Incumbent Utilities Research Articles

Generation search costs and Ramsey pricing in a partially deregulated electric utility industry

With deregulation of the generation sector of US electricity markets, many customers will unbundle from the incumbent utility and spend moneys searching for lower cost generation alternatives, while other customers will remain on bundled rates with that incumbent utility. Regulators will still need to charge both classes of customers for recovery of the costs of providing transmission and distribution (“T&D”) services. Because of the possibility of searching, unbundled customers have incrementally greater sensitivity to the T&D price than do bundled customers and should optimally be charged a lower Ramsey T&D rate than bundled customers.

The Effect of Wholesale Market Deregulation on Shareholder Wealth in the Electric Power Industry

This paper analyzes electric utility stock price reactions to events preceding the passage of the Energy Policy Act of 1992, a development that precipitated the onset of competition in the wholesale sector of the electric utility industry and accelerated the pace toward state‐level deregulation of the retail sector. For the industry as a whole, we find that, at worst, investors had neutral reactions to events preceding wholesale deregulation. However, stock price reactions vary systematically with differences in incumbent utilities’ marginal costs, though not with differences in fixed costs or purchased power costs. These results are consistent with the notion that new technologies have substantially reduced barriers to entry into the electric power generation industry, rendering capital cost advantages of incumbent utilities vulnerable to being neutralized by new entrants. However, marginal cost advantages are more likely to be sustainable because they are likely to be driven by inimitable locational advantages.

Principles for Developing Competition: Enhancing Transition Rules for a Restructured Electricity Industry

Transition rules should encourage all retail electricity competitors and potential competitors, including incumbent utilities, to bring to the marketplace whatever procompetitive strengths they might possess, regardless of the historic origin of those strengths.

Active Market Share: measuring competitiveness in retail energy markets

As retail electric and gas markets deregulate, market share measurement becomes critical for marketers, regulators, and incumbent utilities. Yet traditional market share measures miss important features of these network industries. In this paper we model provider choice in network industries and develop two alternate market share measures—The Active Market Share (AMS) and the New Mover Market Share (NMMS), that are based on ‘active demand’. These measures are shown to provide more accurate real-time measures of market activity. The NMMS is a special case of the AMS which is easy to measure empirically. Numerical simulations are used to provide comparisons between each measure over time. Both the AMS and NMMS will be important tools for anyone interested in measuring the competitiveness of deregulating markets.

Should Utility Incumbents Be Able to Extend Their Brand Name to Competitive Retail Markets? An Economic Perspective

As retail competition begins, at least for the short run, there should be policy restrictions on an incumbent utility’s ability to extend its brand to an affiliated marketer. However, a utility-affiliated marketer should be permitted to compete in a newly deregulated market using a generic or self-developed brand name.

Conceptual Issues Raised by the PECO/Enron Dispute

Enron’s alternative plan for competition in Pennsylvania served notice on the incumbent utility and perceptive regulators that proposals too favorable to incumbents can and will be exposed—potentially with great benefits for consumers and competitors of the incumbent, and to the incumbent’s disadvantage.

Discussion: “Stranded Costs and Competitive Forces in the Electric Utility Industry”

Stranded costs in the electric utility industry—the past costs incurred by incumbent utilities that could not be recovered in a competitive market environment—have been a troubling and troublesome policy issue for electricity deregulation. Although electricity deregulation surely would have proceeded slowly in any event,1 the stranded cost question— who (customers? shareholder-owners?) will absorb the losses in the forthcoming competitive environment?—has clearly slowed the process even further.

Vertically integrated utilities:

There is no prospect of a truly competitive market for generation so long as monopoly owners of transmission and distribution wires are allowed to own generating plants. But it may be possible to do as some states have already done—pay the incumbent utility its stranded costs on condition that it divest its generation and clear the way for a truly competitive market structure.