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Consumer Choice in Natural Gas: A Hard Look at Savings

Fortnightly Magazine - October 1 1998

TO DATE, RETAIL NATURAL GAS UNBUNDLING HAS proven to be only marginally successful. In political terms, state legislators and utility commissioners can point to significant progress in passing initiatives to mandate local utility unbundling. Many utilities have developed and won approval of new rate structures that enable small industrial, commercial and even residential customers to purchase natural gas from non-utility suppliers. As a result, many customers now technically have a choice: They can choose to purchase natural gas from non-regulated suppliers or remain with the utility and continue to receive regulated bundled service. In reality, however, relatively few customers procure their natural gas from non-regulated suppliers. Most energy customers are either so satisfied with their utility service that they see no reason to switch, or they find that purchasing gas from non-regulated suppliers is economically unattractive.

Many natural gas utilities structure transportation rates for residential and commercial classes to preclude real customer choices. As such, most current rates serve as a profound impediment to the successful transformation of the retail gas industry.

Some Progress, in Political Terms

As of late August, some six states had already issued some type of political order requiring their local distribution companies, or LDCs, to initiate rate changes that will result in choice for their natural gas customers. At least 26 other states either have introduced limited open access for commercial customers or are considering proposals to unbundle their gas utilities.

Beyond the political process, many utilities have won approval for rate changes that will allow residential, commercial and industrial customers to procure their supplies from non-regulated suppliers. Large industrial customers have had that ability, particularly with respect to interruptible service for many years. However, during the past five years, smaller-volume industrial, commercial and residential customers have obtained the ability to purchase firm service from non-regulated suppliers. At least 97 utilities have firm transport rates for small-volume industrial transportation rates; 75 have transportation options for commercial customers; 44 have transportation options for residential customers (either through pilot programs or standard rate options).

Although many utilities have transportation rates for all categories of customers, customers largely have not switched away from utilities en masse. In New York for example, where residential customers have enjoyed the right to purchase gas from non-regulated suppliers since 1996, as of June 1998 only about 10,500 residential and 21,000 commercial customers had turned to suppliers other than their utilities. Programs in California, New Jersey and Pennsylvania have been similarly slow to develop.

But Few Incentives,

for Customers or Suppliers

Unbundling has proceeded so slowly because customers in general have little incentive to switch suppliers. Particularly for residential customers and small- volume commercial customers, the potential to save money through use of a non-regulated supplier is minimal at best. (Savings are defined as the difference between what the LDC would charge and what the non-regulated supplier charges.) Conversely, if one assumes that the savings potential of a customer is effectively the equivalent to the non-regulated supplier's gross margin, then the margins are too small to trigger and sustain significant investment in the people and