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Standard-Offer Service: Beauty or Beast?

Fortnightly Magazine - September 2008

Gas interruptible-service customers are not offered standard commodity service by BGE, but rather the customers must obtain gas-commodity service from a third-party supplier. However, gas may be provided by BGE from month-to-month on a best-efforts basis. With few exceptions, all of these large customers are taking service from competitive suppliers and there is clearly an incentive to seek a retail supplier that offers pricing, terms and conditions, and other services that meet the customers’ needs.

For other customers, retail choice is an option, but a standard-offer service designed to provide best prices can be a challenge that needs to be overcome by suppliers. Such a challenge should not be met by so-called pro-competitive schemes such as opt-out aggregation or the purchase of receivables without any discount. Opt-out aggregation simply will create large volumetric risks for wholesale suppliers that will be reflected in higher standard-offer service prices for all customers. Proposals for the purchase of receivables, without appropriate discounts, will create market distortions and hidden subsidies that will raise the rates for all distribution or standard-offer service customers, depending on the incidence of the subsidies.

When suppliers resort to arguing that standard-offer service rates should be set as high as possible to allow competition to develop, they are helping neither regulators, customers, nor themselves. For larger customers, retail suppliers have been very successful in serving significant percentages of customers and loads. For mass-market customers (residential and small commercial), the key to the continued development of successful retail competition isn’t artificial subsidies to encourage competition. Rather, competitive retail suppliers need a level playing field and the opportunity to compete.

A retail customer will receive just and reasonable prices for energy only if the PJM wholesale market is efficient and has effective market rules to facilitate entry. The utility offering of standard-offer service should be viewed as just one option for customers in the retail market. Competitive suppliers must offer packages of innovative pricing bundled with value-added services in order to effectively and profitably provide retail services to customers. Suppliers need to offer products that provide value depending on the individual requirements of their customers—most notably price levels, risk tolerance and need for additional energy services.

 

Endnotes:

1.Interim Report of the Public Service Commission of Maryland to the Maryland General Assembly, Part I: Options for Re-Regulation and New Generation , Dec. 3, 2008, pages 10-11.

2. Ibid, pages 11-12.

3. http://www.ferc.gov/industries/electric/indus-act/competition.asp

4. Ibid, Interim Report , p.2.

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