While five of seven midwestern states have choice programs forresidential gas customers, that doesn’t mean an energy shoppingtrend is sweeping the heartland. In fact, as is the case with therest of the country, regulators, utilities, marketers and end-usershave miles to go before competition really sets in.

Residential choice programs done so far are roughly analogous toFERC Order 436, said Ken Malloy, president of non-profitWashington, DC, think tank The Center for the Advancement of EnergyMarkets. More work is needed.

Specifically, the industry needs to move from what Malloy callspassive access to choice to active access. Consistency is neededamong state unbundling programs so marketers can participateeconomically on a national basis. Efforts to educate consumers needto begin earlier in the choice process. And gas and powerconvergence can be harnessed to drive choice initiatives.

To date, the majority of choice programs have provided passiveaccess – customers can choose alternate suppliers but have littleincentive to do so, and the safety net of regulated gas supply fromthe utility remains in place. Georgia, regarded by many as anexample of how choice should come about, has active access. There,if customers don’t choose a supplier, one will be chosen for them.Customers get a push, and marketers see a carrot, knowing end-usersreally will be up for grabs.

Neither the gas nor electricity infrastructures were designed tosupport competitive markets, notes Jamie Wimberly, vice presidentof the Consumer Energy Council of America, a non-profit group withan eye on the interests of small business and residentialconsumers. This is exacerbated by regulations that differ fromstate to state. “There’s a gap in perception between whereconsumers are and where the market is. Education is one factor.Getting the market structure is another. Increasingly, I think, forpolitical expediency, a lot of states have structured their marketsfor short-term gains.”

Besides regulatory complexity, barriers to entry for marketersinclude “ridiculously low” margins, said Wimberly. And customerchoice that arrives along with a 10% rate reduction risks creatingunregulated monopolies once the transition phase is complete, saidWimberly. “That’s our biggest fear.” However, that specter hasdiminished somewhat as regulators become less willing to prescriberate cuts along with competition measures, he said.

Wimberly and Malloy have worked together addressing the issue ofcustomer choice education. The key, they say, is doing it earlierand doing it better. Kansas City-based Missouri Gas Energy, forinstance, is working on education well in advance of customerchoice. In other cases, “by the time the customer can make achoice, there’s really too much going on at one time for thecustomer to make an effective choice,” Malloy said. What he calls aprognostic education program is one that begins as early as twoyear prior to choice being offered. The bulk of education effortsshould fall on the shoulders of LDCs, Malloy said, but stateregulators have a definite role in providing coordination,structure and guidance.

Although the two industry experts find much lacking in customereducation, that’s not to say there’s not a good bit of it going on.Nicor Gas of Illinois, for instance, sends speakers to Rotary clubsand targets customers with direct mail brochures that includemarketer contacts and sheets summarizing customer gas usage for theprevious 12 months. The Ohio Public Utility Commission has becomefamous for its “apples-to-apples” marketer comparison charts. “Itis the most requested consumer item we have ever produced.” For thegas utilities in Ohio, the PUC produces a chart every two weeksthat lists all marketers targeting residentials and gives pricecomparisons computed for an average household’s annual consumption.Also included on the chart is the “price of doing nothing,” saidOhio PUC spokesman Dick Kimmins. That’s a lot of information asthere are 19 marketers participating in the Columbia of Ohio choiceprogram.

“Americans in general are pretty smart shoppers,” Wimberly said.”They know a good deal when they see it. In this particular casethe awareness level is growing, but it’s still very low, and theunderstanding level also is very low. You’ve got to remember,you’re talking about decades of getting a bill and having no choicebut paying that bill.”

Like others in the industry, Wimberly sees convergence of gasand power as an engine to drive competition. When states adoptchoice legislation for both and as the two commodities cometogether, through mergers, alliances and such, back-officeoperations can be combined to drive down costs, creating moresavings available to consumers. Add in new products and services,as the telecommunications industry did, and suppliers create aportfolio of consumer enticements. “Competition opens the door formore energy related services,” said a Northern Indiana PublicService Co. (NIPSCO) spokesman. “Before deregulation, people didn’tthink that they needed caller ID or call waiting. There will beservices that haven’t even been thought about yet that will improvecustomer service and give customers what they need.”

