Pros and Cons of Competition in Residential Gas Market

You asked for a discussion of the arguments for and against opening the residential natural gas market to competition. The Department of Public Utility Control (DPUC) opened the commercial and industrial markets to competition in 1996. Opening the residential market to competition raises a wide range of public policy questions, and DPUC has chosen not to act on this issue in the absence of guidance from the legislature. Nationally, approximately 56% of residential natural gas customers can choose a competitive marketer, according to the American Gas Association.

A common argument for introducing competition in energy markets is that it can reduce rates. This has been a common theme in states that opened up the residential natural gas market, when the rates charged by marketers were as much as 10% to 15% below the rates charged by local utilities. The prospect of losing customers to marketers may also encourage utilities to make their operations more efficient and responsive to customers.

Another argument for opening the market to competition is that it can allow customers to enter into fixed rate contracts with marketers. In Connecticut and many other states, utility rates are subject to a purchased gas adjustment, which adjusts rates up or down to reflect the

wholesale costs of the gas that the utilities buy. While the adjustment protects both the utilities and their customers, some customers may prefer a fixed rate contract.

Several states have had seen extensive competition develop after opening their markets. In Ohio, approximately 40% of the residential customers of the state’s major gas utilities buy their gas from competitive suppliers (the utilities continue to be responsible for delivering the gas to the customers). This proportion has remained stable for the past several years, according to staff at the Office of Consumer Counsel, indicating that customers have been satisfied with their choice of suppliers.

A common argument against opening the residential market is that few marketers are interested in serving small customers, and those that enter this market will choose to serve only the most profitable customers. This could increase costs for less attractive customers who continue to be served by the utilities. In Connecticut, the proportion of commercial and industrial customers served by marketers has decreased in recent years as marketers have left the state, and the remaining marketers have expressed little interest in serving residential customers according to DPUC staff.

A major concern with regard to opening the residential market is that marketers, particularly those that are small or undercapitalized, may be unable to fulfill their contracts during periods of peak demand. Several states have required the utilities to serve as a “provider of last resort” in such circumstances. This can raise public health and safety issues with regard to reliability of service. If a marketer becomes unable to serve its customers, the provider of last resort may be unable to acquire sufficient gas supply in time to meet the additional demand to serve these customers. Interruptions of gas supply can jeopardize the health of the affected customers, particularly if the interruption occurs in the winter. Unlike interruptions of electric power, gas interruptions may require utility staff or others to go from home to home to restore service, a time-consuming and expensive process.

Opponents of opening the residential market to competition often cite the experience in Georgia. In 1997, the state authorized competition in the residential market in the area served by the state’s major gas utility. The act required that when certain market conditions were met, all customers who had not yet chosen a competitive supplier would be assigned to a competitive marketer based on the market share obtained by the marketers in the first several years of the program. So many customers signed up with marketers that the customer assignment process was moved up by several years and all customers were assigned in the fall of 1999.

In October 1999, a marketer, Peachtree Natural Gas, filed for bankruptcy after it had been assigned its share of non-choosing customers. The publicly stated cause for this bankruptcy was Peachtree’s obligation to pay the utility for its distribution charges before the marketer had obtained customer payments. It also experienced significant billing difficulties and complaints. Another marketer, Gas Key, obtained about 3% market share, but sold its assets to Georgia Natural Gas after claiming it was “overwhelmed” by the volume of customers who signed up and could not handle the billing. More generally, customers experienced significant levels of billing errors that led to over 15,000 complaints to the Public Service Commission. The legislature subsequently amended the law in 1997, 1999, 2001, and 2002. A commission Website, http: //www. psc. state. ga. us/gas/ngdereg. htm, describes the various bills.

If the legislature decided to open the residential market to competition, it might want to address the following questions:

1. whether to introduce competition all at once or to establish pilot programs;

2. how to address stranded costs, i. e. , costs the utility incurred with DPUC approval whose future recovery is jeopardized by competition;

3. how to ensure that a marketer affiliated with an utility does not gain an unfair advantage over unaffiliated marketers; and

4. how to ensure that marketers are creditworthy and thus financially capable of serving their customers without establishing inappropriate barriers to marketers entering the market.


February 19, 2004		2004-R-0190
PROS AND CONS OF COMPETITION IN RESIDENTIAL GAS MARKET

By: Kevin E. McCarthy, Principal Analyst