Study shows electric customers could be at risk

July 9, 2003 — A study just released concludes that recent decisions in three Eastern states could prove very risky for residential electricity customers and could result in more volatile prices.

Barbara Alexander, the author of the study and a national expert on utility consumer affairs, examined recent developments on the design and pricing of Default Service in six states that have adopted retail electric competition and who are ending their rate freeze or transition period.

The decisions made by regulators in Maryland, New Jersey, and Massachusetts “indicate a cause for serious concern and a likelihood that current trends, if not reversed, will carry significant risks of harm to consumers, particularly residential consumers,” Alexander wrote.

The paper, titled “Managing Default Service To Provide Consumer Benefits In Restructured States: Avoiding Short-Term Price Volatility,” was prepared for the National Center for Appropriate Technology (NCAT), a non-profit in Butte, Montana that has served economically disadvantaged people since 1976 by providing information and access to appropriate technologies that can help improve their lives.

Default Service refers to the electric service provided to customers who do not choose a competitive electric supplier, or who are not able to obtain service from a competitive supplier the vast majority of residential and small commercial customers in most states that have adopted retail electric competition.

Recent developments in New Jersey, Maryland, and Massachusetts have based the price of default service almost entirely on short-term wholesale market prices, Alexander’s research shows. Relying on short-term markets is risky, she said, because of the possibility of volatility in prices, including price spikes and other external events such as fuel emergencies.

Other states are taking a more long-term view of the Default Service obligation. Both Montana and Connecticut, in particular, have recently adopted legislation that requires Default Service to be priced and managed based on long-term price trends and reflect a balanced portfolio of short- and long-term energy resources, including renewable resources.

Alexander called for a “new regulatory vision” to guide default service acquisition that is “proactively managed to provide benefits to consumers.”

The key attributes of a Default Service policy that will provide consumer benefits, according to Alexander, are as follows:

“- Assures reasonably stable, reliable, affordable, and environmentally sustainable energy services;

“- Relies on a longer term, diverse portfolio of electricity resources to assure balance and reduce risks of short term volatility in prices, increased regulatory costs or other external events;

“- Lowers environmental impacts of electricity generation, and allows for displacement of old, inefficient generation with new, more efficient generation, resulting in lower overall cost;

“- Strengthens the development of new public benefit programs, and supplements existing programs through resource procurement policies, to assure affordable service for low-income customers, renewable investments and cost-effective energy efficiency resources; and

“- Enhances the development of a healthy wholesale electricity market.

The study is part of NCAT’s continuing effort, through its National Energy Affordability and Accessibility Project, to document how restructuring is affecting low- and moderate-income residential consumers. It was funded by the U.S. Department of Health and Human Services Administration for Children and Families.

The study can be found online at NCAT’s National Energy Affordability and Accessibility Project (NEAAP) web site at: http://neaap.ncat.org/experts/index.htm.


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