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NEM Sets Guidelines for Deregulating Markets

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 deregulation efforts.

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 attractive option.

"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 study said.

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

John Norris

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