John Quain, chair of the Pennsylvania Public Utility Commission, who helped draft legislation to introduce electric competition in his state, predicts that natural gas deregulation is next on the...
Letter to the Editor
consider switching. Second, we know now, not surprisingly, that small customers are less inclined to switch than large customers. This has been true in other restructured industries as well. Having higher levels of consumption, large customers are likely to be more sensitive to price differentials across suppliers. Third, we have not observed a logistic-curve pattern of consumer participation-initial low participation followed by high growth in participation. Instead, for many programs we have seen participation rates reaching a plateau with little growth in recent years. Finally, there is residential-customer inertia. For marketers to attract residential customers they must work harder to increase consumer benefits or lower consumer transaction costs, or both. This is in essence the challenge that marketers face if they want to attract more customers. Marketers may have to find ways to leverage the sale of commodity gas into potentially higher profit margin, value-added services. Marketers also may have to "brand" their product so as to differentiate their service from other marketers.
In characterizing the gas choice programs to date, it would be misleading to say that they have been a failure. Studies have indicated that consumers as a whole have benefited. At specific points in time, some customers who chose a marketer might be worse off, but that is part of the risk for consumers in any market when they have a choice of suppliers.
Gas choice programs are not the panacea that some have hoped for. Given how some programs were designed and structured, the potential benefits to consumers were destined to be small relative to the search and hassle costs inevitably incurred by customers. My position today is that these programs were worth the effort and we should continue to improve them to increase the potential benefits to consumers and potential profits to marketers in the absence of subsidies and other market distortions that would skew the outcomes.
I believe that the ball is in the court of marketers to come up with new business strategies and products to attract more consumers. These strategies can include segmenting the market, repackaging value-added services, and product differentiation. Retail marketing of gas has so far been a low-marginal-cost business where it has become essential for marketers to expand their consumer base to reduce their average cost. Of course, these efforts may not guarantee success.
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