A new study released last week by the National Energy MarketersAssociation (NEM), found that deregulating energy markets are morecompetitive when incumbent utilities are not the default supplierand the service charge billed to customers is “truly”representative of retail service.

The study, called “National Guidelines for Designing and PricingDefault Energy and Related Services,” analyzed a host of differentdefault supplier and pricing scenarios. The purpose of the reportis to urge state commissions and legislators to carefully considerthe issues raised in the study while planning state energyderegulation efforts.

As defined by NEM, a default supplier is the entity responsiblefor the consumers who fail to make “timely supplier elections.” Inthe 12-page report, NEM applauds Atlanta Gas Light’s (AGL)unbundling efforts. “There are several benefits to [AGL’sapproach]. First, by allowing a period of choice prior toassignment, customers are engaged and, as shown in the [AGL]program, many customers will choose competitive suppliers…..Inaddition, such an approach ensures competitive neutrality among allcompetitors in a given marketplace and allows consumers to enjoythe benefits of meaningful choice.”

Through its research, which took more than a year to compile,the association found that the most successfully deregulatedmarkets held another supplier, besides the utility or one of itsaffiliates, responsible for non-switching customers. This was thecase in AGL’s program, where Shell Energy became the defaultsupplier (see NGI, Nov. 8).

The study offers other choices restructuring markets can exploreto determine which entity should be the default supplier. Thetransition to a default supplier should maximize incentives forcustomers to switch, minimize incentives for incumbent utilities tohold on to customers, educate the consumers and lower costs. Thealternate scenarios included a system where suppliers bid for theservice through a price set by the state commission or anothersystem where companies bid straight away. While the reportdiscusses the pluses and minuses of each option, it makes one thingclear: keeping the utility as the default supplier is the leastattractive option.

“Retaining the utility as the default provider of energy supplyservices long term in a restructured environment will have anegative impact on the development of competitive markets,” thestudy said.

On the price side, the study found that more competitive marketsare forged when a default supplier’s “price to compare” is morerepresentative of retail service costs. The report exploresdifferent options concerning the default service rate. According toNEM, markets are more competitive when this rate includes thewholesale cost of the energy, plus its related retail costs such ascapacity charges for gas or transmission charges for electricity.The default supplier’s service rate is important, NEM said, becauseit “…serves as the price to compare – the target against whichall competitive offers are judged by consumers.”

The study said that a rate, originally set by the marketplace orstate commission, then adjusted for the costs of retail service, isthe most competitive method for determining the default price. NEMcalls this method “wholesale prices adjusted to reflect retailservice costs.” Conversely, the index rate, or rate determinedsolely 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 theindex rate method is being employed in California.

“Default service pricing mechanisms that hide the true costs ofproviding retail energy services, showing instead the wholesale[energy] cost alone as the ‘price to compare,’ do not benefitservice customers…..” the study said.

The report can be found on NEM’s web site atwww.energymarketers.com

John Norris

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