Competitive pricing in the electric industry

This paper deals with pricing in an increasingly competitive electric industry. Many electric utilities face the prospect over the next several years of losing a portion of their industrial load to alternative suppliers and technologies. ‘Bypass’ has become a major concern for electric utilities. This paper first outlines the basic economic issues associated with bypass and the choices confronting regulators when bypass has begun, or is imminent or a real possibility. It then examines different pricing options for accommodating bypass, focusing on the major features of a flexible pricing rule based on the theory of contestable markets. This rule is designed to effect optimal bypass and thereby maximize the total economic benefits of competitive forces emerging in the electric industry