Review of Industrial Organization 21: 329–333, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Pricing in Competitive Electricity Markets, A. Faruqui and K. Eakin, editors. For-
ward by J. Robert Malko. Boston: Kluwer Academic Publishers, 2000, xxxiii, 450
pages. ISBN 0-7923-7839-3.
Pricing in Competitive Electricity Markets examines two questions. First, what will
the deregulated industry look like? Generation and retailing may be deregulated,
but monopoly and regulation will remain for transmission and distribution. Second,
what products will emerge in the new structure? Price competition on a homogen-
eous good characterized by high ﬁxed cost and low marginal cost means losses for
all ﬁrms. Hence, product differentiation emerges, through pricing, power quality,
or ancillary services. Authors from various backgrounds address these questions in
27 chapters over six sections. Section highlights and comments follow.
Section I overviews deregulation and the emerging product differentiation.
Retail competition focuses initially on price, resulting in widespread losses.
Proﬁt recovers with consolidation and product differentiation. The limited ability
to differentiate electricity per se forces competition along other dimensions, the
most immediate is price. This ranges from a guaranteed price (e.g., ﬂat or time-
of-use), where the energy provider bears the risk, to a spot price (e.g., real-time
pricing), where the customer bears the risk. A related dimension is power quality,
such as green power, premium power for sensitive computing, and interruptible
power for ﬂexible producers. A more removed dimension is ancillary services,
such as advanced metering services, energy and risk management, and engineering
Section II examines industry history and deregulation.
The problem of having price reﬂect production cost, the peak-load problem, and
customer alternatives emerged almost immediately. John Hopkinson (circa 1892)
proposed a demand charge and an energy charge. Since this ignores the timing
of customer relative to system peak, Gisbert Kapp proposed time-of-use pricing,
with peak power priced at a premium relative to off-peak power. Arthur Wright
advocated a declining block rate, the initial block based on maximum consumption,
to avoid price constraints in the U.K. This was widely adopted in the U.S. though
no price controls were in effect.
Regulation similarly evolved, with utilities initially regulated by franchise
competition. Scale economies, no monopoly protection, and corruption of some