Retail Gas Reform: Learning from the Georgia Model

Fortnightly Magazine - April 15 1997
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New legislation would tackle the most difficult problem (em low load factors for small-volume customers.

We commend the Natural Gas Competition and Deregulation Act, SB 215, passed by the Georgia General Assembly in March. (Governor Zell Miller was expected to sign the bill in April.) The Georgia legislation envisions a new framework for regulating the retail gas market. In the broad sense, the Georgia plan eschews experimental pilots in favor of creating a new industry structure that is amenable to competition, and a new regulatory scheme to be administered by the Georgia Public Service Commission. The Georgia reforms can, and should, serve as a model for gas retail reform legislation in all states.

Over the past decade, the Federal Energy Regulatory Commission's restructuring of the wholesale gas market has produced enormous gains to consumers and to the performance of the U.S. economy. By unbundling the competitive from noncompetitive wholesale functions and by subjecting the structurally competitive functions to the discipline of the market, the FERC has reduced costs, improved quality, spurred innovation and increased the menu of alternatives available to purchasers. %n1%n

Wholesale gas prices have declined by 52 percent. Service reliability has improved. Moreover, every function affected by competition (em exploration, production, wholesale trade, pipeline transportation, and storage (em has seen significant, efficiency-enhancing innovations that have improved the price-quality relationship and increased the range of service options available to wholesale purchasers.

Nevertheless, the natural gas revolution is not yet complete. The retail market remains relatively untouched. Additional gains are available by extending the reforms to the retail level. Any effective reform of retail gas markets should include at least three public policy goals: 1) greater access for small customers, 2) broader service options for consumers, and 3) more incentives for entrepreneurs.

Untapped Areas

Generally speaking, small-volume consumers have yet to reap the full benefits from the competitive market. That deficiency should be erased. The combination of wholesale competition, bypass and local distribution company responses to threats of bypass has produced an environment in which most large consumers can take full advantage of competition. But while large consumers can choose among suppliers and have experienced a 60 percent decline in the prices they pay, small consumers have obtained proportionately smaller gains. Few have gained access to multiple alternative suppliers. The prices they pay have declined only 32 percent to 38 percent. First, therefore, small consumers should have access to competition now available to large consumers.

Second, market reforms should broaden the service options available to consumers. The range of service options available at the retail level remains extremely narrow. Traditional command-and-control, cost-of-service regulation of a franchised monopolist tends to produce a one-size-fits-all approach. Consumers would refuse to tolerate this service in any other market and should not be forced to tolerate it in the gas market.

Third, any worthwhile reform should unleash the entrepreneurs willing to pursue a new vision of the future. Regulated monopoly retards the rate of technological and entrepreneurial innovation. Every restructured market that permits market forces to play a greater role has experienced immediate, substantial and continuous innovation.