Gas Aggregation and Low-Income Customers

Compiled by the LIHEAP Clearinghouse, April 1999

According to the U.S. Department of Energy, residential customers in 1997 were billed $34.6 billion for natural gas deliveries, an average of $617 per customer. For a household earning $8,000 a year, that represents 7.7 percent of its income. Non-low-income households pay, on average, only 4 to 5 percent of their incomes for heating.

For low-income natural gas customers, who spend a disproportionately large share of their income to heat their homes, lower prices through choice can be especially attractive. While the low-income market is not necessarily attractive to non-utility gas suppliers or marketers, some states have taken steps to make it so.

Low-income customer enrollment in certain assistance programs allows them to be easily identifiable as a group, and their gas needs to be efficiently pooled or aggregated. In some states, these assistance programs may also guarantee gas suppliers' payment for all or part of the gas purchased on behalf of the low income.

The presence of assistance programs that already "aggregate" large numbers of low-income households was a major factor in decisions to undertake low-income gas aggregation pilots in Ohio, New York and Pennsylvania. It was also a key factor in the savings and subsequent continuation of Ohio's Columbia Gas Customer CHOICE pilot.

Following is a summary of gas aggregation pilots or programs involving low-income households in Ohio, Pennsylvania, and New York, and a look at gas customer choice experiences to date in Michigan, Massachusetts and Georgia, where low-income customers have not been aggregated.

OHIO

Under Columbia Gas of Ohio's Customer CHOICE program, piloted in the winter of 1997, natural gas customers of Columbia Gas were able to choose another supplier, while Columbia continued to deliver the gas through its distribution system, maintain the safety and reliability of the system, and handle customer billing.

In Ohio, gas costs, which include the commodity itself and transportation from the wellhead to the facilities of the local gas utility, are roughly 60 percent of the consumer's monthly bill. The other 40 percent are distribution costs, system maintenance, meter reading, billing, customer service and safety. The goal of the pilot was to make gas transportation competitive, allowing alternative suppliers to compete with Columbia in supplying natural gas.

In Columbia's pilot, about 60,000 participating non-low-income customers reduced their monthly gas bills by as much as 18 percent. Two other gas companies, East Ohio and Cincinnati Gas and Electric also had customer choice pilots, although they did not achieve the savings that Columbia's customers did. Columbia was given approval to expand the pilot throughout its territory in the spring of 1998; the other two companies were allowed to modify and continue their programs.

Columbia's low-income Percentage of Income Payment Plan (PIPP) customers were handled differently in its pilot and in its current expanded program. Rather than having a choice, their gas needs were pooled together and bid out separately to competing gas suppliers.

The winning pilot bid came in at 12 percent below Columbia's Expected Gas Cost. In a report on the initial eight months of the pilot, Columbia said PIPP customers saved an average of 7.1 percent off their otherwise applicable Columbia bill. The average savings was less than the 12 percent because the latter is a factor of the Expected Gas Cost portion of the bill, not the entire bill.

Columbia purchased the gas for its PIPP customers and retained the meter-reading and billing functions. It also continued to provide and charge for transportation services. Arrearages went on Columbia's books, not the supplier's.

"The feedback on the program has been overall very positive," said Richard Sims, director of community and customer support services for Columbia Gas.

From the perspective of LIHEAP, the gas aggregation program operates seamlessly with LIHEAP and the PIPP, according to Vicky Mroczek, of the Ohio Department of Development, Office of Community Services, which administers LIHEAP and the PIPP. While PIPP customers still pay their required percentage of income, as described below, the lower gas price means the LIHEAP benefit goes further and more households can be served, she said.

First implemented in 1983, based on an order of the Public Utility Commission of Ohio, Ohio's PIPP is the largest and oldest state mandated plan in the country, serving about 200,000 households each year.

Qualifying PIPP customers pay 10 percent of the household's current gross monthly income to the utility company that provides the primary source of heat and 5 percent of the household's current gross monthly income to the company providing the secondary source of heat. A customer served by a combination utility company or with an all-electric home pays 15 percent of monthly income to that utility company.

Electric customers pay the specified percentage of income during the heating season, (November 1 through April 15); during the non-heating season (April 16 through October 31), they pay the percentage of income or the current bill, whichever is higher. Gas customers pay 10 percent of their income year round.

Customers who are at or below 50 percent of the federal poverty level pay 3 percent instead of 5 percent for their secondary source of heat during the winter season only. Or, if the lower income customer is served by a combination utility company or has only one heating source, the customer pays 13 percent of gross monthly income to that utility company. If customers remain current on their PIPP payments, they cannot be shut off during the winter months.

