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PA PUC Report Says Retail Competition Act Failed; Shane Says Dump It

A report by the Pennsylvania Public Utility Commission (PUC) released last Thursday said competition in the residential and commercial natural gas market has failed due mainly to "substantial barriers" that favor distribution companies and effectively lock others out of the market.

The report five years after the state's competition act supposedly opened the way for competition said the PUC should convene stakeholders to find a way to increase competition. Veteran Commissioner William Shane opposed further action, saying it was a lost cause.

Commissioner Kim Pizzingrilli, a PUC member since 2002, was more optimistic, pointing out that the competition act requires the commission to reconvene stakeholders and attempt to further competition. She said she looked forward to the exercise. The Commissioners voted 5-0, to send the PUC report on Pennsylvania's retail natural gas market to the general assembly, with Shane concurring in part and dissenting in part.

"While I agree with the conclusion of the report that there is no effective competition in the natural gas industry for residential and commercial customers, I dissent from the report's recommendation to reconvene the stakeholders group. I believe that the Natural Gas Choice and Competition Act should be repealed as a useless 'dead letter' law. Another collaborative would be a futile exercise."

The 1999 Natural Gas Choice and Competition Law allows customers to purchase gas from independent suppliers, while still having their gas physically delivered by PUC-regulated distribution companies. The law directed the PUC to investigate the level of competition five years after the law went into effect and to report its findings to the General Assembly.

The Commission opened the investigation in May 2004, and asked gas distribution companies, suppliers and interested parties to comment on the level of competition in the market. The investigation determined there is not effective competition in the retail natural gas supply market because there was a lack of participation by natural gas suppliers and buyers in the market on a statewide basis.

According to suppliers there's a reason for that, the reason being the substantial barriers to entry put in place by distributors in the form of differing security requirements among distributors, the omission of procurement, administrative and other costs from the distributors' price to compare, and varying penalties -- not cost-based -- placed on suppliers using different distributor systems. Because the marketplace lacks accurate and timely price signals; customers don't see the market cost of natural gas supply service offered by the distributors, the report said.

The commission said the first stakeholders meeting should be held before the end of 2005.

Shane, who spent 13 years on the Commission prior to 1990, including serving as chairman, agreed with the report, but dissented on trying to fix it. Shane just returned to the PUC in mid-2005 after serving as counsel in the intervening years to Exxon Mobil, Texaco, Chevron, BP and other major natural gas producers.

Representing the producers who supply 80% of Pennsylvania's natural gas, Shane participated in the gas competition collaborative in January 1998.

"That collaborative was dominated by Natural Gas Distribution Companies (NGDCs) whose 30 or 40 utility representatives loudly berated the ideas and comments of the half dozen or so gas marketers and producers. The Pennsylvania producers were sadly silent during this debate. Their silence had been purchased by the NGDCs with a provision in the draft language that preserved their contracts. A modest sensible amendment by a colleague from Exxon was hooted down by the crowd.

"The NGDCs put language in the draft that raised competition barriers and, in my opinion, competition was stillborn. The process was so frustrating that it seemed to me the process was designed to fail. And it has failed."

"To the extent competition takes place in the residential sector, where most of us don't feel like reading all that fine print in the bill insert to save a few cents per month anyway, the market will bring that competition. This dead letter law is no help at all," the commissioner said.

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