AN OVERVIEW AND HISTORY OF GAS DEREGULATION
Compiled by the LIHEAP Clearinghouse, April 1999

Gas deregulation has often been termed "stealth" deregulation. That’s because while much national attention has been focused on electric utility deregulation, the deregulation of the natural gas industry has been making steady inroads for at least 15 years.

A 1998 General Accounting Office (GAO) study counted 43 natural gas customer choice programs in 16 states for residential and small commercial customers. Additionally, gas utilities in 11 other states and the District of Columbia are beginning or considering customer choice programs.

The GAO study and another by the National Regulatory Research Institute (NRRI) completed in February 1999, are the first to begin to document participation and savings in residential and small customer natural gas choice pilots.

Following is a brief history of how natural gas customer choice began.

The GAO report, titled Energy Deregulation -- Status of Natural Gas Customer Choice Programs, notes that before 1978, gas producers sold gas to interstate pipeline companies, which, in turn, sold it to local gas utilities, which then sold the gas to end users such as residential customers and small businesses. A series of federal government initiatives, beginning with the 1978 Natural Gas Policy Act, changed all that.

"The price at which producers could sell their gas to interstate pipelines and the price at which interstate pipelines could sell their gas to local gas utilities were regulated by the federal government," the report says. "State authorities regulated the price that gas utilities charged to their end users. Gas utilities held long-term contracts with interstate pipeline companies, while the latter held long-term contracts with producers. Both types of contracts were typically for 20 years or longer and were based on regulated prices.

"Under the Natural Gas Policy Act of 1978, Congress began a process that ended federal control over the price of gas at the wellhead. This process also set in motion a series of public policy changes by the Federal Energy Regulatory Commission and state regulators that has culminated in "customer choice" programs for residential and small commercial natural gas users.

"Under these programs, homes and small businesses can choose their supplier of natural gas, much as they now choose their long-distance telephone provider. Under a customer choice program, nonutility gas suppliers, called gas marketers, purchase gas and arrange for its transportation to the local gas utility. Local gas utilities, while no longer purchasing gas directly for their customers, continue to deliver it to homes and businesses."

Proponents of customer choice programs argue that allowing choice will mean competition, leading to lower gas prices and greater service options for consumers. Others are concerned about the reliability of service and the possible market power of gas suppliers if regulated gas utilities are no longer responsible for purchasing gas on behalf of their customers.

Large commercial and industrial concerns in many states were the first to buy natural gas directly from a supplier of their choice, rather than as part of a bundled supply and delivery service provided by a regulated utility. Now, residential and small business consumers are beginning to enjoy the same freedom of choice, which in most cases means lower prices.

The GAO surveyed gas utilities that had customer choice programs under way as of July 31, 1998. In addition, researchers interviewed and gathered information from state regulators, gas utility representatives and gas marketers.

The survey found that 43 gas utilities in 16 states have choice programs for either, or both, residential and small commercial natural gas customers. In addition, they found, gas utilities in 11 other states and the District of Columbia are beginning or considering customer choice programs.

States that reported residential customer choice programs included California (3), Illinois, Indiana, Maryland (3), Massachusetts, Michigan (3), Nebraska, New Jersey, New Mexico, New York (9), Ohio (3), Pennsylvania (4), Virginia, Wisconsin and Wyoming. The GAO survey found that roughly 553,000 residential gas users were participating in customer choice programs in the United States.

Most customer choice programs for residential and small commercial customers are less than three years old and several are less than one year old, so information on these programs is limited. Scant information the GAO researchers gathered estimated savings in most of these programs ranging from 1 to 15 percent on total gas bills mostly attributed to lower transportation and storage costs, lower gas costs and savings on state and local taxes. In Ohio, consumer groups are reporting savings ranging from 3 to 30 percent depending on the supplier and service territory. In Pennsylvania, savings average about 8 percent.

Savings are defined as the difference between what the gas utility would charge and what the gas marketer charges for gas delivered to a utility's city gate. Customer savings come from a combination of gas marketers' savings on upstream transportation and storage costs and on the cost of gas. In some states, customers are also achieving savings because natural gas sold by marketers is subject to fewer state and local taxes than gas sold by local gas utilities. The costs of natural gas, its transportation and storage, and subsequent local delivery are incorporated into monthly gas bills.

The NRRI report, titled Household Participation in Gas Customer Choice Programs: Some Facts, Explanations, and Lessons Learned, reviewed 22 gas choice programs in 13 states, most of which had begun in 1996. Participation rates in these residential and small customer choice programs varied considerably. The mixed results "suggest that most small gas customers are reluctant to relinquish bundled sales service provided by their local gas utility even when alternate service would result in bill savings, " the report noted.

The report suggested three likely reasons for customer nonparticipation: 1) some customers made well- informed decisions, correctly anticipating no net benefits from choosing an unencumbered marketer; 2) some customers were so confused and uninformed that they decided to stay with their existing provider; and, 3) discriminatory actions by the local gas utility may have prevented or discouraged customers from switching, or discouraged new suppliers from entering the market.

"Problematic for regulators and other policy makers are explanations two and three, which justify actions improving consumer information and `leveling the playing field,'" the report said.

The GAO report can be ordered by mail from U.S. General Accounting Office, P.O. Box 37050, Washington, DC 20013; the first copy is free. Or it can be downloaded from the GAO Internet site at http://www.gao.gov.