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Fall 2002
NCAT Study Finds Residential Consumers Can Be Worse Off Under Restructuring
A five-state study by the National Center for Appropriate Technology (NCAT) on how
residential consumers have been affected by electric and natural gas market restructuring
documents the adverse impacts of passing through wholesale energy rates to these
consumers.
While these are early findings from a handful of restructured states, the study
pinpoints aspects of several states' models that are detrimental to consumers, as well as
several that serve consumers well, according to Kathleen Hadley, NCAT executive director.
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.
"In those states that have relied on 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," said consumer
expert Barbara R. Alexander, one of the study authors.
At a minimum, the consumer experiences documented by the study suggest that legislators
and regulators should develop policies that protect such customers from uncertainty and
short-term price volatility, she added.
The NCAT study found that, with few exceptions, restructuring laws have not brought
about the dramatic price reductions and competitive power markets that many policymakers
had anticipated. Even in states that passed through wholesale market prices and did not
rely on rate caps for default service, customers have not seen any evidence of a robust
competitive market directed at residential and small commercial customers.
The exceptions noted by NCAT occurred in selected regions in two states, Ohio and
Massachusetts, which have utilized a strategy called opt-out aggregation. The study found
that this strategy has yielded electric bill savings for consumers and given them access
to competitively determined electricity prices. In one Ohio town, customers participating
in an aggregation project saved as much as 17 percent; in a Massachusetts pilot, average
savings have ranged between 11 and 22 percent.
The experiences of these two states are notable, said study author Matthew H. Brown,
because they offer lessons about keeping electricity costs low while bringing the benefits
of competition to residential and other small customers.
Among other findings of the NCAT study:
- The five states studied are still in transition to fully competitive residential
markets, and the transition period will last longer than expected. A variety of
circumstances, such as the failure of a competitive market to develop for residential
customers, the turmoil that has accompanied the development of wholesale market prices,
and the inability of competitive suppliers to "beat" the Default Service price
in each state, have combined to create significant uncertainty and, at the least, a longer
transition period.
- As states move to the end of the transition period, it is clear that the method of
pricing and delivery of Default Service (service for customers who do not have a
competitive supplier) will be crucial to residential customers. "No state has yet
confronted the long-term policy implications of the failure of a competitive market to
develop for residential customers or adopted policies and programs that will govern the
provision of Default Service after the end of the transition period," Ms. Alexander
said.
- Competitive market abuses, particularly door-to-door marketing, point to the need for
additional regulatory oversight. Door-to-door marketers utilizing threats,
hard-sell tactics, and misrepresentations have been reported in Georgia, Texas, New York
and elsewhere, and they represent the highest number of customer complaints. These
practices suggest that door-to-door marketing may require closer regulatory supervision
and the adoption of additional disclosures and educational materials.
- With the exception of Georgia at the onset of its market opening, the five states have
attempted to prevent the most obvious abuses of a competitive market. The other four
states have adopted comprehensive consumer protection programs and policies: consumer
education programs, supplier licensing, mandatory price and fuel mix disclosures,
enrollment and switching protocols designed to prevent slamming, contract and bill
disclosures, prohibitions on redlining and anti-discriminatory conduct, and beefed-up
enforcement tools for utility regulatory commissions, particularly the ability to assess
civil fines and penalties for noncompliance. Texas and Ohio, in particular, are models for
well-designed consumer education and protection programs
NCAT conducted the study as part of its National Energy Affordability and Accessibility
Project (NEAAP), which is funded by the U.S. Department of Health and Human Services,
Administration for Children and Families, Office of Planning, Research and Evaluation. The
study, titled "The Transition to Retail Competition in Energy Markets: How Have
Residential Consumers Fared?" is available in the Experts Corner on the project
website at www.ncat.org/neaap.
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