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Price Discovery Not a Shock to Maryland Consumers

Price Discovery Not a Shock to Maryland Consumers

Slow but steady appears to be winning the race for the retail natural gas market in 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 five-year-old 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 choice program in Maryland for Washington Gas Light also has seen attrition of close to 7%, "mainly due to Conectiv's transition," according to Adrian Chapman, WGL's vice president of energy acquisition. Delaware-based Conectiv recently dropped out of the Maryland market saying it was changing its strategy to focus on its home territory.

WGL currently has 85,000 of its 340,000 residential customers enrolled in choice programs. The Washington, DC-based utility has "good participation numbers" in similar programs running in its District of Columbia and Virginia territories, but deregulation there has been in operation only two to three years, as opposed to Maryland's five years. "Our goal is to attract marketers to our jurisdiction. We're trying to make the programs similar across all three areas. We want marketers to look at customers behind the Washington Gas system generally."

One marketer which is aggressively pursuing customers in the WGL market, Powertrust Inc., of Reston, VA, won't be doing the same in BG&E's territory because the utility won't let them do their own billing. "It's all about billing," said Sean Collins, Powertrust's vice president of industrial relations. "This is at the top of our list. For us to be truly competitive we have to establish our brand name with our customers. We aren't going to be able to do that if everything they get has BG&E's name plastered all over it."

Powertrust also said the matching credit for the retail power market was too low. "You want to be able to leverage with the electric market" and serve dual fuel customers, Collins explained, but it's impossible to compete with the shopping credit in place. Powertrust, which started out as a service company for billing and moved over into actual marketing, says it expects to be able to offer lower rates because of its interactive billing system. "Some marketers can save on the commodity; we cut costs with our highly efficient web-based system" that is integrated with back office functions.

Powertrust is in the process of buying out a subsidiary of Perry Energy, currently in bankruptcy court, which has customers in Maryland. It will continue to serve those customers, but it won't be adding to their ranks in the BG&E territory. The company also will take over Perry's retail business in Georgia and has operations in Ohio and in the heating oil and propane market in the Northeast, where it is planning a rapid expansion into natural gas.

Meanwhile, "there are a lot of happy customers out there right with two-year fixed price contracts at 34 cents," Collins said. Powertrust had hedged when it signed the contracts, so fulfilling them is not a problem.

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 now 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. WGL's November gas rate was 63 cents. Both companies have flexible supply contracts which allows them to pick up any customers who want to return to utility service.

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 don't appear on BG&E's bulletin board because they serve specialized markets, including commercial or industrial customers, and have asked not to be publicly listed. WGL, which has had as many as 14 marketers participating, now has dropped to 10 in its Maryland choice program. "This is not unusual for a new business in any industry."

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. Also, some may have had a business plan to get in early, gather customers and then sell out to other marketers, Chapman said. Both noted the tendency of marketers to specialize. For instance, a marketer with a strong retail sales program may turn to another marketer with a focus on the wholesale market to provide the supplies.

Collins said Powertrust buys gas from a number of suppliers, but "doesn't run a trade shop."

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, Valavanis maintained. 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. "This puts more of a burden on marketers to manage their supply on a daily basis." Washington Gas Light also is moving toward the DRS system, which will ease the balancing burden on utilities. Chapman noted WGL also will reduce its balancing charge to marketers.

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.

Ellen Beswick

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