|
Go
back a year, to the summer of 2000. Georgia's retail natural
gas market was spinning out of control, taking hits in the national press.
Some consumers had to wait month after month just to get a bill - if they
were lucky. Citing an "utter state of confusion," the state utility commission
had to impose new billing rules, to force suppliers to get their act together.
Then came the winter of 2000-2001,
with sky-high gas prices that strained pocketbooks for gas customers all
across the country, putting even more pressure on Georgia's nascent gas
market.
And yet we can say today that
retail gas competition is working in Georgia.
After a fierce shakeout, only
five retail gas suppliers still survive in Georgia with any meaningful
slice of market share. That's out of at least 24 that jumped in at the
start of the program. However, as we will show here with some hard numbers,
a market with five suppliers appears to be enough to offer meaningful
choice to residential consumers, based on our observations of the Georgia
experience:
- Price. Georgia's
average retail gas prices for the nine-month period from mid-2000 to
spring of this year appear comparable to those in neighboring states.
- Choice. The
five suppliers operating today in Georgia provide fixed and variable
rate plans to consumers that offer real choice on price.
- Reliability. Customer
complaints fell markedly from July to December 2000. And though complaints
rose again in the spring of this year, we believe we can show that this
second round of discontent followed directly from the run-up in wholesale
gas prices, which hit consumers nationwide. This fact suggests that
quality and reliability of service and billing was not the driving factor
for any rise in consumer discontent, as was the case before.
What has made Georgia's plan
different from gas and electricity market restructuring plans in California,
Pennsylvania, Texas, Ohio, and other states?
First, the utility distribution
company, Atlanta Gas Light (AGLC), got out completely from the retail
supply business over a 10-month period, opting to become strictly a distributor
for competitive suppliers.
Second, the state forced all
customers to choose a competitive supplier by the end of those 10 months,
instead of allowing them to stick with a standard offer or default plan.
Thus, some 80 percent of customers had chosen a supplier by the end of
the period, leaving a small portion to be allocated to the suppliers,
based on the market shares those suppliers had already attracted.
Third, AGLC acted only temporarily
as a "pooler," or provider of last resort (POLR), for customers that no
supplier wanted to serve. POLR responsibility was then bid out to competitive
suppliers in the market.
Paring Down the Competitors
The Georgia natural gas market
has evolved in the usual way of an industry moving through deregulation
- with the number of players shrinking way down, illustrated in Figure
A. A market that once was fragmented among 24 certified suppliers has
settled to a point where five surviving retailers now control 99 percent
of share, as tabulated in Figure B. This typical evolutionary process
took place in three distinct phases:
- Swarm phase, where
many new suppliers typically seek a profitable position in a new market.
In Georgia, the state public service commission (PSC) originally certified
a total of 24 suppliers to sell natural gas at retail.
- Consolidation phase,
where "winners" emerge as market share leaders. In Georgia, after the
enrollment period ended, the industry consolidated into four significant
players - Georgia Natural Gas, SCANA Energy, Peachtree Natural Gas,
and Shell Energy - plus another 8 smaller suppliers competing for a
position.
- Shakeout phase,
where "losers" fall away - either they get bought up by the winners,
go out of business, or become only marginally involved in the market.
In Georgia, over the past year, five suppliers have exited the market
completely. Two suppliers are focusing on niches. One new supplier (the
fifth of the five players) now has emerged.
Nevertheless, despite the consolidation
of competitors in the market, consumers still have a wide choice of suppliers
and pricing options. As of May 2001, five significant competitors remained
in the market, with nine distinct price offerings: five variable, three
fixed, and one low-income rate plan. Several smaller suppliers also exist
in the market, with offerings targeted to niche customer segments, including
larger C&I customers.
When suppliers exited the market,
they were able to sell their customer books. Over 340,000 customers, about
a quarter of the market, were sold by exiting suppliers, some at fire-sale
prices. Here are but some of the transactions:
- Peachtree Natural Gas
declared bankruptcy, citing insufficient cash flow due to billing problems.1
Shell Energy doubled its market share by purchasing Peachtree's 170,000
customers for $19 million.2
- Energy America,
a subsidiary of the British retail energy giant Centrica PLC, almost
doubled its share by acquiring the 50,000 Georgia customers of another
bankrupt supplier, Titan Energy, for $2.2 million.3 Titan blamed
its bankruptcy on a dispute with its wholesale supplier, that required
the purchase of gas supply from another wholesaler at nearly double
prior prices, while serving a large fixed-price customer base.4
- New Power Co., a
publicly held joint venture of Enron, IBM, and America Online, established
itself in Georgia through the purchase of Columbia's book of 85,000
customers.5 Columbia's new owner, NiSource, had refocused on
the pipeline business.6
All five of the remaining large
suppliers are affiliates of major energy companies. Independent energy
companies waged major efforts to succeed in the new natural gas market,
but most were not able to make it through the consolidation phase, most
notably Peachtree Natural Gas and Titan Energy, which had a combined total
of 230,000 customers. This shakeout shows how important it was for suppliers
to make the right decisions on billing and risk management. Whether this
is a capabilities issue, or a deep-pockets requirement, is up for debate.
