Energy Deregulation

American consumers and commercial users spent $45 billion in 1996 on natural gas to heat and cool homes and offices, cook food, and provide power to other household and business appliances. Under the Natural Gas Policy Act of 1978, homes and small businesses can choose their natural gas supplier, much as they now choose their long-distance telephone provider. Under a customer choice program, nonutility gas suppliers, called gas marketers, buy gas and arrange for its transportation to the local gas utility. Local gas utilities, while no longer buying gas directly for their customers, continue to deliver it to home and businesses. Proponents of customer choice programs believe that allowing choice will mean competition, thus 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 buying gas on behalf of their customers. This report discusses (1) initial participation in customer choice programs and (2) the effects of these recent customer choice initiatives on residential and small commercial consumers.

GAO noted that: (1) 43 gas utilities in 16 states have customer choice programs for either or both residential and small commercial natural gas customers; (2) gas utilities in 11 other states and the District of Columbia are beginning or considering customer choice programs; (3) as of July 31, 1998, roughly 553,000 residential gas users were participating in customer choice programs in the United States, representing only about 4 percent of the residential customers eligible to participate in these programs; (4) national figures for participation in small commercial programs could not be determined because data were unavailable; (5) while overall participation in residential customer choice programs is generally low, participation rates vary dramatically among programs; (6) customer participation rates are determined by a variety of factors, such as the customers' potential to save money by purchasing gas from a marketer rather than a gas utility; (7) gas marketers told GAO that their participation in customer choice programs is influenced by their potential to earn a profit on their gas sales; (8) customer choice programs for residential and small commercial customers are relatively new, with most being less than 3 years old and several less than 1 year old; (9) as a result, information on these programs' impacts on customers is limited; (10) gas utilities that responded to GAO's survey reported that customers achieved savings and greater service options with no apparent reduction in reliability; (11) while gas utilities reported few problems with the reliability of gas marketers' deliveries, some noted that since customer choice programs are less than 3 years old, the reliability of gas marketers' deliveries has yet to be tested; (12) most gas utilities did not provide an estimate of customer savings because their programs were in their initial stages of operation and information on savings was unavailable from gas marketers; (13) savings estimates GAO did receive ranged from 1 to 15 percent on total gas bills and were estimated to come from lower transportation and storage costs, lower gas costs, and savings on state and local taxes; (14) most gas utilities in GAO's survey have set up independent gas marketers, called marketing affiliates, to sell gas as a separate service to residential and small commercial gas users; and (15) these marketing affiliates have large market shares, raising concerns among some state regulators about how competitive these programs can be and, thus, their potential to reduce prices.