Maryland Refining Choice Program

Slow, but steady appears to be winning the race for the retail natural gas market in the state of Maryland, where some marketers have dropped out --- casualties to high prices and billing problems --- but others are closing ranks and developing the sophistication necessary to weather changing conditions.

Baltimore Gas & Electric's Mark Valavanis credits the phased-in approach of the Maryland program with allowing changes to meet market conditions without headline-grabbing disruptions. About 20% of BG&E's customers, or 110,000, have signed on for choice over the last two years, and current numbers are only down about 5,000 from that high, Valavanis said. "I don't consider that a significant attrition." While the program currently is not expanding, "it's not declining that much either." And more refinements are ahead. "We're encouraging customers to choose."

The Maryland Public Service Commission (PSC) expects the market to take some lumps, "but no one is going without service," said Dr. Jeffrey Conopask, assistant director of rate research and economics for the PSC. If a marketer drops out, customers can sign on with another marketer or revert to service from the regulated utility at tariff rates. "Of course, if they had signed on for fixed price contracts in the 40 to 45 cents per therm range," they may have some sticker shock. "If they find a marketer willing to sign for under 60 cents, they'll be doing well," Conopask said. BG&E's tariff rates for instance, which are set monthly by a market formula, were 57.4 cents/th in November, down from 68.16 cents/th in October. The December numbers haven't been set yet.

One observer pointed out that of the marketers who have dropped out in Maryland, most were able to sell their books of business to other marketers.

While some marketer drop-outs and bankruptcies have made news, there are still plenty of suppliers available. Valavanis said there are at least 30 marketers serving customers in BG&E's territory. "Some are not making offers right now, but they're still serving customers." Some have asked not to be publicly listed because they serve specialized markets, including commercial or industrial customers.

There has been a change in tactics, however. "Early in the program, we saw a lot of fixed price offers. Now there are more flexible prices, offering discounts off of our prices." Valavanis said he believes most suppliers that have failed have fallen victim to billing problems. For others who have exited the Maryland retail market, such as Delaware-based Conectiv, it was simply a matter of a change in business strategy to concentrate on its home territory.

Besides softening the transition, Maryland's phased-in program has resulted in more competition because suppliers have had to really convince customers it was worth it to switch, he pointed out. In Georgia where customers were forced to get another supplier, competition has not been as strong.

Valavanis, who is in BG&E's gas section, believes the shifts among suppliers are not over. For one thing the LDC has changed its balancing rules from a DQS (daily contract quantity) system, using annual or monthly average quantities, to a DRS (daily requirements service) in which the balancing target changes every day, based on forecasts made five days in advance. Other LDCs also are moving toward this system, but "it will put more of a burden on marketers to manage their supply on a daily basis." They will have to have more assets and develop more expertise in managing supply. The larger marketers prefer the new system, while smaller ones preferred the old approach, Valavaris said. The DCQ system, however, also had its problems. "There was trouble last winter. If your balancing was set for an average January day and you had a mild day, there was no place to put the gas. No one had enough storage."

Further refinements are in store. A new law passed by the Maryland legislature instructed the PSC to initiate new measures to protect consumers. The PSC is expected to revisit billing and start examining and licensing marketers, effective next July.

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