Staking Out a Pricing Strategy
Suppliers have staked out their
positions in the market using a variety of marketing strategies and offerings.
Competitive positioning ranged from promises of low prices, to tapping
on the fear of the unknown with brand names, to commitments of superior
products and services. Competition was intense from the start, with sign-up
promotions amounting to up to $50 rebates.
New Power Company's national
aspirations are clear, with its widely publicized $50 million investment
in software for customer relationship management through a partnership
with IBM, and 750,000 customers in 10 states. Both Energy America and
the New Power Company seem to have a solid hold in the Georgia gas market,
but can be expected to expand with dual-fuel offerings when the electricity
market is opened to competition, as they have in other jurisdictions.
Georgia Natural Gas, Shell,
and SCANA offer both fixed-rate and variable-rate price plans. The first
two have offered fixed-rate plans for some time, while SCANA's began in
February 2001. As of May 2001, Energy America and New Power have offered
only variable rate plans. Thus, the major retailers have differed with
respect to the extent that they offer price-risk management along with
natural gas. Yet consumers were given the opportunity to make decisions
about how much price risk they wished to assume with fixed and variable
rate plan options.
Figure D illustrates the range
of variable price offerings in the market during the 2000/2001 winter
heating season. Widely different pricing strategies were suggested by
the behavior of variable price offerings during the period of skyrocketing
wholesale gas prices. When prices climbed during the October 2000 through
January 2001 period, Energy America's rate increased the most, followed
closely by Shell. Georgia Natural Gas and SCANA raised rates moderately,
while New Power/Columbia was able to keep offering a fairly stable rate
throughout the period. In January 2001, these variable rates were widely
divergent, with as much as a 60 cents per therm differential between New
Power and Energy America (75 percent higher).
The range of reactions to rising
wholesale prices may be attributable to differences in risk management
sophistication. New Power was able to remain in the game without the giant
price increases of its closest competitor, Energy America. Both companies
have backing from large international energy firms, and it is likely they
had resources to weather the large winter price increases, but it is possible
that New Power's strategy reflected lower energy costs, due to a better
managed energy portfolio.
How Customers Fared Last Winter
Gas prices skyrocketed last
winter, both at the wellhead and in wholesale spot markets. These unusually
high prices flowed through to consumers as high bills across all gas markets
in the U.S., whether or not open for competition. Figure E shows the wholesale
price of natural gas as measured by the monthly average of daily spot
prices at the Henry Hub, La., a major wholesale trading point.7
How did Georgia's competitive
gas suppliers respond to these winter price spikes? And how did the customers
fare? Did competition act to mitigate the effect of increasing wholesale
prices on residential customers? Or, conversely, have suppliers been able
to take advantage of consumers through price gouging?
To answer these questions,
we compared prices for hypothetical customers of each supplier in Georgia
with prices for hypothetical customers in five neighboring states: Tennessee,
Alabama, Virginia, South Carolina, and North Carolina.8 The result
appears in Figure F.
Understand, however, that the
method we used will tend to favor the regulated local distribution companies
(LDCs) operating in the neighboring states, relative to the unregulated
Georgia marketers. That's because of the typical lag that occurs for increases
in regulated rates to adjust for fuel price increases. Under conventional
Purchased Gas Adjustment (PGA) clauses, customers will typically see prudent,
cost-of-gas increases flowed through to their bills over a period of several
months. Because of the complexity of PGA accounting and the possibility
of regulators disallowing PGA adjustments, our estimates do not attempt
to project future (and possibly substantial) PGA increases in later bills.
Thus, our estimates have a downward bias that results in a deliberate
underestimation of regulated rates. Reflecting this analysis of winter
season bills for hypothetical customers, Figure F shows that Georgia customers
fared well overall.
Georgia customers enjoyed a
range of pricing options. How they fared last winter depended on the choices
they made. Some Georgia customers paid less than the average in these
neighboring states, some paid about the same, and a few may have paid
more:
- Paid the Least.