Ohio's LIHEAP is coordinated with the PIPP; households may sign up for both at the same time on a joint application. In practice, most households are enrolled or reinstated in the PIPP when they apply for LIHEAP crisis assistance. The LIHEAP program determines household eligibility for PIPP, and each year re-verifies eligibility. Households must apply for LIHEAP in order to qualify for PIPP, and income eligibility for both LIHEAP and the PIPP is 150 percent of the federal poverty level.

The amount of the low-income customer's bill that is not covered by a combination of the customer's PIPP payment, LIHEAP, and any other energy assistance the customer may receive, is absorbed by the utility ratepayers. Each year, the utilities file the amount of their PIPP debt with the PUCO, and a "tariff rider" or surcharge is placed on other customers' bills to bring down the debt. For residential natural gas customers, the tariff rider averages about $12 per year.

Savings for low-income aggregated customers are not the same as savings for other choice customers, according to Werner Margard, the state's assistant consumer's counsel. Rather than "in-pocket" savings, for PIPP customers savings means that their arrearages are either declining or not accumulating as quickly as they would, he explained, which translates into a lower surcharge for all ratepayers.

"We have every reason to believe those customers' arrearages are actually declining," Margard said. "It's just not dollars they can see and touch." Though it's too early to tell, Margard said the state expects to see reductions this year in the surcharges on utility customer bills that are used to finance the PIPP program.

The guarantee of cost recovery through the surcharge is part of the reason the PIPP pool of customers is attractive to gas marketers, according to Dave Rinebolt, director of Ohio Partners for Affordable Energy. It has meant even lower bids on natural gas for aggregated customers. Rinebolt said vendors were also given data that shows PIPP customers defaulted on their payment in the same proportion as non-low-income customers.

"So the vendors said this is a good group to bid on when they looked at it from a cash-flow standpoint," he said. "That's the other advantage for vendors when they bid on this pool. You get all these PIPP customers. You get to sell them gas. You don't have to sign them up one by one, so the bids reflect that."

In Ohio, gas pools are determined by distribution company territory, such as the territory covered by Columbia Gas or Cincinnati Gas and Electric Service. Rinebolt said gas utilities in Ohio have a big stake in the success of the choice program because it means greater profits.

"They want their choice programs to work," he said, noting that natural gas utilities aren't allowed by law to make a profit on the commodity and in many cases are locked into contracts to purchase gas at higher-than-market prices. Utilities are permitted by law to pass on the cost of negotiating gas contracts, transporting the gas, advertising it and billing customers, but they cannot make a profit, per se, on the gas itself.

However, if they sell natural gas through an unregulated subsidiary, they may make a profit. Obviously, Rinebolt said, "They would much rather make a profit than not make a profit." The cheaper gas that results has customers lining up, including other groups seeking to take advantage of aggregated purchases. Rinebolt said business groups, including retail stores and chambers of commerce, and non-profits, such the Farm Bureau, community action agencies and public housing authorities, are joining pools to aggregate gas purchases from non-regulated vendors.

His group, Ohio Partners for Affordable Energy, mailed membership applications to 2,100 non-profit groups when it set up its own gas purchasing pool last August.

Rinebolt noted that the success of the Columbia Gas pilot has positively influenced a pending electric restructuring bill for Ohio. Expected to pass this spring, the pending legislation draws upon the Columbia Gas bid experience with low-income customers, and will mandate aggregation and bidding of these customer's electricity needs. "If you can reduce the overall price of electricity to PIPP customers, you save money for PIPP customers and all customers," Rinebolt said.

More important, he said, the Ohio legislation would allow savings from the reduced surcharge to fund a targeted weatherization program, which would further reduce the PIPP surcharge.

For more information, contact Richard Sims, Columbia Gas, (614) 460-6940; rsims@columbiaerenrgygroup.com; or Rinebolt, OPAE, (419) 425-8860; drinebolt@aol.com

PENNSYLVANIA

Columbia Gas has exported its gas aggregation program to neighboring Pennsylvania, but with a difference. Now in its second year, the pilot serves 760 low-income customers in three counties including and surrounding Pittsburgh.

Debby Cochenour, manager of customer programs for Columbia Gas of Pennsylvania and Maryland, explained that low-income customers whose gas purchases are aggregated are enrolled in the utility's low-income Customer Assistance Program, or CAP, started in 1992, in which customers pay a percentage of their income for gas.

