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Retail Advancing at Snail’s Pace
Enron’s announcement last week that it will be terminating itsresidential power marketing efforts in several states should be awake up call for the gas industry as well, where the pace of changetoward retail competition has been a disappointment for manyobservers.
While Enron isn’t getting out of any residential natural gaspilots, the level of competition in the residential sector is stillvery poor, according to the Arlington, VA-based consulting firmHagler Bailly. The firm’s National ACCESS Index scores the currentlevel of residential natural gas competition nationwide as of April23 at 1.6 on a scale of 1-100. The index measures the openness ofthe market based on a number of components, not least of which isstate regulatory policies. According to the index, commercial gascompetition isn’t moving much faster, with a score of 12.9 out of100.
According to a recent Salomon/Smith Barney report, 41 LDCs in 16states have moved toward retail competition but many of them havemade only half hearted attempts at installing successful customerchoice programs.
“Although initial customer reaction has been favorable, thenumber of eligible customers that have signed up to participate [inretail customer choice pilots] has been disappointing,” the SalomonSmith Barney Quarterly Review of LDC Regulatory Activity stated.”Customers are not convinced of any potential benefit. If acustomer is happy with the service that an LDC is providing, thereis no reason for that customer to switch to another supplier unlessthere is a great economic incentive.” And in many cases there isvery little incentive because LDCs typically lower or freeze theirrates when installing customer choice pilots.
Many existing residential pilot programs have attracted lessthan 15% of the eligible customers. For example, only 1% of theresidential customers in KeySpan’s entire New York serviceterritory are buying gas from participating marketers. Only 7% ofthose eligible signed up in the first two years of MichCon’s GrandRapids pilot. And 6% of the residential eligible signed up inNorthern Indiana Public Service Co.’ pilot.
What’s worse is those numbers aren’t likely to grow much overthe next five years as long as state regulators follow theircurrent path and LDCs try to preserve the existing framework,according to Ken Malloy, a senior consultant for Arlington,VA-based Hagler Bailly. The firm scores the openness of theresidential market in 2003 at only 7.1 on a scale of 1-100.
There are many reasons why the retail market is opening soslowly, but some explanations are very subtle, Malloy said in aninterview with NGI last week. One is there’s little difference inthe price of the commodity offered by the LDC and that offered bythe marketer because both enjoy the benefit of a competitivewholesale market. “When an LDC’s price is not that far frommarketer’s you can see why there would be slow penetration,” hesaid. The state commissions haven’t done much to unbundle the other$4-$5 out of a residential customer’s average $7 gas bill.
As Malloy explained it, the residential market is roughly a $7market with $4 of that in distribution costs, $2 in supply and $1in pipeline transportation. “All they’re doing right now is playingaround with the $2 for gas costs and a little bit of the $1 forpipeline transportation. They are not yet going in there andtouching that $4 for distribution costs. They are not spinning offmetering and billing and forcing cost allocation studies thatreally force the LDCs to expose some of its services that might beoffered competitively but that are part of the distribution bundle.
“When you’re in retail you have to reach a critical mass ofdollars with the residential customers. What you’re going to needis the ability to sell both gas and electric, and probably somecommunications and some security services and probably some otherenergy service products, appliances, windows. In other words youneed a bigger integrated bundle of competitive goods and servicesthat you can present the homeowner.”
But to make the picture even more bleak, Malloy believes even ifevery state did a good job, “the sum total of all 50 states doingit separately with all the little differences they might have.wouldstill be highly dysfunctional to marketers doing business inregions and nationally.” It would be akin to each state settingtheir rules for VCR formatting. Each format might be good, butrequiring a VCR company to sell 50 different types of VCRscertainly would not be acceptable.
“In the 18 months that I’ve been out of DOE, I’ve seen the[energy] marketers go from almost jubilation at the prospect ofbeing able to get a piece of this huge consumer market, to what Inow regard as at best – discouragement – at worst – anger – overthe fact that they’ve lost a lot of money and there’s no end insight because it is just too difficult to do business on the kindof patchwork quilt system that we have today.”
For many utilities and regulators who predicted retailcompetition would not work, it has become like a self-fulfillingprophecy. “I think that Georgia and Atlanta Gas Light’simplementation of the Georgia legislation over the next two tothree years will be a water shed in terms of giving us a model thattests the degree to which residential customers will participate inthe customer choice market. You need some mechanism to ensure thatit isn’t easy for the customer to remain within the regulatedumbrella. The customer to some extent has to be forced to chooseamong competing alternative suppliers. As long as it’s easy toremain within the regulated company.they are going to be slow inmoving out from under that paternalism.”
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