Representative fixed rate customers of Georgia Natural Gas and Shell
did the best overall, paying up to 26 to 27 percent less than the weighted-average
bill of representative customers in the five neighboring states.
- Paid Somewhat Less.
A representative New Power/Columbia Energy customer, even though on
a variable rate, paid 8 percent less than the weighted average bill
of representative customers in the five neighboring states.
- About the Same.
Representative variable rate SCANA and Georgia Natural Gas customers
paid close to the same as the weighted-average bill of representative
customers in the five neighboring states.
- Paid A Good Deal More.
Representative variable rate Shell and Energy America customers did
not fare so well, paying 13 and 24 percent more than the weighted average
bill of representative customers in the five neighboring states. Because
Energy America enjoyed a market share representing only 5 to 7 percent
of the customer base, few customers were affected by the relatively
high variable rates and service charges for that supplier, as reflected
in their representative total bill of $1,047.
Customers choosing fixed-rate
plans were able to save substantial amounts relative to those that selected
variable rate plans. Of course, had wholesale prices decreased rather
than increased, the variable-rate plan customers might have had the advantage.
Also, risk exposure has a cost and, no doubt, suppliers offering fixed
rate plans intended to reflect their risk exposure costs in the prices
they charged. Recognizing this, the significant point from a market-performance
evaluation prospective is that customers had a choice of how much risk
they wished to assume and, for some, their choices turned out to be financially
beneficial.
Had Georgia not deregulated
its natural gas market, the traditional purchased gas adjustment mechanism
used in LDC ratemaking would have worked something like a variable rate
plan. The increases in the wholesale cost of natural gas would have flowed
through to customers over time. In contrast to the Georgia situation,
customers of LDCs subject to traditional regulation would have had no
opportunity to express their risk appetite.
There is no evidence from this
analysis that, in general, Georgia customers paid more for natural gas
than customers did in neighboring states. In fact, it is possible that
Georgia customers paid a little bit less overall. In addition, this analysis
does not support any contention that Georgia customers were price-gouged
during the winter 2000/2001 heating season that saw record wholesale natural
gas prices.
Service Quality and Customer Complaints
In the ideal case, competition
should improve service relative to the level provided by a monopoly. At
the very least, deregulation and restructuring should not degrade quality
of service.
Last year the press reported
much customer dissatisfaction with billing by some of the new natural
gas suppliers.9 Yet some level of billing problems is always to
be expected in a market where 1.5 million natural gas customers change
their supplier over a 10-month period.
Figure G shows that between
August and December 2000, there was a dramatic and steady decrease in
the level of complaints to the GPSC about billing practices, falling from
a high of 1,517 in August to a low of 540 in December. This trend implies
that billing service problems were being resolved.
The number of complaints then
picked up dramatically in 2001, reaching an all-time high of 1,898 for
the deregulated market in February. Also revealed by this perspective,
however, is a strong decline in complaints while bills were stable, and
then a sharp increase in complaints parallel to skyrocketing bills at
about a one-month lag. It is likely that this increase in complaints was
due to the large increases in bills, rather than billing problems, and
in fact billing service remains greatly improved relative to 2000.
Several suppliers also offer
bill payment convenience offerings such as level payment plans, automatic
checking debit, pay by phone, and paystations - more options than were
available from AGLC under regulated service.
Will the Georgia program encourage
suppliers to offer new products or new technologies? The jury is still
out - and likely to be out for some considerable time - on whether retail
choice will foster such innovation, either in Georgia or elsewhere.
Nevertheless, it is clear that
suppliers in Georgia are seeking to expand their offerings. SCANA is already
bundling natural gas with HVAC financing and appliance warranty service
and ACN Energy offers telecommunications services. New Power and Energy
America appear poised to offer dual fuel bundles when the electricity
market is opened to competition, based on their activities in other energy
markets.
What Makes This Market Special
In hindsight, one can see the
key advantage in Georgia's gas restructuring plan: Forcing the utility
to exit the supply business. That, in turn, has forced customers away
from the utility's default rate package for standard-offer service, making
it easier for competitive suppliers to break through the fog and communicate
real price signals to customers.
In Georgia, all gas customers
were up for grabs. By contrast, in other states that have restructured
their gas or electric markets, small-volume customers have seen little
incentive to leave the protection of the standard or default service plan
offered by the regulated utility distribution company.
The supply portion of these
regulated rates has tended to be low enough that new suppliers have had
difficulty providing an attractive competitive offer. Fears that high
standard-offer rates will penalize those customers that don't switch are
misguided. All customers have a choice to stay on standard-offer rates
at a premium, or take a cheaper competitive offer. In addition, designing
a standard-offer rate requires making assumptions about costs that are
highly debatable.
