Pennsylvania Retail Market Changes, "More Likely To Set Competition Back Than To Move It Forward," Retail Suppliers Say

The end-state retail market design proposed in a Pennsylvania PUC tentative order, because it retains subsidized default service offered by a single, utility provider granted automatic cost recovery, "are more likely to set competition back than to move it forward," several retail suppliers said in comments to the PUC.

As first reported by Matters, the much ballyhooed Pennsylvania retail markets investigation appears to be grinding to a conclusion embracing the status quo, or, more specifically, the status quo that existed prior to the enactment of the Act 129 "prudent mix" default service standard. Specifically, the tentative order would retain the utility in the default supplier role, and rely on quarterly full requirements contracts for small customer default service akin to the former prevailing market price standard (which was already in place then jettisoned once before)

See prior story on how minimally the end-state proposal in the tentative order differs from the current market design, which the PUC had conceded acts as barrier to effective competition when initiating the retail markets investigation

"In short, the PUC has decided to keep into the place the very impediments which it rightly recognizes are inhibiting the development of a fully competitive marketplace," the Pennsylvania Energy Marketers Coalition said.

Interstate Gas Supply, Inc. and Dominion Retail (EGS Parties) said in joint comments that they, "are extremely skeptical that moving to a ninety (90) day procurement cycle under today's market conditions will allow for the development of a robust competitive market."

The EGS Parties doubt the benefit of the PUC's proposed end-state because it maintains the existing Price to Compare (PTC), which, "is not a comparable product in any sense if it does not contain all of the characteristics and associated costs of providing a product at retail to consumers."

"Retail competition will struggle to develop as long as there is an option labeled 'default service' pursuant to which customers who do nothing to engage in the market receive the benefits of the service without paying the full cost of doing so," the EGS Parties said.

Specifically, costs of default service not currently included in the Price to Compare, and instead paid by both shopping and non-shopping customers, include certain administrative costs, as well as costs "avoided" by the default supplier, which is gifted customers by regulatory design.

"The default service provider is simply handed ... customers without incurring any of the costs of finding, soliciting, enticing, enrolling, verifying, and maintaining the relationship. This includes that rather significant expense of developing and maintaining the utility brand identity, which in itself is a substantial barrier to competition," the EGS Parties said.

"To be successful, any end state proposal must address the reality of the subsidies first, or simply eliminate the single default service benchmark," the EGS Parties said.

Any changes which fail to address these issues, such as the changes in the PUC's proposed end-state, "are superficial, non-substantive, and cosmetic; and, are more likely to set competition back than to move it forward because of the intrinsic inequity of providing consumers with the advantages of what is a wholesale competitive price without also bringing into the equation all of the costs (actual and avoided) in both providing and utilizing that service," the EGS Parties said

"The disparities of the PTC and wholesale markets would be far less problematic if all customers did not initiate service from the EDC. Stated differently, the level of any EDC's PTC would be far less significant as a barrier to entry if EGSs were not required to gain market share by migrating customers away from automatic default service provided at the PTC," the EGS Parties said.

Among other things, if the current model is maintained, the EGS Parties proposed that the best first step in resolving the current, lower than optimal levels of customer shopping, which the PUC recognizes as a problem, is to require customers to choose an electricity provider in the first instance when establishing service. As an initial step, all new or moving customers should be required to affirmatively choose an electricity supplier from a list of supply options, which could include default service. The process cannot, however, suggest any superior status to the default service option, the EGS Parties recommended.

Customers who, for whatever reason, do not choose would be assigned to the suppliers on the list, the EGS Parties recommended.

"This process would constitute a significant remedial step by eliminating the advantage currently enjoyed by the utility through the monopolistic provision of default service, and the benefit that default service customers enjoy by having the EDC provide what is essentially a premium energy product to them at no additional cost to them," the EGS parties said.

"If the Commission seeks to promote a sustainable and robust competitive market, the preeminence of default service must be mitigated or eliminated. The only way to do so is to take away its inherent advantages. Default service providers should not be prioritized to receive all customers first. Default service customers should not be the beneficiaries of a premier shopping service at no charge. Lastly, default service providers should not be insulated against the risk to which competitive suppliers will be exposed in the ninety (90) day market when volatility is introduced," the EGS Parties said

Though not as forcefully, other retail suppliers expressed concerns that the end-state model proposed by the PUC will not achieve the PUC's stated goals of a workably competitive market.

"[U]unless and until the utilities exit competitive functions, the market will continue to be characterized by a patchwork of 'fixes' to overcome the inherent market distortions associated with a utility default service Price to Compare and the unfair competitive advantages inherent in retaining the incumbent or historical monopoly in this role for any extended period of time beyond a transition to a fully competitive end-state," the National Energy Marketers Association said.

The Retail Energy Supply Association, while supporting the PUC's proposed reforms as an interim step (preferring the implementation of EGS-offered default service), cautioned the PUC that other more mature retail electricity markets -- such as New York -- have implemented default service structures similar to that proposed by the PUC, "and have not experienced a significant shift of residential customers moving into the competitive market."

RESA noted that, statewide, nearly 80% of residential customers in New York remain on default service.

Docket: I-2011-2237952