Default service pricing – The flaw and the fix: Current pricing practices allow utilities to maintain market dominance in deregulated markets

Abstract

Utility default service has been priced incorrectly for two decades. Incumbent utilities serving as default service providers for both electricity and gas allocate few to no “costs to serve” to default service rates. The indirect costs not allocated include billing, customer care, enrollments, metering, and other overhead and add up to billions of dollars annually. These costs are paid in distribution rates. The resulting rate for utility-provided default service is a below-market price, allowing the utilities to maintain dominant market positions in the retail markets for residential and small commercial customers. This pricing practice distorts the relevant retail electric and gas markets and harms customers and the markets. NARUC cost allocation guidelines advocate that the cost of utility resources used in the provision of default service should be allocated to that service. This paper presents a Default Service Equalization Adjustment Mechanism (“D-SEAM”) that when deployed properly, will provide the default service utilities with a tool to allocate an appropriate amount of costs to default service rates and then adjust that allocation on a monthly basis to ensure the distribution utility is made whole financially as customers migrate off of default service. Without an appropriate allocation of cost to default service, incumbent utilities will maintain a dominant market position in the retail markets for residential and small commercial customers as a result of the significant subsidy provided by the distribution rates. Utilities should adopt, and/or the regulators should compel the adoption of a complete and appropriate allocation of costs to default service. It is only with this allocation that customers will be able to reasonably compare market offerings.