At one end of the spectrum
is the view that standard service supply should cost no more than the
spot market, or wholesale price. That misses the point, however. Even
in a completely regulated world, utilities are afforded a return that
has to be collected through rates.
At the other end of the spectrum
is the view that the standard service rate should act like a retail rate,
with a retail margin, if there is any chance of a market developing. This
approach makes sense if standard service is only transitional, and all
customers will have to choose a competitive supplier at some point. Sound
familiar?
Yet these standard offers act
like a double-edged sword. They discourage customers from seeking out
competitive offers for a supply price, but at the same time make it difficult
for customers even to discern the supply price they are paying to the
regulated utility. Customers don't really see the supply price - they
see a fixed price that is typically designed to allow a margin for stranded
cost recovery. Very confusing, not to mention the lack of price signals.
And then comes risk management.
Competitive markets impose
much greater price volatility, making it more important for suppliers
to manage price risk for their customers - something that regulated utilities
find difficult to come to grips with. When regulated utilities retain
a retail supply obligation, they become mired in uncertainty: How to share
hedging gains and losses between ratepayers and shareholders?
For example, if an electricity
distribution company hedged its spot market purchases with financial contracts,
such as contracts for differences, the utility commission would most likely
challenge recovery in rates of any losses from those contracts, while
requiring any gains to be returned to or shared with ratepayers.
In short, whenever a regulated
company takes on POLR responsibility for a large customer base, where
wholesale markets are deregulated, the market offers little incentive
for the utility to manage risk. This scenario has emerged in all restructured
electricity and gas markets in the U.S. - except for in Georgia, where
all gas customers must look to competitive suppliers. Those suppliers
that don't hedge effectively will fail in the market, but their debts
are reallocated to customers of other suppliers. Nor is their any public
policy debate on how to distribute such losses.
This article was adapted
from a larger white paper prepared by PA Consulting Group for AGL Resources.
AGL Resources is the holding company of Atlanta Gas Light Co., a regulated
natural gas utility distribution company operating in Georgia, and is
a part-owner of Georgia Natural Gas, the largest competitive gas supplier
in Georgia. George R. Hall was a senior advisor to PA Consulting Group
when the research on which this article was based was undertaken. He directed
this research, which was sponsored by AGL Resources. Emily Bartman is
a principal consultant with PA Consulting Group, within the Energy Strategy
and Risk Management practice. She focuses on retail market structure and
retail energy strategy engagements. She has previously held positions
at Edison International, as director of marketing for Edison Source, and
corporate strategic projects manager. She holds an MBA from the University
of California at Berkeley, and a BA in mathematical economics from Pomona
College, Claremont. ... For more on the white paper, see www.paconsulting.com.
- "Gas Marketers
Thin Out as Deregulation Advances." Atlanta Journal Constitution,
July 10, 2000, page F1.
- "Shell Wins Battle
for Gas Firm Assets." Atlanta Journal Constitution, November
18, 1999, page C1.
- AES Corp. purchased
Titan's assets, including 130,000 customers in Pennsylvania, Ohio and
Maryland for $6 million, but recently sold the mass market customers
to New Power.
- "Gas Marketer's
Parent sold; AGL in Line to Collect Debt." Atlanta Journal Constitution,
July 28, 2000, page F3.
- New Power purchased
all of Columbia Energy's natural gas and electricity customers, including
another 215,000 customers in other states including Pennsylvania, Ohio,
and Maryland.
- "National Firm
Enters State Gas Market." Atlanta Journal Constitution, December
8, 2000, page D1.
- Natural Gas
Week, July 9, 2001, page 13, "Cash Market Hub Trading ($/MMBtu),
Henry Hub, La."
- These hypothetical
customers were assumed to have an average, weather-adjusted residential
load shape, and a design day demand consumption (DDDC) of 1.29. Bills
during the period of July 2000 to March 2001 were analyzed. Distribution
charges (AGLC charges in Georgia) are included in the total bill analysis.
Total bills for a representative customer of each Georgia supplier on
each type of plan were constructed using the "Certified Gas Marketers
Price List" data from July 2000 to March 2001 on the GPSC Web site.
Monthly rates and service charges for large utilities in each of the
five states were gathered and applied to the average customer load and
DDDC profile.
- "Georgia's Price
Crisis." Atlanta Journal Constitution, April 1, 2001, page G1.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.
|
|
 |
Public
Utilities Fortnightly & Spark
