How may a customer exploit the Bonneville Power Administration's new pricing scheme?

Abstract

For more than half a century, the Bonneville Power Administration (BPA) has marketed electricity produced by the Federal Columbia River Power System (FCRPS) to its ‘preference’ customers in the Pacific Northwest. It has historically met the growing needs of its preference customers by augmenting the power provided by the FCRPS with market purchases and recovering its costs through its cost-based rates. The BPA, however, is preparing to implement a new pricing scheme intended to balance its historical commitment to supply its customers with low-cost power from the FCRPS with the need to signal that growing demands are met with increasingly expensive generation resources. This paper describes an opportunity that may exist for customers to exploit the scheme to obtain a larger share of low-cost federal power going forward. We show that when all customers take advantage of the opportunity, they find themselves in a form of the prisoner’s dilemma whose outcome is a lose-lose Nash equilibrium, and discuss its managerial implications.