NEM Sets Guidelines for Deregulating Markets
A new study released last week by the National Energy Marketers
Association (NEM), found that deregulating energy markets are more
competitive when incumbent utilities are not the default supplier
and the service charge billed to customers is "truly"
representative of retail service.
The study, called "National Guidelines for Designing and Pricing
Default Energy and Related Services," analyzed a host of different
default supplier and pricing scenarios. The purpose of the report
is to urge state commissions and legislators to carefully consider
the issues raised in the study while planning state energy
As defined by NEM, a default supplier is the entity responsible
for the consumers who fail to make "timely supplier elections." In
the 12-page report, NEM applauds Atlanta Gas Light's (AGL)
unbundling efforts. "There are several benefits to [AGL's
approach]. First, by allowing a period of choice prior to
assignment, customers are engaged and, as shown in the [AGL]
program, many customers will choose competitive suppliers.....In
addition, such an approach ensures competitive neutrality among all
competitors in a given marketplace and allows consumers to enjoy
the benefits of meaningful choice."
Through its research, which took more than a year to compile,
the association found that the most successfully deregulated
markets held another supplier, besides the utility or one of its
affiliates, responsible for non-switching customers. This was the
case in AGL's program, where Shell Energy became the default
supplier (see NGI, Nov. 8).
The study offers other choices restructuring markets can explore
to determine which entity should be the default supplier. The
transition to a default supplier should maximize incentives for
customers to switch, minimize incentives for incumbent utilities to
hold on to customers, educate the consumers and lower costs. The
alternate scenarios included a system where suppliers bid for the
service through a price set by the state commission or another
system where companies bid straight away. While the report
discusses the pluses and minuses of each option, it makes one thing
clear: keeping the utility as the default supplier is the least
"Retaining the utility as the default provider of energy supply
services long term in a restructured environment will have a
negative impact on the development of competitive markets," the
On the price side, the study found that more competitive markets
are forged when a default supplier's "price to compare" is more
representative of retail service costs. The report explores
different options concerning the default service rate. According to
NEM, markets are more competitive when this rate includes the
wholesale cost of the energy, plus its related retail costs such as
capacity charges for gas or transmission charges for electricity.
The default supplier's service rate is important, NEM said, because
it "...serves as the price to compare - the target against which
all competitive offers are judged by consumers."
The study said that a rate, originally set by the marketplace or
state commission, then adjusted for the costs of retail service, is
the most competitive method for determining the default price. NEM
calls this method "wholesale prices adjusted to reflect retail
service costs." Conversely, the index rate, or rate determined
solely by the wholesale marketplace, is the least competitive,
because none of the unbundled costs are accounted for. Instead,
they are passed through to the distribution rate. NEM said the
index rate method is being employed in California.
"Default service pricing mechanisms that hide the true costs of
providing retail energy services, showing instead the wholesale
[energy] cost alone as the 'price to compare,' do not benefit
service customers....." the study said.
The report can be found on NEM's web site at