Kay Joslin
NCAT

A five-state study by the National Center for Appropriate Technology (NCAT) on how residential consumers have been affected by energy market restructuring documented the adverse impacts of passing through short-term wholesale energy rates to these consumers.

The study reviewed Georgia's restructuring of its natural gas market, as well as the restructuring of electricity markets in Massachusetts, Texas, Ohio, and part of New York.

According to Barbara Alexander, consumer affairs expert and one of the study authors, in those states that have relied on the pass through of short-term market-based prices for default service, residential customers appear to be worse off compared to pre-restructuring rate policies and are certainly worse off compared to customers in those states that have adopted rate caps and rate freezes that insulated customers from price volatility. (Default service is the service provided to all customers who choose not to choose or who for any reason move from a competitive service provider to a default provider for electricity or natural gas.)

Of the five states studied, Massachusetts, New York and Georgia passed through short-term market-based prices to some customers. Ohio and Texas did not, but Texas' initial model for default service pricing was especially harmful and discriminatory to low- and moderate-income consumers, according to Alexander. For several months after it opened its markets, it isolated payment-troubled customers in a default service that was higher priced compared to that paid by customers who did not enter the competitive market or who paid their bills on time. In August, Texas changed its policy and ended the discriminatory default service pricing.

The study termed Georgia's natural gas program the model for what can go wrong when well-designed consumer protection measures are either not adopted or not enforced at the onset of the retail competition program. The Georgia natural gas restructuring legislation had several unique features that no other state has replicated, chief among them is its requirement that all customers switch natural gas providers or be assigned to a competitive provider. This requirement caused confusion, complaints, unexpectedly high prices, an unprecedented number of disconnections, high arrearages, large scale public dissatisfaction, and finally, corrective actions by the state's governor and legislature.

With the exception of Georgia at the onset of its market opening, the states studied have adopted comprehensive consumer protection programs and policies, Alexander said. Texas and Ohio, in particular, are models for well-designed consumer education and protection programs.

The study also found that, with few exceptions, restructuring laws have not resulted in the lower prices or increased choices that many policymakers had anticipated. The exceptions noted in the study occurred in selected regions in two states (Ohio and Massachusetts) that have utilized a strategy called opt-out aggregation, a low-cost way to pool the buying power of a large number of customers.

This strategy has yielded significant electric bill savings for consumers and given them access to competitively-determined electricity prices and green power, according to study co-author Matthew Brown. Opt-out aggregation is a process that allows a municipality, county or other local branch of government to assemble the electric load of all or a part of the customers within its jurisdiction, and bid that load out to the best bidder. The citizens of the aggregating entity become part of the buying group unless they affirmatively "opt-out" by signing a card or a negative check-off saying that they don't want to be part of the group.

Brown said the process reduces marketing costs for the marketers and allows customers to switch with minimal effort and to attain some benefits from the market.

In Cleveland and the northern Ohio area, the study found, some 55 percent of the small customer base has switched, and the majority of those who switched were part of an aggregation project. In Massachusetts a smaller pilot aggregation program has yielded approximately 45,000 participants who have seen rate discounts ranging from 11 to 22 percent and have access to green power options.

NCAT chose these five states because their experience with energy markets restructuring has exposed at least some of their residential customers to market-based pricing. (Other restructured states have protected customers from such pricing through rate freezes or rate caps.) NCAT did not focus either on the much-publicized restructuring experience of California because its approach has not been replicated elsewhere, or on another prominent state, Pennsylvania, because that state's regulated pricing structure largely protects residential consumers from market-based pricing.

The study, titled The Transition to Retail Competition in Energy Markets: How Have Residential Customers Fared?, is available online at www.ncat.org/neaap/experts/mainintro.htm.

Joslin is the director of NCAT's NEAAP project and its LIHEAP Clearinghouse, which compiles and disseminates information on federal, state and privately-funded low-income energy programs. The Clearinghouse is accessible at www.ncat.org/liheap.