Wholesale Spot Price Pass-Through

It has been proposed that, when electricity markets open to retail competition, incumbent distribution utilities should be required to sell to residential customers at wholesale spot market prices. It is argued here that this overestimates the value of spot-price sales to customers, and underestimates the costs and disadvantages of the proposed policy. Experience in San Diego illustrates the problems. But other policies such as “shopping credits” have deficiencies too. An alternative approach, based on transitional maximum price caps, has facilitated the development of a competitive and fully deregulated residential retail market in the United Kingdom.