National Grid would educate people to shop for power

Will a National Grid plan boost shopping in the long run or is it just a Band-Aid on a poorly structured competitive retail market?
     The Now Is the Time to Choose plan -- to educate customers and encourage them to shop -- takes advantage of the higher price for standard offer service (SOS) at 6.524¢/kwh including a fuel adjustment versus the fixed default service rate of 5.7¢ in January.
     Massachusetts Electric (ME) and Nantucket Electric are asking the Dept of Telecommunications & Energy (DTE) to set a floor on the fuel adjustment in the SOS rate that would keep the SOS rate higher until it's eliminated in March 2005.
     The IOUs are enlisting marketers to join its New Choices program to get marketing support via residential billing inserts and messages and letters and seminars for C&Is.
     Sounds good on the surface but Direct Energy (Centrica) believes the good it might do in driving customers to the market would be short-lived and "could result in no meaningful choices from competitive suppliers" for small customers.
     That's because Massachusetts' competitive retail problems go much deeper than a low standard offer, Direct Energy explained.
     About 650,000 non-low income residential customers take SOS from ME and only 7,800 buy from competitive suppliers yet 320,000 residential customers take default service at rates that reflect the wholesale market.
     Since marketers can't compete with either below-market SOS or market-priced default service, Direct Energy sees other impediments to a robust small-customer market.
     What are they?
     A market structure where the regulated utility is the distributor and "a retail marketer offering as many a three different products while recovering important components of retail service through the delivery rate," Direct Energy noted.
     The three products are SOS, a variable-rate default service and fixed-rate default service.
     The generation charge customers pay through SOS and default rates covers only wholesale supply costs, not billing, customer service and marketing costs that all customers pay through distribution rates, Direct Energy contended.
     That structure means customers who shop pay twice for those retail services -- once through distribution rates and again to their marketers as part of the commodity price.
     How can a marketer possibly compete, Direct Energy asked.

QUOTE OF THE DAY:  One can create the temporary appearance of competition in such a market by increasing the price of the utility offering until the utility's advantage of collecting for retail services in its unavoidable distribution rate is neutralized.
Direct Energy to Massachusetts economic regulators.

It helps to identify retail costs buried in distribution rates and separate them out, Direct Energy noted, but "as long as the utility remains a competitive retailer, it has an incentive to maintain its monopoly" in retail services because it earns a return on them.
     The better solution is to separate the distribution company from the retail provider, Direct noted, adding that it is proposing a legislative remedy that would require that.
     ME's plan "only masks the infirmities" in the retail market's structure until the SOS goes away in 14 months.
     Customers who shop then would return to default service where they pay retail costs only once.
     Even higher SOS rates, Direct Energy explained, don't assure that
competitors will move in since the ME proposal "would create the illusion of competition while maintaining a structure that favors monopoly control" of small customers.
     Direct Energy's vision of a proper launching pad for competitive retail is influenced by the Texas retail model but goes further in creating a level playing field.
     Regulated utilities would be removed completely from the retail business -- though they could have marketing affiliates.
     Marketers would bill and collect for distribution thus giving them the customer relationship.
     The analogy?
     When you buy a book from Amazon.com shipping is another line on the invoice. UPS doesn't bill you for the book or send you a separate bill for shipping.
     Utilities would offer retail services -- billing, for instance -- to marketers at tariffed rates, but wouldn't have a monopoly on billing services, Direct Energy proposed.
     A basic electric service (BES) would replace both the SOS and default service in March 1 2005 until 2007 under Direct Energy's plan and retail suppliers would compete in an auction for the right to serve residential and small business customers who don't shop.
     The BES rate would be set in the auction.
     Suppliers could bid to become the POLR for large C&Is who would pay prices that reflect ISO New England's hourly prices going a step beyond the Texas model.
     Thus the winning basic suppliers get to enter the market with scale, echoing Centrica's buying of AES's price-to-beat customers in Texas.
     Direct Energy likes the Texas restriction on the incumbent's marketing affiliate competing in its service territory until a shopping benchmark has been reached -- 40% in Texas, but Direct Energy proposes 35% in Massachusetts.
     The Massachusetts model is yet another example of the damage that can be done when prices are selected -- not by buyers and sellers -- but third parties with political agendas.
     Getting markets open is hard but getting state regulators to refrain from fixing the prices is a major problem in the US that could best be remedied by relying on the Sherman Act.  (Story originally published in Restructuring Today 12/24/03)