292, Case No. 8820 (Jul. 1, 2000).

67See generally NAFC at 15-16.
75

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

could flow from affiliate use of the same or

similar name and logo of the distribution

utility.68 One commenter noted another

dimension of this issue -- the potential for

consumer misunderstanding about the

relationship between a distribution utilityand its

unregulated affiliate when the two use the same

name and logo.69 If use of the distribution

utility’s name and logo implies to consumers

that the affiliate can deliver a superior quality

product, due to its affiliation, when in fact the

affiliate’s product is not superior to that of its

competitors, then such use might be considered

deceptive.70

Most of the states with retail competition

programs allow an affiliate to use the

distribution utility’s name and logo (or one

similar to it), but require a disclaimer stating that

the affiliate is not regulated and is not the same

company as the distribution company. Some

disclaimer requirements also require the affiliate

to inform consumers that they have no

obligation to buy the affiliate’s products in order

to continue to receive regulated services from the

distribution utility. Thus these disclaimers

attempt to correct possible misimpressions by

the consumer regarding the regulatory status of

the affiliate and whether the utility services are

tied to purchase of the affiliate’s product.

Several commenters supported the use of

disclaimers (as opposed to banning affiliate use

of the name and logo), arguing that they appear

to be an effective way of educating consumers

about the difference between the regulated and

unregulated entity.71

 Some commenters said that

disclaimers can correct any consumer

misimpressions caused by affiliate use of the

distribution company’s logo and name.72 But

other commenters were skeptical that

disclaimers are sufficient to convey the correct

information to consumers.73 Empirical evidence

suggests that the effect of the disclaimer is

incomplete; one study conducted for the Public

Utilities Commission of Nevada indicated that

consumers are confused by the affiliate’s use of

the parent’s name, and that the addition of a

disclaimer does not appreciably reduce that

confusion compared to requiring use of a

dissimilar name and logo by the unregulated

affiliate.74

If regulated distribution utilities are allowed to

grant the use of their name and logo to their

affiliates, then in some cases there is likely to be

significant value associated with that use, even

when a disclaimer is required.75 Some

commenters argued that this value should

68NRECA at 7-8, ICC at 11, and MidAmerican at

3-4.

69MidAmerican at 3-4.

70MidAmerican, although it opposed restrictions

on affiliate use of name and logo, nonetheless noted that

advertising or claims of superior service as a result of

affiliation with the regulated distribution company

should be prohibited. Id. at 4. 

71Allegheny at 4, PA PUC at 23.

72Exelon at 17-18, NRECA at 7-8.

73NAFC at 24, NJ Ratepayer at 4-5.

74Manoj Hastak, Energy Company Advertising

Study, Conducted for the Public Utilities Commission of

Nevada (Dec. 1998).

75This value may be due to real efficiencies in

reduced search time for consumers, or it may be due

only to the ability to gain from consumer

misperceptions, as discussed above.
76

Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

belong to the utility’s ratepayers, since it is by

virtue of being a regulated monopoly that the

name and logo take on such value in a

competitive market.76 Other commenters stated

that the value of name and logo use belongs to

the shareholders of the utility, because it is their

investment that created it.

77 The answer to the

question of who rightfully should benefit from

the value of using the utility name and logo

depends on what assumption is made about the

implicit contracts underlying the “regulatory

compact” and regulated utility shareholder

agreements.78

E. Other Consumer Issues

1. Customer Aggregation

Several organizations and companies expressed

support for customer aggregation in their

comments.79 According to one commenter, with

aggregation, “small consumers gain access to

competitive pricing by minimizing supplier

transaction costs and by allowing suppliers to

make informed resource and risk management

decisions.”80 Potential sources for aggregation

arrangements include buying cooperatives, local

governments, business chains, trade associations,

and schools. Although successful aggregation

can occur with little or no involvement of

government entities, states should consider the

effect of their policies on the ability of groups to

employ beneficial aggregation arrangements.

It appears that many states have allowed and, in

some cases, encouraged aggregation through a

variety mechanisms. In some cases, states have

expressly permitted arrangements that allow

consumers to obtain electricity through entities,

such as buying clubs, with which the consumers

are associated.81 Some commenters suggested

that Ohio, in particular, has been successful in

encouraging aggregation.82 In that state, local

governments and groups such as trade

associations, professional organizations, school

districts, businesses, churches or neighborhood

associations can aggregate consumers after the

group or government has been certified to do so

76See, e.g., NAFC at 23-27.

77ICC at 11 and Alfred E. Kahn, Deregulation: 

Micromanaging the Entry and Survival of Competitors at 23-

27 (submitted by EEI).

78The National Alliance for Fair Competition

argues that, despite the fact that a utility may own its

name, ratepayers have served to build the value of name

recognition over the years in which the utility was a

monopoly. Thus, it alleges that, since the benefits of

name recognition to a regulated monopoly are extremely

limited, utility ratepayers should receive the value of

affiliate use of the name and logo, which can be of

considerable worth in a competitive market. NAFC at

19. Shell also alleges that “stranded benefits (meaning

windfalls to the utility from the restructuring process)

have not been used to support or promote a competitive

retail market.” Shell at 4. The opposing view is that a

utility’s ratepayers pay the cost of services rendered to

them, but do not make investments or receive ownership

rights to utility assets. 

79Green Mountain at 8, EPSA at 7-8, and Enron

at 5.

80Enron at 5.

81See, e.g., ICC at 10.

