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Electric Perspectives, Mar/Apr 2002 by Jurewitz, John L, Mealiea, Wallace

But even in the long term, there are arguments for not transitioning to completely free and unregulated retail electricity markets. Temporarily orphaned and chronically undesirable customers are two reasons. Financially desirable customers who are suddenly abandoned by their retail suppliers, or temporarily orphaned customers, need some sort of limited-term (e.g., one month) POLR service to maintain the continuity of their electric service while they are provided a reasonable opportunity to secure service from another retailer. Many also argue that customers who are chronically undesirable (e.g., due to poor credit ratings) may need to be provided Post service on a continuing basis, perhaps at publicly subsidized prices.

The Meltdown of Plain-Vanilla Services

It may be desirable to require the UDC or some other entity to provide at least a "plain vanilla" service that simply passes through wholesale power costs to retail consumers. But the recent experience in San Diego in summer 2000 is not encouraging.

San Diego Gas and Electric was the first UDC in the United States to reach the end of its designated transition period. In the absence of explicit regulatory direction, it then continued to offer its customers plain-vanilla pass-through of wholesale spot-market prices-the barest minimum retail offering. But the subsequent extraordinary events in California's wholesale market proved too much for politicians to forebear intervention. By the end of summer 2000, a retail rate cap was re-imposed, raising serious doubts about the future of retail competition in the state.

On one hand, one can argue that San Diego customers were not adequately prepared for retail access during the preceding transition period and that retail markets were not sufficiently developed. On the other, one can view this episode as an abject failure of restructuring, and wonder skeptically whether a transition to full retail competition can ever be made and, if so, what groundwork will be required.

Procurement and Pricing Solutions

To the extent that regulators mandate default service, it is likely that they will be concerned not only about its physical availability but also its pricing. Their concern about price regulation is also likely to make them interested in both profit and wholesale procurement regulation.

There are several ways in which regulators might structure the wholesale procurement bases of default service. Plain-vanilla passthrough of spot-market power would be the most competitively benign of the possible procurement structures. Service to small customers could be passed through on a load-profiled basis. Larger customers could be required to install hourly meters. The potential disadvantage of this model is that the results may become politically unacceptable if wholesale spot-market prices are overly volatile or rise sharply as they did in California in 2000 and 2001.

Various mechanisms could be used to subdue the potential retail price volatility caused by simply passing through wholesale spot-market prices. For instance, limits could be placed on month-to-month retail price changes, and temporary over- and under-collections could be tracked in balancing accounts for later recovery. To protect the default provider, price-change limits might be over-ridden by limits on maximum balancing account under-collections. Unfortunately, no such framework is guaranteed to be immune to later political adjustments if wholesale spot-market prices become sufficiently extreme.