A look at the numbers for Ohio, Indiana, Illinois, Iowa,Michigan, Minnesota, and Wisconsin reveals Ohio to have far moreresidential participants in customer choice than Michigan, which isNo. 2 in the group. In Ohio, Columbia Gas of Ohio, East Ohio Gas,and Cincinnati Gas and Electric all are open to residential choice.Columbia’s program is by far the largest with more than 394,000participants. Cincinnati and East Ohio are nearly tied with about30,000 each. Dayton Power and Light filed a choice program with thePUC near the end of February 1998, but the commission has yet toact on it.

In Michigan three pilots are in effect. Michigan ConsolidatedGas and Consumers Energy are the largest. MichCon is in its firstyear and has a cap of 70,000 participants, which has been reached,said Gary Kitts, chief administrative officer with the MichiganPublic Service Commission. Consumers’ three-year pilot is in itssecond year and makes choice available to 200,000 this year;142,980 have accepted the offer. Semco Energy is starting thesecond year of a three-year program. Choice is available to 14,000,and 9,350 have made a switch.

In Illinois, Nicor Gas is the only utility with an activeprogram, said Tom Kennedy, director of the policy program in theenergy division of the Illinois Commerce Commission. The secondyear of the Nicor program began this spring, making 82,000residentials eligible. So far, 17,000 residentials have switched.The first year of the program was only open to commercial andindustrial customers. “I think we’re encouraged getting 20% of the[residential] customers into the program,” said John Madziarczyk,Nicor director of rate projects. “That’s a pretty good response wefeel for a first-time pilot program where really within the stateof Illinois the electric system is not open at this time, nor arethere any other gas pilot programs going on within the state.”Central Illinois Light Co. has had a pilot in effect for some time,but there are no marketers participating.

Indiana has the NIPSCO choice program up and running. BeginningApril 1 the program opened to the entire NIPSCO service territory.It is not a pilot but follows one held in St. Joseph County lastyear. So far, only 7,000 of 150,000 residential customers havesigned up. “I think that part of the issue here is just aneducational process that’s going on with our customers,” saidNIPSCO spokesman Tom Stevens. “We as a company are happy with theparticipation so far.”

Wisconsin Gas offers its customers GASadvantage, which is justfinishing up its third year and beginning enrollment for year four.At the end of year three, 1,546 residentials had picked analternate supplier of about 11,000 eligible. At the end of yearthree, there were only two marketers targeting residentials. Thatwas down from three in year two and about six in year one, said DanSage, an assistant administrator in the natural gas division of theWisconsin Public Service commission. “We’ve had very, very fewcontacts, to my knowledge, from customers with complaints orquestions regarding it. It’s been pretty low-key.”

The Iowa Utilities Board has asked utilities to provideunbundling plans, and some workshops were held January throughApril. Utilities Board staff is developing a proposal to take tothe full board. “I know it’s been expressed to them that they needto move forward,” said Chuck Seel, manager of customer service forthe board.

And in Minnesota, Minnegasco filed a pilot proposal severalyears ago, but it was rejected and has not been re-filed.

Generally, evolution of customer choice in the Midwest has beenslow, but the customer participation rate is very encouraging. Sofar a total of 34% of the 2.1 million eligible customers haveelected to participate, which far surpasses the activity in theNortheast where only 8% of 6.5 million eligible residentialcustomers are buying gas from unregulated suppliers.

Much work remains, but at least the Consumer Energy Council’sWimberly is optimistic all consumers will save money if the rightchoices are made. “We believe that even in the open market you canhave the access levels that you have now, that you can havestability and reliability and that you can do something about allthe societal impacts the energy industry causes.”

Joe Fisher, Houston

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