(All of Pennsylvania's regulated gas and electric utilities provide CAPs to low-income households; in 1997 utilities spent nearly $41 million on them, counting administration. CAPs vary by utility, but they include rate discounts, affordable pay plans, and arrearage forgiveness).

The utility depends for its gas on 14 marketers, only one of which is a subsidiary of Columbia. The other 13 are either independent or are subsidiaries of other gas utilities. For its CAP customers, Columbia asked for bids from among the marketers and selected the lowest bid on a yearly contract.

CAP customers as a pool are attractive to marketers for several reasons. First, as in Ohio, they are already identified as a group and can be signed up easily, and as in Ohio, they are automatically enrolled in the program if they fall within the aggregation service area. Second, the utility guarantees payment for 100 percent of their gas bill.

"We guarantee 100 percent on receivables, and we get you all the customers in one pool," Cochenour said. "Technically, we do not get any customers for the marketer; rather, we contract individually with each customer but contract on the pool of customers to the marketer. This protects the identity of our CAP customers from the participating marketer."

The company is able to guarantee receivables in the CAP aggregate because it filed for recovery of the shortfall in a rate filing and received approval to recover 100 percent of any shortfall from low-income CAP customers, Cochenour said. So the utility has the added incentive to find lower-cost gas for such customers, she said, adding, "What we are hoping to do is reduce our own shortfall."

Yet the choice program for CAP customers has not produced the savings it has for other residential customers who have been paying on average 8.65 percent less for natural gas. The savings for CAP customers is a more modest 2.1 percent. That represents a savings to the company shortfall, which is the difference between what the customer used and what the customer was asked to pay.

"This is recovered in our rates so the ratepayer benefits. The lower shortfall equates to lower rates, so the company benefits and the CAP customer benefits because it helps to keep the program affordable," Cochenour said. She attributes the savings difference partly to the fact that the utility buys gas for CAP customers on a yearly contract, rather than monthly; the yearly contract has less flexibility.

Although other gas utilities in Pennsylvania offer residential customer choice programs, only Columbia Gas has a low-income gas aggregation program. CAP customers who are paying a reduced monthly bill are unlikely to benefit by switching suppliers, said Cindy Datig, executive director of the Dollar Energy Fund, a fuel fund which also administers several CAPs.

"If they switch to a new supplier they'd just be creating a new bill for themselves," which would not be covered, she noted. The customer's CAP payment goes to the distribution portion of the bill, which is also the case under Pennsylvania's electric restructuring legislation, wherein universal service program benefits (including CAPs) and LIHEAP benefits are assigned to the local electric distribution company.

It is expected that the Pennsylvania legislature will address gas restructuring later this year and that universal service and consumer protection provisions will closely mirror those of the electric restructuring bill.

For more information, contact Cochenour at (412) 572-7152; dcochen@columbiaenergygroup.com

NEW YORK

The third gas aggregation program is in New York, where National Fuel Gas Distribution Corp. has collaborated with state and local government agencies and the Public Service Commission (PSC) to test a new method of providing natural gas service to some low-income customers.

The two-year Public Assistance Cooperative for Energy (PACE) became effective for about 7,000 public assistance households in Erie and Chautauqua counties on April 1, 1998. Under PACE, the counties pooled and competitively bid the gas supply needs of certain public assistance households who were National Fuel customers. Texaco, the selected supplier, offered locked-in savings for the project period for participating customers.

National Fuel provides transportation service and remains responsible for all meter reading, billing and gas safety matters. Erie County chose to participate in part because its Department of Public Works had five years of experience in purchasing natural gas from alternative suppliers.

Overall, the program has been very successful, according to Jonathan Gruchala of National Fuel, and Bruce Bowdy of the Office of Temporary and Disability Assistance, the LIHEAP grantee, which participated in the pilot design.

"We have come very close to realizing the savings we projected," Gruchala said, adding that to date average savings to participating households have been almost 9 percent, with a range of from $80 to $120 annually per household.

In an order approving National Fuel's filing for the aggregation program, the New York PSC wrote that "the pilot program would not only promote competition in the gas market, but more importantly it would bring the benefits of competition to a group of customers who might not necessarily be pursued by non-utility providers. The pilot is expected to reduce the bills of each participating customer up to $77 each year, assuming all savings are passed through to the participants."

A program description provided by National Fuel said savings would incur on the actual natural gas fuel supply, or gas cost, and the cost of transportation, or transport cost, of the gas from the wellhead source to the customer's residence. Additional savings would result from avoided gross receipts taxes and other state taxes, which suppliers are not required to pay. National Fuel estimated per household savings of up to $125 per year.

