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Fewer Residentials Opt for Retail Marketers; Second Year of Decline

Enrollment in natural gas customer choice programs declined last year for the second year in a row, according to the Energy Information Administration (EIA). About 11%, or 3.9 million, of about 34 million residential customers with a choice were buying gas from retail marketers at the end of 2005.

Participation percentages declined in all states but New York and Indiana. EIA attributed this to concerns about high and variable gas prices, which "apparently reduced interest and confidence in marketer pricing options." It seems that customers aren't buying the premise that alternative suppliers can save them money, at least not in this gas price environment. And some marketers appear to be having doubts themselves.

The largest decline in customer choice was in New Jersey, which went from 5.2 to 1.3% participation. There a marketer chose to return about 80,000 choice customers to utility service before the start of the heating season as gas prices surged to record highs, EIA said. "Overall, the number of marketers offering services to residential customers in 2005 remained about the same as in 2004 (81 vs. 83), but considerably less than the 159 marketers participating in 2001," EIA said. "Some states, such as New Mexico and West Virginia, have had virtually no marketer participation, even though legislation is in place that allows all customers to purchase natural gas from third-party suppliers."

Georgia has the largest customer choice program, followed by Ohio. The two states combined accounted for nearly two-thirds of total customer choice enrollment in 2005.

No significant program changes occurred in the states that allow customer choice but have virtually no participation. Massachusetts, New Mexico and West Virginia had fewer than 300 residential customers participating. Customer aggregation continues in California but accounts for only 0.4% of deliveries to residential customers. Only 0.5% of residential and commercial customers in Montana have chosen alternative suppliers, and only 0.2% of South Dakota customers from all sectors use transportation service. Colorado allows utilities to offer choice programs, but none have submitted unbundling plans.

As of December 2005, 21 states and the District of Columbia had legislation or programs in place that allow for residential and other small-volume consumers to buy gas from someone other than their utility. Seven states and the District allow all residential consumers to choose suppliers, but a lack of marketer participation has thwarted competitive retail markets. Six states are in the process of implementing choice statewide with programs available to more than half of their residential customers. Five states have pilot or partial unbundling programs in place. An additional eight states are considering action on choice, while 19 states have taken no action and two have discontinued their pilot programs.

In New York, which has the third largest choice enrollment, the public service commission in May 2005 approved a plan by Central Hudson Gas and Electric Co., modeled after the Orange and Rockland Power Switch program, in which the utility buys marketers' accounts receivable without recourse. This simplifies marketer operations and eliminates the need for marketers to perform credit checks. Marketers offer a guaranteed discount to participating customers for a two-month period and agree to take all residential and small commercial customers referred by the utility. Customers are randomly assigned to marketers. Direct Energy Services LLC recently entered the New York gas market and plans to expand throughout 2006 (see NGI, March 3).

In Nebraska the public service commission opened a docket to investigate and adopt policies for administration of Kinder Morgan Inc.'s choice program, which serves about 73,000 customers.

In Ohio the public utility commission is considering a request by Dominion East Ohio, which holds 49% of the state's choice market, to exit the commodity market and become a distribution-only company in the near future. The company applied to the PUC in April 2005 for a two-phase pilot program. In the first phase the gas cost recovery mechanism would be eliminated for its nonchoice (sales) customers and replaced by a monthly market price determined through a bidding process. Winning bidders would become wholesale suppliers to Dominion for firm service redelivery to end-use customers. Under the second phase, remaining sales customers would be assigned to participating marketers on a pro rata basis. At that point Dominion would become a distribution-only company but would continue its role as provider of last resort. Hearings on phase one of the proposal are under way.

In Pennsylvania the public utility commission is trying to foster increased competition. The commission submitted a report to the legislature in October 2005, which was mandated after five years of deregulation, that concluded that the number of suppliers and buyers in choice programs across the state was insufficient for effective competition and that the marketplace "lacks accurate and timely price signals" (see NGI, Oct. 10, 2005).

In Massachusetts a report issued in June 2005 by the Department of Telecommunications and Energy restated the department's commitment to eventual transition to a competitive gas market. The report concluded that retail markets are not competitive enough to allow local distribution companies (LDC) to assign interstate pipeline capacity voluntarily rather than on the currently mandated basis. In Massachusetts the number of customers moving to transportation service is "stagnant and declining, with essentially no participation by residential customers," EIA said.

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