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(Cont'd from previous page)
Cherry Picking
While nearly everyone agrees that a move to retail electric
competition will soon take place, there remain serious questions
about whether or not it will benefit residential and rural consumers.
These questions center around the concept of the “cherry picking” of
large commercial loads by predatory utilities.
Large industrial accounts are very attractive to utilities,
because large amounts of energy can be sold in one place. Due to
economy of scale, this makes it possible to generate electricity less
expensively per kiloWatt-hour,and it means the generation utility can
charge a lower price and still make a profit.
Some industry leaders fear cherry picking would work this
way: A generation utility would come into a distribution territory
and approach all the large industrial accounts with low bids for
electricity. The industrial consumers would, quite understandably,
accept those offers and stop buying power from their home utility.
With the loss of all of its large industrial consumers, the cost
per kiloWatt-hour to the home utility increases, and so their rates
go up. In rural areas, this could be particularly dramatic, because
costs in serving areas of low population density are already much
higher. The end result could be that large industrial consumers in
urban areas get premium pricing, while residential and rural
consumers see a significant increase in rate.
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Stranded Costs
Another big open question in the restructuring debate has to do
with the recovery of “stranded costs,” which are costs incurred by a
utility preparing for anticipated power needs that might not come
about under competition.
For almost a century, the electric utility industry was shaped by
the belief that electric consumers could be best served by regulated
electricity monopolies. These independent monopolies, coordinated by
regulation, were able to provide reliable, efficient service to all
consumers who desired it, while making the most effective use of
available resources.
One way this arrangement promoted efficiency was by cost
reductions due to economy of scale. Utilities with a stable,
predictable consumer base could plan purchases and building projects
on a larger scale, which was cheaper per consumer. The existing
industry structure also prevented needless and expensive duplication
of facilities by companies vying to serve the same area.
In exchange for exclusive rights to serve certain territories,
utilities accepted the obligation to serve anyone in those
territories who was willing to abide by the government-regulated
terms of service.
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