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By Kenneth W. Costello
Senior Institute Economist

And Mohammad Harunuzzaman, Ph. D.
Senior Research Specialist

October 2000

Gas choice programs started in a small Iowa town in 1995. Since
then, programs have spread across twenty three states and the District of
Columbia with about three million customers (mostly residential
customers) participating. Some gas utilities have developed second
generation programs, with more customers allowed to participate and
more permanency in the duration of the program. The evidence to date,
at least as interpreted by many industry observers, has been mixed: many
residential customers and marketers have participated in the programs,
but the benefits have generally not been significant. Perhaps the best
characterization of the outcome of gas choice programs is that "we have
learned much and the results for many, if not most, programs are
encouraging enough to move ahead."
This study attempts to add to the "knowledge base" concerning the
benefits that residential gas customers have received from choice
programs. This issue has both academic and policy importance. The
academician wants to know whether the competition induced by choice
programs has benefitted consumers as expected and, if so, by how much.
Practitioners and policymakers, namely the utility, the public utility
commission and are interested in knowing
whether these programs are "right and whether should initiated or expanded. Naturally, one important piece of information in
determining this is the actual benefits to consumers. After all, choice
programs are rationalized as the preferred mechanism to disperse the
benefits of gas industry restructuring and competition to small retail
customers, including residential customers.
This study largely confirms the perception by industry observers of
outcomes of gas choice programs to date: customers have generally
received limited benefits from current programs - the average price
savings for all the selected programs in the study are 3.02 cents per
therm or 7.8 percent; and, marketers and other energy service providers
have not yet successfully learned how to repackage different value-added
services that customers demand and at a profit to suppliers.
Consequently, the benefits of past and current gas choice programs come
almost exclusively in the form of lower gas bills. It is inconceivable that
gas choice will accelerate much beyond its current status without the
availability of value-added services. These services will provide greater
benefits to consumers and opportunities for suppliers to earn much higher
profit margins than what they have to date.
This study did provide some surprises, at least to the authors.
One was the finding that for several of the programs some marketers
offered prices above the local gas utility's standard offer price. No
information was available on how many customers actually purchased
gas from these marketers. finding was the wide range of prices
offered by marketers in some oroarams. More than anvthina. this
fact may reflect an expected characteristic of a newly structured market
where consumer misinformation and confusion commonly occur.
Overall, the study provides empirical support for the commonly held perception that residential consumers, to date, have benefitted from
gas choice programs but not significantly. Marketers in general have
found it difficult to overcome the economics of commodity retailing for
mass market customers where low profit margins are the norm. To
reiterate, for gas choice programs to achieve greater success in the
future, marketers face the challenge of repackaging different services,
both gas and nongas, so as to produce value-added benefits to residential
consumers; so far, this has not occurred.

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