Competitive wholesale electricity markets are important to achieve effective competition in retail markets, according to a new report issued by the staff of the Federal Trade Commission (FTC). The report also examined which features of various state retail electricity programs have resulted in consumer benefits and which have not.

In the report, “Competition and Consumer Protection Perspectives on Electric Power Reform: Focus on Retail Competition,” the staff highlighted “certain jurisdictional limitations” on the authority of individual states to design successful retail competition plans and whether there is a need for federal legislative or regulatory action.

Responding to a request by House Energy and Commerce Committee Chairman W.J. “Billy” Tauzin and Energy and Air Quality Subcommittee Chairman Joe Barton, the staff updated a July 2000 FTC staff report to identify several points on how electric restructuring has progressed at the state level so far:

The report came to four major conclusions. The first is that for all of the expected benefits of retail competition to be realized, it is important that wholesale markets be competitive. The report stated that “effective wholesale and retail competition will mutually reinforce each other, thus combining to bring benefits to retail customers.” As both wholesale and retail markets become regional, the staff said governing policies and jurisdictional approaches also must move in that direction for wholesale and retail competition to be successful.

The staff’s research also found that policies are needed in retail and wholesale markets to increase demand-side responsiveness. “So far, neither retail nor wholesale markets for electricity generation encourage effective demand-side responses,” the report stated. “Generally, retail customers do not have price information and time-sensitive rates that reflect the changing price of obtaining electricity at various times of the day and over the course of the year.”

By increasing the price sensitivity of demand, it will also help to constrain existing or potential market power in generation. The staff said this is true because a price increase will be less profitable for generators if it is passed through and retail buyers reduce their consumption as a result. In addition to variable pricing for generation services, retail suppliers “should be permitted to offer competitive metering and billing services to their customers.” In the staff’s opinion, such competition would encourage the development of innovative new services.

The report’s third conclusion is that policies that set the price of standard offer service for non-choosing customers have a substantial effect on the entry of new retail suppliers. To assist competition, the staff argues that state policies that eliminate barriers to entry are necessary to allow for the long-run entry of entities to compete with the incumbent utility.

“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,” the staff urged. “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.

The staff’s final conclusion is that state consumer protection policies can affect both consumers and the likelihood of new entry to increase competition. The report stated that consumers’ choices will be made most efficiently if they are exposed to accurate, timely and comparable information about retail suppliers of electricity. “Enforcement of truth-in-advertising laws will help ensure that suppliers make truthful, nondeceptive, and substantiated advertising claims in the new retail marketplace,” the FTC staff said in its report. “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 consumers.”

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