Pace of Retail Gas Competition Disappoints Some Observers
Enron's announcement last week that it will terminate
residential power marketing efforts in several states (please see
story p.6) should be a wake up call for the gas industry as well,
where the pace of change toward retail competition has been a
disappointment for many observers.
While Enron isn't getting out of any residential natural gas
pilots, the level of competition in the residential gas sector is
still very poor, according to the Arlington, VA-based consulting
firm Hagler Bailly. The firm's National ACCESS Index scores the
current level of residential natural gas competition nationwide as
of April 23 at 1.6 on a scale of 1-100. The index measures the
openness of the market based on a number of components, not least
of which are state regulatory policies. According to the index,
commercial gas competition isn't moving much faster, with a score
of 12.9 out of 100.
A recent Salomon Smith Barney report finds 41 LDCs in 16 states
have moved toward retail competition but many of them have made
only halfhearted attempts at installing successful customer choice
"Although initial customer reaction has been favorable, the
number of eligible customers that have signed up to participate [in
retail customer choice pilots] has been disappointing," the Salomon
Smith Barney Quarterly Review of LDC Regulatory Activity stated.
"Customers are not convinced of any potential benefit. If a
customer is happy with the service that an LDC is providing, there
is no reason for that customer to switch to another supplier unless
there is a great economic incentive." And in many cases, the
economic incentives are reduced even further when choice is made
available. LDCs typically lower or freeze their rates when
installing customer choice pilots (please see MichCon story p. 11).
Many existing residential pilot programs have attracted less
than 15% of the eligible customers. For example, only 1% of the
residential customers in KeySpan's entire New York service
territory are buying gas from participating marketers. Only 7% of
those eligible signed up in the first two years in MichCon's Grand
Rapids pilot. And 6% of the residential eligible signed up in
Northern Indiana Public Service Co.' pilot.
What's worse is those numbers aren't likely to grow much over
the next five years as long as state regulators follow their
current path and LDCs try to preserve the existing framework,
according to Ken Malloy, a senior consultant with Hagler Bailly.
The firm scores the openness of the residential market in 2003 at
only 7.1, up slightly from 1.6 in 1998.
There are many reasons the retail market is opening so slowly,
but some explanations are very subtle, Malloy said following his
speech on the issue last week at a Federal Energy Bar Association
conference in Washington, D.C.
One is there's little difference in the price of the commodity
offered by the LDC and that offered by the marketer because both
enjoy the benefit of a competitive wholesale market. "When an LDC's
price is not that far from marketer's you can see why there would
be slow penetration," he said. The state commissions haven't done
much to unbundle the other $4-$5 out of a residential customer's
average $7 gas bill.
"All they're doing right now is playing around with the $2 for
gas costs and a little bit of the $1 for pipeline transportation.
They are not yet going in there and touching that $4 for
distribution costs. They are not spinning off metering and billing
and forcing cost allocation studies that really force the LDCs to
expose some of its services that might be offered competitively but
that are part of the distribution bundle.
"When you're in retail you have to reach a critical mass of
dollars with the residential customers" by combining gas,
electricity, communications, home security services, appliances,
windows and other energy services. "Right now there hasn't been
enough work by state regulators to ensure that there is symmetry
and integration between gas regulation and electric regulation that
allows the opportunity to sell a joint product." Regulators need to
think in terms of creating a regulatory scheme that encourages the
sale of a "converged bundled offering of a wide variety of goods
But to make the picture even more bleak, Malloy believes even if
every state did a good job, "the sum total of all 50 states doing
it separately with all the little differences they might have.would
still be highly dysfunctional to marketers doing business in
regions and nationally." It would be akin to each state setting
their rules for VCR formatting. Each format might be good, but
requiring a VCR company to sell 50 different types of VCRs
certainly would create quite a headache for manufacturers.
"That's exactly the situation [energy] marketers find themselves
in. Each service territory has its own set of rules and its very
expensive to have to comply with all of them. They would prefer, my
guess is, one set of rules nationally, even if it was a bad set of
"Right now the incumbent can use the ability to establish
different rules for implementing unbundling as a wedge against deep
penetration by marketers," he said.
Malloy believes the retail industry now is in a situation
similar to where the wholesale gas market was at the beginning of
the 1980s. At that time, FERC gave multiple pipeline companies a
wide degree of discretion to come up with their own transportation
programs for fuel switchable customers. And each pipeline did it in
a way that garnered advantage for itself to the disadvantage of the
captive customers in many instances. "That's sort of where we are
right now [in retail]. Each LDC and each electric utility is given
a fair amount discretion in how they will implement unbundling.
Even if each did it well, the fact that you need to do business on
250 different systems in order to hit 90% of the load in the U.S.
makes it highly dysfunctional." Because LDCs are state regulated
entities in contrast to the pipelines, however, the possibility of
preventing the development of a "crazy quilt" of retail gas markets
is even smaller.
"In the [last] 18 months...I've seen [energy] marketers go from
almost jubilation at the prospect of being able to get a piece of
this huge consumer market, to what I now regard as at best
discouragement at worst anger over the fact that they've lost a lot
of money and there's no end in sight because it is just too
difficult to do business on the kind of patchwork quilt system that
we have today."
For many utilities and regulators who predicted retail
competition would not work, it has become like a self-fulfilling
"I think that Georgia and Atlanta Gas Light's implementation of
the Georgia legislation over the next two to three years will be a
water shed in terms of giving us a model that tests the degree to
which residential customers will participate in the customer choice
market," said Malloy.
"I obviously believe that we will find that there is a lot more
enthusiasm for choice when it's done right. You need some mechanism
to ensure that it isn't easy for the customer to remain within the
regulated umbrella. The customer to some extent has to be forced
out into a competitive market and forced to choose among competing
alternative suppliers. As long as it's easy to remain within the
regulated company.they are going to be slow in moving out from
under that paternalism."