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TransActions - February 2000 (Vol
100)
All Customers are Not Equal For many years the customers of electric and gas utilities dreamed about, desired and sometimes demanded the right to choose their gas or electric service provider. In a steady progression of states, those aspirations are becoming a reality. Unfortunately, as the deregulation of gas and electric utility industries has evolved, an all too familiar aspect of serving various customer classes is perpetuating itself. Basically, it boils down to the fact that all gas and electric customers are not equal. They are not equal in terms of their individual utility service requirements or usage characteristics. Perhaps even more importantly, they are not equal in terms of their knowledge and ability to exercise their right of choice in the most economical manner. While large commercial and industrial customers have employed qualified persons or contracted with energy consultants to study deregulation and restructuring laws, and to negotiate favorable rates and contracts, the poor residential customer has been left in a state of confusion and disillusionment. The superior ability of the large commercial and industrial rate classes to further their best interests was clearly evident in the regulatory process by their use of highly paid law firms and expert witnesses to advocate their positions regarding volatile issues such as cost allocation and rate of return. However, in that environment, residential customers typically had the benefit of the public service commission staff or office of public utility counselor to protect their interests. In a deregulated, competitive energy market, the large commercial and industrial customers will still have available to them the type of expertise needed to make informed decisions, whereas residential customers are expected to function on a similar basis merely by virtue of being presented with a list of energy service providers and being given a crash course on utility terminology. In this light, it is not surprising that the reports thus far regarding the restructuring of the gas and electric industries reveal significant opportunities and realized savings for large commercial and industrial customers, and yet little or no such favorable results for residential customers. Why The Confusion? Residential customers are confused about both major elements of their energy service purchase decision, namely the product and the price. Large commercial and industrial customers consider gas and electric services as one of many resources necessary to produce a given output. In that respect, those customers already possess a good knowledge of the gas or electric service product they are purchasing, and can readily converse with suppliers using the appropriate industry language. In contrast, residential customers inherently think of gas and electric service in terms of its end use such as lighting, hot water, conditioned air and cooking. The residential customer's focus has always been on what happens on his side of the meter, not on what it takes for the utility to get the energy to his meter. Nonetheless, in a seemingly futile attempt to enlighten the residential customers, public service commissions that have enacted deregulation have inundated those customers with a host of concepts and terms such as "unbundled services," "stranded costs," and "wires companies" that have done much more to frustrate customers than to educate them. Even when done well, assimilating this myriad of vast terminology requires more effort than most residential customers are willing to expend, especially in light of the relatively minor bill reductions they can hope to achieve. That brings us to the second major element in their energy purchase decisions which has led to their confusion and disappointment, namely the price. As the inevitability of deregulation became more apparent, many gas and electric utilities began offering their largest commercial and industrial customers rate reductions, special rates or discounts as an incentive for retaining those customers over the long term. As a result, those customers actually received most or all of the price-related benefits to be gained by deregulation well in advance of enactment of state restructuring law. Once again, residential customers did not participate in such "defacto" customer choice benefits. Furthermore, even after the adoption of restructuring legislation, residential customers are not always enjoying the decreases in overall energy cost that they thought they would receive. In California for example, deregulation of the electric utility industry included the ability of utilities to recover their stranded costs. Although the prices in the electric rates for residential and small commercial customers were lowered by 10%, a new charge was added to every bill, which was applied to the stranded costs of the electric utilities. A California family with monthly electrical energy usage of 500 kWh saved roughly $6.00 a month as a result of the price decrease, but that savings was more than offset by the additional monthly charge related to the stranded cost recovery. The plan, of course, is for the stranded cost to last only a few years while price reductions are more permanent. However, at this stage in California's deregulation process, it is easy to see why residential customers are confused about their price decreases actually resulting in a higher overall cost of electricity. Such confusion is not limited to California. A recent survey released by Deloitte & Touche Consulting suggests that there is a general state of confusion among residential customers nationwide, as indicated by these findings:
What Do Residential Customers Understand? Residential electric and gas customers do understand many facets of typical competitive markets, such as coupons, frequent flyer miles, grocery store certificates and free cellular phone time. If you promise them things they understand, they will respond. In fact, the response may be more than the utility bargained for, as experienced by gas marketers in Georgia last year. When Georgia deregulated the natural gas industry, a host of gas marketers offered a potpourri of incentives to residential customers to gain market share. Those incentives included $50 rebates, grocery store coupons and free gas energy during the summer months. People liked the incentives so much that they switched in droves. However, the immediate financial impact on the gas marketing entities made one wonder whether or not those marketers themselves were actually confused by the deregulation process. SCANA was the most "successful" in attracting customers, but the 30% market share they achieved produced a net loss of $43,000,000. Peachtree Natural Gas was the second most successful marketer, with a market share of approximately 11%. Their gas marketing efforts, however, resulted in a filing for bankruptcy, and Shell (the third most successful marketer with a 10% market share) bought out Peachtree Natural Gas' business. Meanwhile, despite the huge losses incurred by gas marketers, residential customers in Georgia were for the most part confused and angry about the deregulation process. Aside from the up-front dollar incentive they received to switch suppliers, their cost of gas energy did not decline significantly nor did it vary appreciably from one supplier to another. Furthermore, the unbundled charges billed by the Atlanta Gas Light Company for distributing the natural gas sold by marketers caused a customer uproar. Despite attempts to educate customers by means of public advertising (the cost of which was billed to gas customers and sometimes shown as a separate line item on the monthly bill), thousands of customers bewildered by the transition process tied up the Atlanta Gas Light Company phone bank with questions about final bills and the definition of strange billing terms. In fact, the "Design Day Capacity Charge" caused such a furor (it was actually not based on the customer's peak day usage) that the Public Service Commission scheduled a special hearing to allow customers to voice their complaints, some of which accused Atlanta Gas Light Company of abusing the English language. In short, the implementation of customer choice natural gas service in Georgia should serve as a useful model not to follow in other states or for other utility services such as electricity. In fact, the natural gas deregulation experience in Georgia has been such a "fiasco" that there exists virtually no interest in introducing legislation to deregulate the state's electric utilities during the 2000 General Assembly. Although some legislators believe more time is needed for the benefits of the gas deregulation to surface, others are already discussing the need for a form of "reregulation." Is There Hope For A Competitive Residential Market? The drawbacks and disappointments suffered by the residential customers under deregulation do not have to continue. To improve the current status, however, both legislators and regulators must realize that simply offering residential customers a choice of energy service providers is not enough. The pure novelty of being able to choose one's energy service provider has a fleeting value in and of itself. It must be accompanied by an educational process that overcomes the inattention of a generally uninterested customer group and by a smooth billing transition process.
One important characteristic of a viable, competitive market is the assumption of knowledgeable consumers making rational decisions. The evidence thus far clearly indicates that the competitive marketplace for residential gas and electric energy service largely does not contain such consumers. That condition need not and should not remain the case. As residential customers become more aquatinted with the multifaceted (unbundled) nature of energy services, and as stranded cost recovery diminishes, those customers will become more knowledgeable and active, and will then hopefully experience the types of savings many larger customers have already realized. For more information, contact Steve Shurbutt at 770-425-8100 or e-mail: info@gdsassociates.com. STATE RESTRUCTURING - JANUARY 2000
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