Retail Unbundling - Pennsylvania

Retail Unbundling - Pennsylvania
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Status: The State has begun to implement comprehensive unbundling for its residential gas customers.

Overview: Competition for natural gas supply has been allowed in Pennsylvania since enactment of the Natural Gas Choice and Competition Act in 1999. However, as of January 1, 2009, according to the Pennsylvania Office of Consumer Advocate, only 7 percent of the State's residential customers purchase natural gas from alternative suppliers, down substantially from the 10 percent level in December 2001 although 25,000 more than the 6 percent level in 2007. In an effort to increase "efffective competition" for natural gas supply, the State Public Utility Commission (PUC) in September 2008 approved a 2-year action plan to reduce or eliminate barriers to marketer participation in choice programs. The plan is based on recommendations from a PUC-led task force known as SEARCH (Stakeholders Exploring Avenues for Removing Competition Hurdles), which was formed after the PUC report to the General Assembly in October 2005 concluded that the number of suppliers and buyers in choice programs across the State was insufficient for effective competition and that the marketplace lacked "accurate and timely price signals." The report noted that suppliers felt that substantial barriers to market entry exist because of the local distribution companies’ (LDCs) differing and high security requirements, excessive and varying penalties for nondelivery, differing nomination and delivery requirements, and misleading price comparisons.

According to the PUC, the action plan will consist of two phases. The first phase will include formation of an Office of Competitive Oversight within the PUC, advocacy and development of legislative changes dealing with capacity assignment and release, and expansion of the purchase of receivables program. (In purchase of receivable programs, the LDC is responsible for billing the customer, collecting payment, and then reimbursing the marketer, even if the customer does not pay.) The second phase will include three rulemakings to address the respective issues of LDCs, marketers, and business practices. LDC issues include price comparisons, purchase of receivable programs, and mandatory capacity release. Marketer issues include creditworthiness and security requirements, and business practice issues include standardization of LDC operating rules and electronic bulletin boards.

In December 2008, the PUC initiated a rulemaking to change the requirements for marketer licensing and revise the consumer protection guidelines in purchase of receivable programs. It would let marketers use accounts receivables in purchase of receivable programs to fulfill some or all of their security requirements. It would also specify standard language for the financial instruments used for security and reasonable criteria for LDCs to use in setting the amount of security marketers need for licensing approval. Comments are due in February 2009.

Customers in five LDCs’ service areas (Columbia Gas of Pennsylvania, Inc., Dominion Peoples, Equitable Gas Company, PECO Gas Company, and UGI Gas Utilities, Inc.) are choosing to buy gas from marketers at this time. The first three of these LDCs had conducted extensive pilot choice programs prior to the legislation. At a hearing in September 2004, the consumer advocate noted that nearly all the switching to third-party suppliers has occurred in areas that had extensive pilot programs in place before the choice legislation was enacted. During these pilot programs, customers who switched to marketers were exempted from paying a 5-percent gross receipts tax. However, this advantage was eliminated with passage of the choice legislation, which abolished the tax as of January 1, 2000. The consumer advocate also noted that participation in choice programs may be hindered by the difficulty in tracking the “price to compare” since it changes quarterly and the sometimes long period (up to 48 days or more) it can take for a switch to occur.

All marketers must be licensed by the PUC in order to provide natural gas service in Pennsylvania. As of December 2008, 26 marketers were licensed to serve residential customers in the State, but only 7 companies were enrolling new customers, up from 4 in 2007.

EIA State Data: In 2007, Pennsylvania had 2,620,181 residential and 234,542 commercial customers who consumed approximately 206 and 130 billion cubic feet of natural gas, respectively. The average prices paid for natural gas purchased from local distribution companies and marketers by residential and commercial customers were $14.66 and $12.77 per thousand cubic feet, respectively.

Eligibility and Participation in Retail Choice Programs: Retail unbundling in Pennsylvania began in November 1996 with the implementation of pilot programs by Columbia Gas of Pennsylvania (August 1996) and Equitable Gas Company (September 1996). Approximately 25,000 residential and small commercial customers were eligible to participate in these early programs. In 1997, three additional LDCs initiated customer choice programs (PG Energy, Inc., National Fuel Gas Distribution Corp., and People's Natural Gas Company, now doing business as Dominion Peoples). As of December 2007, about 1.6 million residential customers have access to competitive suppliers and about 160,033 have enrolled in choice programs, down from 179,000 in December 2006, 165,000 in December 2005, and 181,000 in December 2004.

Eligibility and Participation by Customer Class, December 2008

Customer Type	2007 Customer Total	Eligible December 2008		Participating December 2008
Customer Type	2007 Customer Total	Total	Percent of Customers	Total	Percent of Eligible	Percent of 2007 Customer Total
Residential	2,620,181	2,629,972	100	185,387	7.0	7.1
Commercial	234,542	234,542	100	22,448	9.6	9.6
Total	2,854,723	2,864,514	100	207,835	7.3	7.3
Sources: 2007 Customer Total and 2008 Estimated Commercial Participation: Energy Information Administration, Natural Gas Annual 2007 (January 2009). Residential Eligibility and Participation: Pennsylvania Office of Consumer Advocate (January 2009).

