7 'Just and Reasonable' Prices in 'Competitive' Markets Market-Based Rates Set by the Seller
| Author | Scott Hempling |
| Pages | 267-285 |
7.A. Seller-set prices can be “just and reasonable”—if seller lacks market power
7.A.1. Paths to regulatory withdrawal
7.A.2. Wholesale electricity: Seller-by-seller review
7.B. The courts speak: To prevent market power, regulators must screen
and monitor
7.B.1. The obligation to screen
7.B.2. The obligation to monitor
7.C. The agencies act: Techniques and procedures for screening and monitoring
7.C.1. Screening sellers
7.C.2. Monitoring sellers and punishing violators
7.D. Are scarcity prices just and reasonable?
7.E. The future of market-based rates
267
“Just and Reasonable” Prices
in “Competitive” Markets
Market-Based Rates Set by the Seller
CHAPTER SEVEN
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Without empirical proof that . . . existing competition would ensure that the actual price
is just and reasonable, [the Commission’s approach] retains the false illusion that a gov-
ernment agency is keeping watch over rates, . . . when it is in fact doing no such thing.1
7.A. Seller-set prices can be “just and reasonable”—
if seller lacks market power
7.A.1. Paths to regulatory withdrawal
When policymakers convert monopoly markets to competitive markets, they begin with
market structure. They (1) authorize entry by new competitors; (2) make competition
effective by unbundling the competitive from noncompetitive services and reducing entry
barriers; and (3) monitor the results to prevent anti-competitive action like price squeeze,
predatory pricing and tying. Those were the subjects of Chapters 3, 4 and 5. We now
turn from structure to pricing. Chapter 6 explained how, in regulated monopoly markets,
the regulator sets the prices. When we authorize competition in previously monopolistic
markets, should we let sellers set the prices?
The answer has been yes, with two distinct approaches to the regulator’s role: statutory
repeal and administrative withdrawal. Statutory repeal is straightforward: A legislative
body repeals price regulation. Doing so removes the regulator’s rate authority entirely,
leaving entrants to price at will. Examples are state statutes authorizing retail competi-
tion in gas and electricity. In those markets, the new competitors set their prices without
regulatory review. There is no “just and reasonable” limit and no regulatory role.2 Admin-
istrative withdrawal is less straightforward. The statutory “just and reasonable” standard
remains on the books; but the regulator, using implicit or explicit authority and subject
to varying procedures, withdraws from price-setting. The assumption is that competitive
market forces will keep prices just and reasonable. Under this administrative withdrawal
umbrella, there are four main variations.3
2. Caution: While the competitive retail sellers in these states can price at will, the provider of “default”
service (also known as “standard offer” service or “last resort” service) is usually subject to some state
commission price regulation. See supra Chapter 3.B.2.
3. In each of these variations, the regulator puts no boundaries on the prices. Recall from Chapter 6.E that
regulators can also grant sellers pricing discretion within regulator-set boundaries. These price caps and
their cousin “alternative form of regulation” (AFOR) are actually a variation on cost-based rates, because
they have a foundation in some measure of cost, such as the carrier’s last cost-justied rate. Price caps
and their relatives have at least three common features: (1) The statutory just and reasonable standard
remains in place, (2) the regulator assumes that competitive forces will keep prices just and reasonable,
and (3) the formulas and quantities used to set the caps are periodically reviewed to see if they are pro-
ducing excess or insufcient prot because of the relationship of price to cost.
Chapter Seven268
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