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Nation's Choice Programs Marginally Beneficial

Nation's Choice Programs Marginally Beneficial

Have natural gas choice programs taken hold and produced savings, or is the five-year old concept of offering people a choice of gas suppliers missing its mark?

A new report by the National Regulatory Research Institute (NRRI) gave the industry pretty low marks so far for customer choice.

From the first gas choice program launched in a small Iowa town back in 1995, to today's three million choice customers spread among 23 states and the District of Columbia, the question remains the same. Are choice customers receiving more significant benefits with their natural gas marketer than they did with their old utility suppliers?

Apparently the answer is "not yet," according to NRRI's review titled "Consumer Benefits From Gas Choice: Empirical Findings from the First Programs."

"Customers have generally received limited benefits from current programs" the NRRI said in its fourth retail gas study. "The average price savings for all the selected programs in the study is 3.02 cents per therm, or 7.8%." The NRRI believes that part of the reason for limited benefits is the fact that marketers and energy service providers have yet to learn how to repackage value-added services that their customers demand.

The institute's study also produced evidence as to why most programs receive a low turnout rate. "The fact that most residential consumers have remained with their incumbent utility can be largely explained by economics; the expected benefits relative to the costs and risks associated with switching to a new supplier are just too small to induce switching."

Unstable deregulated gas markets such as Georgia's and Maryland's which have seen marketer after marketer file for bankruptcy, or simply pack up shop and leave, also contributes to the reluctance for consumers to leave their incumbent utility. DukeSolutions heads the list as the most recent gas marketer to drop out of the Georgia market, leaving only 11 marketers of the original 21 to serve the deregulated state (see related story this issue).

Maryland is another state which is marred with gas marketer volatility. However, unlike Georgia, where most marketers have not been replaced in the past, defunct marketers in Maryland are often replaced by new entrants. There are still approximately 30 marketers in the Baltimore Gas & Electric service area in that state (see related story this issue).

Co-authors Kenneth Costello and Mohammad Harunuzzaman felt that the study mostly confirmed what industry observers had expected, except for a few irregularities. One thing that surprised the NRRI was that in several of the programs studied, some marketers actually were offering prices higher than those of the local gas utility. Another observation that shocked the study's authors, was the large range of prices offered by marketers in some of the programs.

The NRRI study did conclude that benefits of existing gas choice programs consist strongly of lower gas bills, plus the choice of being billed on a fixed price or variable price scale. The researchers found that most residential consumers in the programs it studied signed-up for fixed price contracts, paying a premium to avoid the ups and downs of the market. The NRRI speculated that fixed price customers were likely experiencing greater benefit due to the recent spell of price volatility and $6.00 gas.

"In sum, the analysis for this study suggests that gas customer choice programs generally have had the intended effects of reducing prices and improving the efficiency of the market," the study concluded. "The effects have, however, been observably small." To achieve greater success, the group believes marketers must improve their current programs to include lower consumer transaction costs, better consumer education and the availability of value added services.

Raymond Lawton, director of NRRI, said the study addressed important policy questions regarding customer gas choice programs' short history. "The report should especially assist those state commissions contemplating either initiating or expanding gas choice programs in their states," Lawton said.

Parties interested in obtaining copies of the study may call Costello at 614-292-2831, or e-mail him at Costello.1@osu.edu.

Alex Steis

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ISSN © 2577-9877 | ISSN © 1532-1266
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