In its FY 1998 LIHEAP leveraging report, New York reported savings of nearly $160,000 from the first six months of the pilot.

The participating low-income customers are known as restricted or "vouchered" customers. Under New York's welfare program, these households are entitled to a monthly energy allowance, but because they are vouchered, their natural gas heating bill is paid as billed each month by the Erie or Chautauqua County Departments of Social Services. Their energy allowances are deducted from their monthly public assistance grant.

The accounts of vouchered households must be reconciled annually, Bowdy said. In that process, some are found to have been overpaid through their energy allowances and they end up owing the county, which must recoup the overpayments by reducing the amount of their public assistance grant by up to 15 percent per month. Other vouchered clients, upon reconciliation, are found to have been underpaid and the county gives them a refund.

Major goals of the pilot are to reduce the amount of recoupments owed by the clients, or to increase the amount recovered by the client in the annual reconciliation, both of which have been accomplished, according to Bowdy and Gruchala.

Pre-pilot research by National Fuel showed that vouchered households used 33 percent more natural gas than the average residential customers, which was another reason for including them in the pilot.

The New York pilot is similar to the Ohio program in that the vouchered households are a group that is easy to identify and to aggregate, and the low-income household's gas bill is guaranteed to the supplier. It is also similar in that the savings are passed along in the form of reduced recoupments or refunds at year's end, rather than going directly into the client's pocket. While the vouchered clients have no choice but to be aggregated, they do have the choice to drop out of the pilot if they so choose. However, Bowdy said, no clients have done so.

Gruchala said National Fuel would like to expand the program to non-vouchered public assistance households and to other counties in its service area, and it will ask the PSC's permission to do so after the pilot completes its first year.

For more information, contact Bowdy at (518) 474-9227, or Gruchala at (716) 857-7492, gruchalaj@natfuel.com

MICHIGAN

Michigan is another state with gas customer choice programs. The experience of one gas utility provides a counterpoint to states that are experimenting with gas aggregation for low-income customers.

The Michigan Public Service Commission (PSC) recently approved experimental pilot programs for Consumers Energy, MichCon and SEMCO Energy, which permit customers to shop for gas for homes or businesses.

The pilot programs are designed to permit simplicity of choice from the customer perspective and to gain information that can be used to make sound policy at the conclusion of the experiment. Approval of the programs reflects the PSC's belief that experimentation with alternative, more flexible regulatory mechanisms is appropriate in view of the changing nature of the gas industry. The programs are intended to provide incentives to the utility to operate in an efficient manner and should enhance the utility's ability to respond to market demands.

Customers can select the gas supplier of their choice or simply do nothing and continue to get their gas from their local gas utility. Natural gas continues to be delivered by local gas utilities regardless of which gas supplier a customer chooses. Participating gas suppliers, or marketers, are not regulated by the PSC.

Linda Taylor, consumer affairs supervisor for gas for Consumers Energy, a combination gas and electric utility, deals regularly with local low-income agencies, and senior and consumer groups. She explained that the company is in the first year of a three-year residential choice pilot.. The pilot aims to give 100,000 customers a year the option to choose; after three years the utility hopes to have some 300,000 choice customers. The price of natural gas for Consumers Energy customers will be frozen and guaranteed for three years at 28.4 cents per hundred cubic feet (Ccf). The average residential customer uses about 1,350 Ccf of natural gas each year.

Customers can switch suppliers at any time, or simply do nothing and continue to get their gas from Consumers Energy.

Taylor explained that under the Michigan's PSC-mandated Winter Protection Plan (WPP), low-income customers pay only 7 percent of their estimated annual bill, plus a portion of arrearages, and are protected from shut-off from November through April.

Consumers' WPP customers have a choice: they can opt to choose a supplier and participate or they can remain WPP customers, but not both. "We basically have taken a position that since this is an experiment that we want the low-income segment to have this shut-off protection," Taylor said.

For WPP customers who opt for choice, they may get the benefit of getting cheaper gas if they can find it, but they also face the risk of losing guaranteed heat for the winter. "It would be difficult to say how many low-income customers are exercising their choice by opting out of the Winter Protection Plan," Taylor said. "On a daily basis we are getting customers who are coming back to get shutoff protection," she added. "Choice can be a good thing, but there are risk factors.

I believe someone has to look out for the best interest of our low-income customers, but still allow them to make their choice. We have to educate them without persuading them, and that's a fine line."

Consumers has some 20,000 WPP customers year-round; the numbers peak at 28,000 to 30,000 WPP participants in the winter.

