Sponsored & Written by: Charles “Chuck” Harder Vice President, Rates & Regulatory, SourceGas, LLC
I appreciate the opportunity afforded me by the Financial Research Institute (FRI) to share my Point of View on Choice Gas programs. Choice Gas programs allow consumers to choose amongst competitive commodity supply options, either in lieu of or in addition to regulated system supply. Choice Gas programs offer benefits to consumers that cannot be readily attained through the regulated construct.
My Opinion of Choice Gas Programs Has Evolved
My first experience with unbundling and retail competition was in the mid-1990s. Enron was making a concerted effort to influence state public utility commissions to open up retail electric and natural gas markets to competition. The idea was that introducing competition would lower costs for energy consumers as it had done to long-distance rates in the telephone industry. I was skeptical. Thanks to the deregulation of wellhead natural gas prices in the mid-1980s and FERC actions in the 1990s (e.g., FERC Order 636), upstream natural gas markets were already competitive. The local distribution company (LDC) was buying and reselling natural gas to consumers with no mark-up under rules that required it to do so at the lowest or most advantageous price. LDCs had considerable purchasing power, and they had access to the same natural gas supplies and upstream suppliers. How could a marketer do any better? Did marketers simply want to “cherry-pick” the higher load-factor consumers? What was the benefit to the low load-factor, residential or small business consumer?
My current view toward Choice Programs has been largely influenced by a couple of events in the past 10-15 years. First, the end of the “natural gas bubble” in 2002 and the prospect of an extended period of high and volatile natural gas prices caused LDCs to look for ways to provide price stability for consumers and to mitigate the regulatory risks associated with natural gas purchasing. Trying to formulate fixed bill and fixed price options through traditional regulatory processes proved to be cumbersome, and the end result wasn’t timely or marketable. Second, retail restructuring in the Texas electric industry showed me that, like other products and services, consumers aren’t always interested in the lowest price. They want options. My personal decision in choosing a retail electric provider (REP) wasn’t driven entirely by price. My decision was also driven by my desire for price certainty … and the Southwest Airlines points offered by my REP. I was willing to pay more than the lowest competitive rate.
Choice Gas Programs Offer Benefits to Consumers
The first step toward Choice Gas is the unbundling of the natural gas supply commodity from its delivery in the utility’s tariffs. Unbundling transforms traditional gas supply service by the incumbent utility because it provides regulators the opportunity to examine and open up segments of traditionally bundled supplies and delivery to competition.
In a Choice Gas program, unregulated natural gas marketing firms, also known as suppliers, can provide consumers with multiple pricing options that are not often available through a utility. Suppliers have this ability because they can assume market risk in a manner that is not allowable for the utilities. As a result suppliers can offer pricing options that will allow consumers to avoid market fluctuations, which is beneficial to consumers.
For example, a consumer can select either a fixed price per unit option or a fixed monthly bill option. These types of pricing options can be secured under a one, two or three year contract. Both of these pricing options are deemed desirable by consumers that value certainty over the lower prices that might be available at times under an index-based price. This would be ideal for a landlord who includes utilities in the cost of rent, or a business that needs certainty for the purpose of pricing their product(s). This would also be valued by consumers on fixed monthly incomes.
Other consumers may be interested in a supplier pricing option that follows the market more closely, but not as closely as the utility gas supply rate. This consumer will desire a pricing option that caps the upside risk allowing some protection from market fluctuations. A consumer in this position may also value a blended rate, which places only a portion of the consumer’s usage at market-based risk.
Another supplier pricing option is a negotiated rate. Large-volume consumers may be able to negotiate lower prices with a supplier, which is not something that can be done with an incumbent utility. Smaller-volume consumers can seek to achieve this result by banding together to aggregate load for negotiation purposes.
The desire for suppliers to achieve market share will drive competition among suppliers. Under a Choice Gas program, consumers will be able to choose among these different products and the competition among suppliers should ensure that the products the suppliers offer are priced competitively. Each of the supplier’s products will have an inherently different price that will not be readily comparable to the pricing of other supplier products, including the utilities’ pass on rate. Thus, a Choice Gas program does not guarantee lower prices, but instead opens up the commodity market to competition.
This market competition is beneficial because consumers value the ability to choose. While price may be a determining factor for some consumers, it will not be the only factor used by consumers that select supplier pricing options. As described above, a landlord may find more value in the certainty of a fixed bill than the ability to purchase natural gas at a lower price. Another way of looking at this is the variety of grocery stores. Within a few miles of most residences in urban and suburban areas are several different grocery store options. Some consumers prefer to pay the higher prices at a grocery store because they value that product over cost savings. Some consumers will buy groceries from the store closest to their home because they value convenience over food type or pricing. Other consumers will only purchase groceries from a store that employs union workers because that is important to those consumers.
Choice Gas is similar in that it provides consumers with many different options so that consumers can choose a billing option that fits either their budget or their values. Having the ability to choose drives consumer satisfaction. It is good public policy to provide these choices and promote market competition.