82See, e.g., OCC at 1. “In February 2001, Green

Mountain Energy Corporation . . . was selected to serve

over 400,000 Ohio electricity customers in the country’s

largest-ever energy aggregation contract.” 

www.newrules.org/electricity/defaultohio.
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Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

by the Ohio commission.83 Under this approach,

consumers voluntarily sign up with the entity

that will buy power for them. In addition to

allowing residents to sign up with their local

governments voluntarily, Ohio allows local

governments to serve as the default buyer for all

customers if residents approve such an

arrangement through a referendum. When a

referendum establishes the local government as

the default buyer, residents must affirmatively

choose a different supplier if they wish to

purchase their power through or from another

entity. 

Although there may be a variety of ways to

address aggregation, states should pay attention

to consumer choice concerns that may arise,

particularly if entities attempt to place

individuals into these arrangements

automatically without notice or a public process

(such as a public referendum). Approaches that

do not give consumers effective choice may

undercut the benefits of competition, which

depends ultimately on the consumer’s ability to

choose.

2. Public Benefit Programs

Many commenters stated that there would be a

continuing need forpublicbenefitprograms (e.g.,

low-income assistance programs) under retail

competition.84 NARUC, for example, stated, “a

fundamental responsibility of State and federal

electric utility regulators in this transition period

is to assure that vital public interests and

established public benefits will be preserved in

any restructuring of the electric utility

industry.”85 Some commenters emphasized the

need to increase such programs in light of

energy cost increases and the large proportion of

income already devoted to energy purchases by

low-income households.86 A key concern,

however, was to ensure that low income

assistanceprogramsdonotdistort the economics

of entry. 

Other commenters, including alternative

suppliers, believe that low-income programs

should “be portable” -- that is, that low-income

households should not have to take standard

offer service in order to obtain assistance.87

These commenters also support financing such

programs through “competitively neutral”

charges88 or general tax revenues.89 A particular

concern for these commenters is that the price of

standard offer service not be based on the needs

of low-income residential customersbecause this

would likely result in competitive distortions.90

One association of alternative suppliers

suggested that aggregation of low-income

residential customers could reduce costs of

83See

www.state.oh.us/cons/publications/aggregation.asp.

84See, e.g., AARP at 4, Cleco at 5, ECA at 7,

Exelon at 26-27, MidAmerican at 7, NEMA at 13, Shell at

17, and UWUA and the MUPHT at 12-13

85NARUC at 12.

86AARP at 1-2, and UWUA and the MUPHT at

12-13.

87AARP at 5, Cleco at 5, MidAmerican at 7, and

Shell at 17.

88ME PA at 19 and MidAmerican at 7. Maine,

for example, specifies that support will come from an

additional distribution charge.

89Cleco at 5.

90 Green Mountain at 5, MidAmerican at 7,

NEMA at 13, and Shell at 17.
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Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

acquiring and serving these customers.91 

A number of additional types of public benefit

program elements, such as energy conservation,

renewable fuel, clean-coal technology

development, and customer education,92 were

identified in several comments. But, there were

no specific comments on design or funding for

these elements or views expressed either for or

against their continuation. 

F. Conclusions

• States have adopted measures to protect

consumers who are able to choose among

competing suppliers in retail electricity

markets. A key policy goal is how best to

meet important consumer protection

objectives while minimizing compliance

requirements for competing energy

suppliers. Avoiding unnecessary

state-imposed costs and burdens will

accelerate the evolution of competitive

retail electric power markets.

• Initially, a diversity of regulatory

programs across states can help to

identify the best approaches to protecting

consumers while imposing minimal

burdens on suppliers. Subsequently,

however, significant cost reductions to

electricity suppliers may follow from

uniform supplier licensing and customer

switching rules across the states. To that

end, industry members have been

working to develop model uniform rules.

If the states, in turn, implement consistent

regulatory frameworks, such rules can

lead to significant benefits for market

participants and consumers.

• Consumers’ choices will be made most

efficiently if consumers are exposed to

accurate, timely and comparable

information about retail suppliers of

electricity. Enforcement of truth-inadvertising laws will help ensure that

suppliers make truthful, nondeceptive,

and substantiated advertising claims in

the new retail marketplace.

• Standardized labeling of retail electricity

products and services may be beneficial

to consumers and competing electricity

suppliers, as long as it allows suppliers to

provide additional information as they

begin to offer innovative services and

products to customers. Whether required

by differing state rules or uniform rules

across the country, mandatorydisclosures

to consumers can help ensure that

consumers receive, before purchase,

accurate information important to their

purchasing decisions in a newly

restructured market. Excessivedisclosure

requirements, however, may discourage

the provision of information, particularly

in advertising. Uniform rules can reduce

supplier labeling costs, but they reduce

the ability of states to tailor the rules to

their own policy needs.

• Policies are needed to prohibit vertically

integratedutilitiesfromanticompetitively

(1) shifting costs from their unregulated

generation and retail operations to their

regulated distribution and default service

91 NEMA at 13.

92 ICC at 20 and 21, ME PUC at 9, MI PSC at 9,

NJ Ratepayer at 9, and NYPSC at 17.
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Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition

operations , and (2) exercising

discrimination in the provision to retail

suppliers of inputs over which the utility

has a monopoly.

• Consumer education programs that

provide general information to increase

consumer awareness about retail

competition, as well as “nuts and bolts”

information to allow consumers to shop

effectively and select their supplier, will

help to ensure that consumers have the

information they need to participate

effectively in competitive retail electricity

markets.