For retail natural gas choice to recover, several critical ingredients must be present, according to a report by R.J. Rudden Associates Vice President Howard S. Gorman. Residential choice is working well in Ohio, Maryland and Nebraska where meaningful numbers of residential customers participate and marketers are well established, but programs are not doing well in Wisconsin, Massachusetts and New Jersey, where there are only a few participants or marketers, or in Georgia where the program has been disruptive to consumers and marketers. The verdict is still out in New York, Pennsylvania and Illinois.

“Some of the ingredients for success are not surprising — actively recruiting marketers, getting all points of view and conducting effective pilot programs,” said Gorman. But other factors are being overlooked in some states. “Thinking through the issues is important, but states that focus on the details of planning and do not allow for adjustments are struggling. You need to be able to adapt, especially at this early stage of unbundling. Where gas choice is initiated by the state commission it has an advantage over legislative initiatives — regulation can be changed more easily than legislation.”

Georgia, which is considering reregulation, has found that out the hard way. Georgia installed the most comprehensive retail choice program in the nation by legislative mandate. But the 1.3 million residential gas consumers were not prepared to be pushed out of regulated service. As a result, when prices rose sharply last winter, they blamed deregulation. Marketers also were not prepared to handle the sudden large volume of customers. Some went bankrupt. Some had a difficult time with billing. Eleven of the original 19 marketers left the program. And now the state is in the process of reinstalling a regulated gas sales provider.

Another surprise is that states that have led in electric choice are struggling with gas choice. Not only is there no carryover effect, but relying on success in electric choice instead of having a separate, clearly-defined gas choice program may actually be the cause of disappointing results for gas in Pennsylvania and New Jersey, according to Gorman. To succeed, gas choice should be tied to economic or energy policy goals, not pursued for its own sake, he said.

Gorman also reported that to attract marketers and consumers, “it’s critical to show real commitment to choice. Marketers must expect a reasonable profit before they will invest. Consumers want to know first that marketers are under the supervision of the state commission, but also that the local utility (LDC), whom they trust, supports choice and will be there if the marketer fails. LDCs understand that the commissions are looking to them to fund transition costs, but they want to be assured of recovery.” The last two issues, supplier of last resort obligations and transition costs, are the areas of the most uncertainty in implementing gas choice programs.

How will we know when gas choice can succeed? “When we have marketers operating in several states,” said Gorman. “Right now only about 10 marketers are active in more than two states. When we have a group of marketers that can spread their costs over a large area, increase their purchasing power and diversify their risks, we will have the infrastructure for gas choice to take hold in the states that want it.”

That goal, however, may take a long time to achieve. Just last week, the nation’s largest retailer, NewPower, expressed doubt that it would be able to continue providing retail service. NewPower’s customer count at the end of December 2001 increased to over 800,000 (including pending accounts), compared to the fourth quarter 2000 customer base of 368,000, but the company reported a net loss of $212.8 million before non-recurring items for 2001. Furthermore, North America’s largest retail marketer, Centrica, backed out of a deal to buy NewPower because of a NewPower affiliation with bankrupt Enron Corp.

Gorman’s findings were presented at the American Gas Association’s Rate and Strategic Issues Committee meeting on March 26 and are posted on the Rudden web site at www.rjrudden.com in the section titled Profiles.

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