Residential Customer Eligibility and Participation by Local Distribution Company, January 1, 2009

Local Distribution Company	Number of Residential Customers
Local Distribution Company	Eligible	Participating	Percent Participating
Columbia Gas of Pennsylvania	375,061	63,088	16.8
Dominion Peoples	330,062	106,212	32.2
Equitable Gas Company	240,709	11,987	5.0
PECO Gas Corporation	443,428	520	0.1
UGI Gas Utilities	297,192	3,580	1.2
Other (6)	943,520	0	0
Total	2,629,972	185,387	7.0
Source: Pennsylvania Office of Consumer Advocate (January 2009).

Regulatory and Legislative Actions on Retail Unbundling

Summary: The Pennsylvania General Assembly passed the Natural Gas Choice and Competition Act in June 1999, which called for statewide unbundling of the natural gas industry to begin on November 1, 1999, and be completed by July 2000. It directed natural gas distribution companies to file restructuring plans with the Pennsylvania Public Utility Commission that include provisions for supplier of last resort, universal service for low-income customers, and energy conservation. The PUC formulated regulations to implement the legislation using the input from working groups to deal with safety and reliability, customer information disclosure, standards of conduct, and consumer education. The PUC also formulated regulations concerning the licensing of natural gas suppliers. According to the schedule set by the PUC in July 1999, four LDCs were to file their restructuring plans in August 1999, two in October, three in December, and one in February 2000. Columbia Gas of Pennsylvania's restructuring plan was approved in December 1999, and the other LDC plans were approved during 2000.

The Natural Gas Choice and Competition Act specified that after July 1, 2004, the PUC is to initiate an investigation or other proceeding to evaluate the competitiveness of natural gas supply services in the State and report its findings to the General Assembly. If the market is not sufficiently competitive, the PUC is to reconvene the stakeholders to consider measures, including legislative, for encouraging competition.

The PUC began its investigation in May 2004 and submitted its report to the General Assembly in October 2005. The report concluded that the number of suppliers and buyers in choice programs across the State was insufficient for effective competition and that the marketplace “lacks accurate and timely price signals.” The report also noted that, according to suppliers, substantial barriers to market entry exist because of the LDCs’ differing and high security requirements, excessive and varying penalties for non-delivery, differing nomination and delivery requirements, and misleading price comparisons. Because of the report’s findings, the PUC called on stakeholders to come together by the end of 2005 to consider what actions should be taken to encourage competition on a statewide level. A draft report of the group's recommendations was posted in May 2008 and the final report was released in September 2008, forming the basis for the 2-year action plan currently underway in an effort to increase retail competition.

