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Standard-Offer Service: Beauty or Beast?

Fortnightly Magazine - September 2008

the local distribution system largely were provided by independent entities prior to customer choice. In 1985, Federal Energy Regulatory Commission (FERC) Order 436 encouraged open access and set unbundling in motion, but there still were obstacles to full access to the wholesale market. In 1992, FERC Order 636 required pipeline companies to provide open-access transportation services on a non-discriminatory basis. This had the effect of eliminating the pipeline merchant function and interstate pipelines no longer provided bundled transportation and commodity services. The local distribution company (LDC) then had to purchase the gas commodity in the wholesale markets and arrange for its transportation to the city gate.

Subsequently, natural gas deregulation at the retail level from the LDC perspective was largely a matter of allowing customers to make their own arrangements for the acquisition and transportation of gas supply. New rules needed to be established relating to the obligations of competitive gas suppliers and the LDC.

BGE’s experience in introducing customer choice for gas developed over more than a 20-year period: Interruptible service customers were allowed to choose an alternative supplier in 1976; this choice was applied in progression from larger to smaller firm service non-residential customers starting in 1983 until all such customers could choose an alternative supplier by the last quarter 1998. For residential customers, customer choice started with a pilot of 25,000 accounts in 1997, then expanded to 50,000 accounts in 1998, with all customers allowed to choose an alternative gas supplier by the end of 1999.

At BGE, all gas customers pay the utility for the delivery of the natural gas from the city gate (where the interstate pipelines deliver gas) through the distribution mains and service lines to the homes and businesses in its service territory. When the customer elects to obtain gas-commodity service from a competitive supplier, the customer or the supplier must arrange for the transport and delivery of gas into the company’s distribution system. The customer only may contract with a gas supplier that has obtained a license from the Maryland Public Service Commission (PSC) and has separately agreed to comply with terms and conditions applicable to all suppliers including: creditworthiness, responsibility for gas delivery, penalties for failure to deliver, balancing services and fees, assignment of firm pipeline transportation capacity, and allocation of peak-shaving activities.

Electric Industry Restructuring: The restructuring of the electric utility industry also began with changes in federal rules, including policies to encourage independent power production, to promote the development of competitive wholesale power markets and to require open access to the transmission system for all generators of electricity. In 1999, FERC Order 2000 called for the establishment of regional transmission organizations (RTOs) to operate and control the use of the transmission system with the goal of improving efficiency and reliability.

All of BGE’s electric customers, since the effective date of July 1, 2000 for customer choice, have the option of purchasing electricity supply from third-party competitive suppliers or from BGE’s standard-offer service. The deregulation of the vertically integrated utility in order to facilitate both wholesale and retail competition was a much