Dow Jones Newswires -- February 14, 2000

Economist: Power Dereg Will Promote Customer 'Redlining'
By BRYAN LEE

WASHINGTON -- State efforts to restructure electricity markets and  promote retail competition will result in discrimination against customer classes, electronic "redlining," and price fixing, according to a study released Monday.

Retail electricity competition will benefit high-volume industrial and commercial purchasers while resulting in price discrimination against Small  business and residential consumers, according to the analysis sponsored by  the American
Public Power Association.

APPA is a trade group representing more than 2,000 municipally owned electric utilities.

The study, by Corta Madera, Calif.-based economist Eugene Coyle, employed economic "game theory" to predict behavior by electricity sellers and consumers. It also based its conclusions on market behavior in other industries, such as
pricing of airline travel and college tuition.

Twenty-five states have moved to open up retail power markets, but actual
competition is occurring in slightly more than a handful of states, led  by 
California, Pennsylvania and New England.

Coyle's study didn't consider real-world data from states where retail power
markets competition is under way.

Nevertheless, Coyle's conclusions are expected to resonate on Capitol Hill, since it reinforces arguments cited by those who oppose U.S. legislation to promote
retail power competition nationally.

Electricity deregulation "will leave society worse off," Coyle predicts.

"This is not because producers of electricity prefer one kind of customer to
another, but because to be profitable producers must discriminate. Essentially, they will charge each type of customer a different price, based  not on cost but
on 'what the traffic will bear'," the report says.

'Data Mining' To Identify Profitable Customers

Many states have moved forward with retail competition programs based on
economists' testimony that competition will protect consumers better than cost-based rates determined by regulators.

"More rigorous analysis, however, exposes the dangers of blithely accepting
cliches about the market," Coyle warns.

"The standard theory of competition fails in industries where the  product sold is an undifferentiated commodity, and separately where production requires large fixed investment," Coyle writes, noting electric power contains both elements.

"Because of the product and cost characteristics of electric power, severe price discrimination is certain to occur in deregulated electric power, and  small
business and residential customers will be the target."

In an undifferentiated commodity market, prices are driven down to the point where they are no longer profitable, resulting in collusion and cooperation - price fixing - among producers to prop up prices, the report  finds.

"Mergers will proceed until collusion/cooperation can be effected," the
report says.

Coyle predicts that retail power providers will use "data mining" of  large
electronic databases to identify the power-demand characteristics representing
the most potential profits, and will target costly  marketing activities to those
customers.

This will result in electronic "redlining" in which the benefits of competition are denied to certain classes of customer, just as banks  would  "redline" certain neighborhoods based on economic characteristics, he predicts.

Economists assume that electricity deregulation will result in one low price
determined by competition.

But just as price discrimination is central to airline profitability - business
customers get "gouged" while leisure travelers get bargain  rates - so, too, will it be for electric power, except small-scale customers will  get gouged rather than large-scale corporate customers, Coyle maintains.

Congress in the "Freedom to Farm Act" deregulated agriculture commodity
prices, predicting the market would work better in regulating prices obtained by farmers. Instead, it has resulted in depressed prices and precipitated an economic crisis in rural areas, Coyle noted.

"Price discrimination has always gone on in electric power," Coyle said  in a 
telephone interview Monday, citing differential pricing for industrial  and 
residential customers.

The "main benefit" of regulated cost-based pricing has been to limit  price
discrimination, he says.

While the report doesn't use any real-world data to buttress its arguments,  Coyle maintained the effects his analysis predicts can be seen already in California's first-in-the-nation deregulated market.

He cited the high-profile example of Enron Corp. (ENE), which pushed hard  for retail competition and spent heavily to establish a market presence, but  then withdrew from the residential market in California because new-customer acquisition costs were too high and profit margins too thin.

New customer-protection rules and antitrust enforcement aren't enough to guard against price discrimination and electronic "redlining" in deregulated  power
markets, Coyle's report concludes.

The solution, he recommends, is aggregation of customers by public entities,  which can purchase power in bulk at favorable terms. "Local and democratic
control is a key element in obviating undue discrimination among customers."

By Bryan Lee, Dow Jones Newswires; 202-862-6647; bryan.lee@dowjones.com

Copyright (c) 2000 Dow Jones & Company, Inc. All Rights Reserved.

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