Regulatory and Legislative Actions

Legislation	10/07	Special Legislative Session on Energy Policy. Proposed House Bill 40 would provide for low-interest loans to utilities to replace deficient and aging pipeline facilities. House Bill 41 would give the PUC authority to mandate acquisition of Philadelphia Gas Works (PGW) by a capable public utility if considered necessary. It would also establish a distribution surcharge for all LDCs in the State, with a special surcharge provision for PGW. The bills were referred to the Consumer Affairs Committee in November 2007. (No further action reported as of December 2008.)
	12/04	Responsible Utility Consumer Protection Act (Senate Bill 677). The Act amended Title 66 by adding Chapter 14 (sections 1401-1418), which is intended to protect responsible bill paying customers from rate increases attributable to the uncollectible accounts of customers that can afford to pay their bills but choose not to pay. The legislation is applicable to electric distribution companies, water distribution companies, and larger natural gas distribution companies (annual operating income in excess of $6 million). It requires the PUC to report to the General Assembly every 2 years as to the degree to which the law's requirements are being implemented; the effect upon the utilities' cash flow, uncollectible levels, and collections; the level of access to utility services by residential customers; and the effect upon the level of consumer complaints and mediations. The report may also contain recommendations about legislative or other changes.
	06/99	Natural Gas Choice and Competition Act (HB 1331). Provides for restructuring of the natural gas industry so that consumers can choose their own gas supplier. The act also deletes a 5.1-percent gross receipts tax on gas utility sales, effective 1/1/2000. A 6-percent "sales" tax will remain applicable to certain nonresidential customers. LDCs must file restructuring plans that unbundle all natural gas supply services and that specify system reliability standards and capacity contract mitigation guidelines. LDCs must also specify provisions for billing, dispute resolution, customer information, slamming prevention, etc. LDCs can continue merchant services and their affiliates can participate as marketers, abiding by code of conduct rules (interim rules adopted 11/18/99). Until 7/1/2002, an LDC can assign, release, or transfer capacity to licensed gas suppliers who in turn must accept the existing contract terms if they serve customers on the LDC's system. After 7/1/2002, the PUC can prevent assignments if it considers it warranted. Rates charged by LDCs are frozen until 2001, but LDCs can request permission to capitalize and defer costs over an "appropriate" period. LDCs can recover all costs incurred under transportation pilot programs approved before 2/1/99. Costs incurred under these pilots through 10/31/04 may be recovered if the volumetric charge does not exceed 1% of the LDC's approved volumetric charge for residential sales service. In 5 years (2004), the PUC is to evaluate the competitiveness of natural gas supply services in the State and report its findings to the General Assembly. If the market is not sufficiently competitive, further actions will be considered.
Regulatory Action	12/08	PUC Proposes Rule Changes Regarding Security Requirements for Marketer Licensing. The PUC asked for comments on proposed rule changes that would revise the consumer protection guidelines in purchase of receivable programs and change licensing security requirements. It would let marketers use accounts receivables in purchase of receivable programs to fulfill some or all of their security requirements. It would also specify standard language for the financial instruments used for security. Comments are due in February 2009.
	09/08	PUC Initiated a 2-Year Action Plan to Increase Retail Competition and reduce or eliminate barriers to marketer participation in choice programs. The plan is based upon recommendations from a PUC-led task force charged with finding ways to create effective competition for natural gas supply. The plan will be implemented in two phases. The first phase will include formation of an Office of Competitive Oversight within the PUC, development of legislative changes dealing with capacity assignment and release, and expansion of the purchase of receivables program. The second phase will include rulemakings to address the respective issues of LDCs, marketers, and business practices. LDC issues include price comparisions, purchase of receivable programs, and mandatory capacity release. Marketer issues include creditworthiness and security requirements, and business practice issues include standardization of LDC operating rules and electronic bulletin boards.
	05/08	Draft SEARCH Report Posted for Public Access. The report of the Natural Gas Stakeholders Working Group called SEARCH ("Stakeholders Exploring Avenues for Removing Competition Hurdles") summarizes the work of four subgroups tasked with examining issues identified as being barriers to effective competition at the retail level and finding possible solutions. The PUC was required to convene the SEARCH group after reporting to the General Assembly in 2005 that effective competition did not exist.
	12/07	New Case and Document Management System. The system will permit electronic filings, which will require PUC procedural changes. Proposed revisions were published on Nov. 17, 2007, with comments due by Jan. 16, 2008.
	09/07	PUC Rejected Philadelphia Gas Works' (PGW) Request to Remove Capacity Release Credits and Off-System Sales Margins from the PGW Rate. The PUC approved an increase in residential rates but rejected PGW's proposal to include certain revenues in base rates to offset long-term debt borrowing.
	09/07	The PUC Reported that PPL Corp. Intends to Sell Its Distribution Company, PPL Gas Utilities Corp. in 2008. The company serves about 77,000 natural gas customers in 34 Pennsylvania counties.
	06/06	Stakeholders Working Group Renamed SEARCH (Stakeholders Exploring Avenues for Removing Competition Hurdles). The PUC-led task force includes natural gas distribution companies (LDCs), marketers, and consumers. The group is examining issues related to mandatory capacity assignments, purchase of receivables, consumer education, consumer protection rules, and costs of retail supply services and also considering possible incentives that might result in LDCs exiting the merchant function. The group's report will be submitted to the PUC sometime in early 2007.
	03/06	PUC Adds Fourth Subgroup to Stakeholders Working Group: Competition Monitoring. The PUC confirmed the previously announced subgroups as well as a fourth one, Competition Monitoring. The subgroups will meet independently and provide updates at meetings of the entire working group.
	01/06	Stakeholders Working Group Meeting Scheduled and Subgroups Formed. The PUC proposed three subgroups to study specific issues and asked for volunteers to participate in each group. These subgroups are: Inter-Company Activity; Customer Interface; and Cost of Service.
	10/05	Report on Competition Submitted to General Assembly. The PUC found that effective competition does not exist in the retail natural gas supply market statewide and that the PUC should reconvene stakeholders in the industry to explore additional ways to increase competition. The group is expected to meet by the end of the year. One commissioner (Shane) objected to reconvening the stakeholders group and instead recommended repeal of the Natural Gas Choice and Competition Act.
	09/04	Special Hearing Held to Determine Competition Level. The PUC heard comments from natural gas suppliers, natural gas distribution companies, consumer advocates, and industry representatives as to the status of competition in the retail natural gas market. In general, companies cited a falloff in the number of participating marketers and customers.
	05/04	Investigation Launched into Status of Retail Competition. The PUC directed LDCs and suppliers to provide data on gas sales, transportation volumes, and the number of customers served since 1999, as part of its investigation into the competitiveness of natural gas supply services in the State. The data and any comments are due by August 27, 2004, and a hearing is scheduled for September 30, 2004. At the conclusion of the investigation, the PUC is to report its findings to the General Assembly.