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After the Shakeout: Another Look at the Georgia Gas Market

Five suppliers are left. But that works when the utility gets out of the supply business.
Fortnightly Magazine - September 15 2001

customers away from the utility's default rate package for standard-offer service, making it easier for competitive suppliers to break through the fog and communicate real price signals to customers.

In Georgia, all gas customers were up for grabs. By contrast, in other states that have restructured their gas or electric markets, small-volume customers have seen little incentive to leave the protection of the standard or default service plan offered by the regulated utility distribution company.

The supply portion of these regulated rates has tended to be low enough that new suppliers have had difficulty providing an attractive competitive offer. Fears that high standard-offer rates will penalize those customers that don't switch are misguided. All customers have a choice to stay on standard-offer rates at a premium, or take a cheaper competitive offer. In addition, designing a standard-offer rate requires making assumptions about costs that are highly debatable.

At one end of the spectrum is the view that standard service supply should cost no more than the spot market, or wholesale price. That misses the point, however. Even in a completely regulated world, utilities are afforded a return that has to be collected through rates.

At the other end of the spectrum is the view that the standard service rate should act like a retail rate, with a retail margin, if there is any chance of a market developing. This approach makes sense if standard service is only transitional, and all customers will have to choose a competitive supplier at some point. Sound familiar?

Yet these standard offers act like a double-edged sword. They discourage customers from seeking out competitive offers for a supply price, but at the same time make it difficult for customers even to discern the supply price they are paying to the regulated utility. Customers don't really see the supply price - they see a fixed price that is typically designed to allow a margin for stranded cost recovery. Very confusing, not to mention the lack of price signals.

And then comes risk management.

Competitive markets impose much greater price volatility, making it more important for suppliers to manage price risk for their customers - something that regulated utilities find difficult to come to grips with. When regulated utilities retain a retail supply obligation, they become mired in uncertainty: How to share hedging gains and losses between ratepayers and shareholders?

For example, if an electricity distribution company hedged its spot market purchases with financial contracts, such as contracts for differences, the utility commission would most likely challenge recovery in rates of any losses from those contracts, while requiring any gains to be returned to or shared with ratepayers.

In short, whenever a regulated company takes on POLR responsibility for a large customer base, where wholesale markets are deregulated, the market offers little incentive for the utility to manage risk. This scenario has emerged in all restructured electricity and gas markets in the U.S. - except for in Georgia, where all gas customers must look to competitive suppliers. Those suppliers that don't hedge effectively will fail in the market, but