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Retail Gas Reform: Learning from the Georgia Model

Fortnightly Magazine - April 15 1997

authorizes marketers to aggregate the firm distribution capacity necessary to serve each small consumer who elects to purchase from the marketer and resell the unused firm capacity as interruptible capacity. This clever mechanism transforms a characteristic of small consumers that is usually considered a liability (em their low load factor (em into a major advantage from the perspective of a marketer.

Under the Georgia Plan, for each small customer the marketer can attract, the marketer will secure two sources of revenue: 1) the proceeds of the gas sale to the small customer, and 2) the revenues from the resale of firm distribution capacity not used by the customer. This innovative feature of the Georgia plan also will benefit large consumers by providing access to multiple competing suppliers of interruptible distribution service and deregulating the interruptible distribution function once consumers have access to competitive alternatives. Improving the LDC's system load factor by increasing the volume of interruptible sales also is likely.

The Georgia plan recognizes that most retail distribution functions must remain subject to state regulation as a natural monopoly. It also recognizes, however, that traditional cost-of-service regulation should be replaced with performance-based regulation. Cost-of-service regulation creates inadequate incentives to perform in an efficient manner. Moreover, cost-of-service regulation is far too slow and static to coexist with the dynamic competitive markets that increasingly govern other functions which must be performed to provide gas service at the burnertip. %n3%n

Any gas retail reform plan must include replacement of cost-of-service regulation with performance-based regulation to have any realistic chance of attaining beneficial results. The Georgia plan authorizes the PSC to start performance-based regulation of all noncompetitive distribution functions and sets forth the criteria the PSC should use while crafting performance-based rates.

The Quickest Road

to Benefits

Adoption of a retail reform plan of the type under consideration in Georgia should yield some benefits as reduced prices. We anticipate that small consumers can expect price reductions in the order of 10 percent because of the enhanced incentives for efficiency created by the introduction of competition to govern some functions and performance-based regulation to govern other functions.

The biggest gains from such a reform likely will appear in two other areas. First, the menu of service options available to consumers likely will expand significantly. Each consumer could choose which of the many options best meets his or her needs. Second, the service options made available will include some that we cannot even imagine today but that consumers will find far preferable to the plain vanilla, one-size-fits-all traditional form of retail gas service. Once the regulatory barriers to technological and entrepreneurial innovation are removed, we are confident that some firms will design wholly new and better ways of competing to satisfy consumer needs.

Most states are delaying retail gas reform to await the results of various small scale "pilot programs." Such delay imposes unjustifiable costs on consumers. We already have access to the results of a decade of full-scale retail reform in Canada. %n4%n That experience provides data far more reliable than we can expect to get from