For more information, contact Taylor at ljtaylor@cmsenergy.com

OTHER STATES

Other states, like Michigan, have gas customer choice pilots or gas deregulation, although information about low-income consumers and gas supplier choice is limited. Following are experiences to date from Georgia and Massachusetts.

GEORGIA

Georgia's 1997 Natural Gas Competition and Deregulation Act allows choice to customers of the state's two largest investor-owned gas utilities. Atlanta Gas Light (AGL), the largest investor-owned gas utility, will provide supplier choice to its 1.4 million customers, but the other IOU has decided not to open up its territory.

A nonprofit agency in Atlanta wants to make sure that the elderly poor are not worse off due to gas deregulation. In particular, the agency is concerned about continuation of a low-income senior discount of about $9 per month received by about 30,000 senior gas customers statewide.

AGL, a major force behind deregulation, had proposed dropping the discounts; however, the Public Service Commission (PSC) ordered the discounts continued, saying they were in the public interest.

Currently, AGL plans to decrease the discount to $6 per month and to phase it out entirely within two years, according to Lynn Westergaard, president of Atlanta's Resource Service Ministries. Westergaard is working with AGL to get them to continue the discount at the $9 amount long term. After two years, AGL will no longer have responsibility for it and it would be up to marketers to continue it.

However, Westergaard said, only time will tell whether the marketers will fund the discount. He hopes that a Universal Service Fund (USF), established under the deregulation legislation, could help fund the discount. Although the USF was apparently not designed to fund low-income services, Westergaard believes it could be "liberally interpreted" to do so.

According to an article on the Internet site energy.com, the USF was designed to reimburse marketers for unpaid bills. It amounts to about $8 million and is taken from payments industrial companies make to AGL.

One important concession to the new gas marketers was for AGL to provide them a customer database of the senior discount recipients. This information has been provided, and Westergaard is working with one marketer that is committed to marketing gas to the elderly and to continuing the discount at $10 per month, as well as offering an additional five percent savings on the cost of gas.

Westergaard noted that Resource Service Ministries helped create the discount in 1988. It is actually a waiver of utility customer service charges for gas and electricity customers aged 65 and over with incomes of less than $10,000 yearly. It is funded by utility ratepayers at a charge of about 20 cents per month per customer. Since its inception it has saved over $140 million for low-income seniors.

The state's major electric utility, Georgia Power, provides a senior discount of about $7.50 per month. In 1998 the discount totaled nearly $9.3 million and was provided to nearly 70,000 electric and 30,000 gas customers.

For more information, contact Westergaard at (404) 352-5440.

MASSACHUSETTS

While there is no low-income gas aggregation in Massachusetts, a gas supplier choice program has been underway by Bay State Gas for over two years

According to Steve Carvalho, state LIHEAP director, "It has been a great learning tool for our office and the advocacy community."

LIHEAP agencies have been faced with a variety of issues including: marketer confusion (both with their inability to understand the marketplace and the rules of the LIHEAP program); customer confusion brought on by the marketing efforts of some marketers in the area; LIHEAP clients who were switched to a new marketer without their alleged knowledge; customers who switched marketers within the LIHEAP program year; and clients who were declined because they were recipients of LIHEAP. The latter occurrence was encountered with only one marketer, Carvalho said, and has been corrected.

He added that Bay State has been extremely supportive in resolving the issues and in responding to problems in a timely manner.

Bay State, like all regulated gas and electricity utilities in Massachusetts, provides a low-income rate discount. Gas utility discounts average about 20 percent and total around $12 million yearly. As is the case in Pennsylvania, the discount is applied to the distribution portion of the bill, not the marketer or supplier portion.

For the first two years of the pilot, the number of participating low-income households was 143 and 274 respectively, Carvalho said, which is less than 3 percent of total household participation.

Since late 1997 a Massachusetts Gas Unbundling Collaborative has been meeting to develop a common set of principles and procedures for the comprehensive unbundling of the natural gas industry in Massachusetts. The collaborative includes representatives from the state's ten investor-owned natural gas local distribution companies, marketers, consumers, government agencies, pipelines and unions. Carvalho said it is likely the collaborative will draft rules to govern gas deregulation that will closely mirror the state's electric deregulation law, which contains numerous low-income protections, including codification of the existing low-income rate discounts.

Members of the collaborative have agreed that statutory and regulatory-based consumer protections, as well as low-income gas discounts, should continue

For more information, contact Carvalho at (617)727-7004, ext. 507, or scarvalho@state.ma.us; activities of the collaborative are summarized on its Internet site at: http://www.magnet.state.ma.us/dpu/gasunb.htm.

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