Deregulated natural gas under fire; All controls end as of Nov. 1 but without legislative framework; 'There is no competition'; BGE determines who enters market, can fine competitors, critics say; Energy

THE BALTIMORE SUN

Natural gas sales in Maryland will be fully deregulated Nov. 1, and the rush for customers is on.

With 445,000 gas customers in the Baltimore region still up for grabs, competitors of Baltimore Gas and Electric Co. are beefing up their marketing campaigns with direct mail, newspaper advertisements, telemarketing and even door-to-door sales pitches.

Nearly 90,000 Baltimore-area residents have enrolled with one of the nearly a dozen natural gas suppliers operating in the territory of BGE, which continues to distribute the gas through its pipelines.

The opening of the natural gas market to competition caps two years of pilot programs that saw about 50,000 residential customers sign up with independent suppliers.

While electricity deregulation was prompted by industrial and commercial customers seeking big savings, the Maryland Public Service Commission decided to restructure the state's gas industry with little prompting from the public, said Calvin Timmerman, the PSC's director of rate research and economics.

Instead, it was sparked by the Federal Energy Regulatory Commission eliminating pipeline companies as the sole gas merchants in 1994.

"We thought, why shouldn't we make provisions for suppliers and all customers to come together," Timmerman said.

Maryland was among the first states to look at deregulating its gas market for small businesses and residents. Large industrial and commercial customers were allowed to shop for natural gas as early as 1984.

Gas deregulation "is the quiet evolution as opposed to the noisy electric revolution," Timmerman said. "There were no big doings in Annapolis. It's just here. If you want to buy gas from someone else you can. If you don't want to, you don't have to."

But critics warn that the ad hoc nature of gas deregulation in the state and the lack of a legislative framework have left some competitors hamstrung and customers unaware and unprotected.

"I think we put the cart before the horse," said People's Counsel Michael J. Travieso, whose state agency represents residential customers.

"The pilot [program] turned into total deregulation. I don't have a philosophical objection to opening the gas industry up to competition. But it would be better if we had a plan," he said.

Supporters -- including BGE and the PSC -- say deregulation can be considered a success, considering about 16 percent of residential customers have switched, along with 20 percent of commercial gas customers.

Three-part bill

As part of the deregulation process, charges on consumers' monthly bills will be separated into three parts: a "customer" charge, a distribution charge, and the cost of the gas itself.

The latter, which typically makes up a third of the bill, is the only part being deregulated.

When customers shop for gas, they compare the gas charge, which in Maryland ranges from 31.7 cents per therm to 37.9 cents per therm.

BGE's current gas charge is 39 cents per therm. The utility's natural gas business will remain regulated by the PSC.

BGE's monthly customer charge of $12 pays for the utility's gas pipelines.

The distribution charge pays for the utility's cost delivering the gas to residential customers. BGE's distribution charge, which varies monthly, for October is 29.82 cents per therm.

Last is the gas charge, which is paid to the supplier.

Gas suppliers began soliciting residential customers in June and enrollments began in July.

When consumers enroll with a gas supplier, they must typically sign a contract that binds them to the stated price, usually for one year.

Travieso, the people's counsel, raises concerns about consumer protection. Unlike electricity deregulation, there is no state legislation to guide the restructuring of the natural gas industry, he said.

The Public Service Commission recently solicited opinions from the state's gas industry on whether there should be legislation, but it has yet to issue a decision.

Also, Travieso said, consumer awareness of the changes in the gas industry is negligible, adding: "Consumers may not understand the intricacy of looking for a gas supplier."

Charles McKay of Severna Park agrees.

He signed up for BGE's first pilot program in 1997. He opted for a two-year contract with Keyspan Energy Services, a gas marketer in Stamford, Conn. Keyspan's 33 cents per therm beat BGE's average rate of 45 cents per therm for that year.

McKay now has the choice to renew his contract with Keyspan, which increased its rates to 37.5 cents per therm, or shop around.

With more marketers in the pool as well as incentives -- like free service contracts, or free gas for a month -- in the mix, McKay decided to renew with Keyspan to avoid the hassles of shopping.

'More complicated'

"Just when I'm trying to simplify my life, it has gotten so much more complicated," said McKay, 74. "The average person is not knowledgeable enough to make a decision, so I'm wondering what the impact of multiple choice really will be."

Mark Valavanis, BGE's gas program administrator, said the utility "is doing a good job with customer education."

BGE has sent out 40,000 brochures alerting customers to gas deregulation, included inserts in its bills, handled phone calls from consumers with questions and promoted its site on the World Wide Web, Valavanis said.

"Gas deregulation has evolved, and it's working," he said.

Some gas suppliers complain that customers may not receive the full benefits of competition. They say the program left BGE with too much power.

Competitors complain that the utility has an unregulated affiliate, BGE Home, which competes for the same customers as the other gas suppliers, and that the PSC has allowed the utility to set many of the rules for gas deregulation.

Unlike with electricity deregulation, which is set to start in July and in which suppliers would be licensed and monitored by the PSC, gas suppliers are authorized by BGE to enter the Maryland market if they meet certain financial requirements.

BGE also has the power to impose fines and penalties on its competitors, they complain.

"Competition has worked even when there's an affiliate involved. We've seen it elsewhere in the country," said Valavanis. "There are all extremes. Atlanta drew up legislation that said the utility had to exit the market entirely. We think we have a more balanced program."

Unfair advantage?

Glenn Williams, chief executive of ACN Energy Inc., a gas supplier in McLean, Va., said BGE has an unfair advantage.

"The utility is not only our competitor, it's our regulator," Williams said. "The loser here is the consumer. Instead of giving choice a chance, BGE is choking it."

Thomas Apple, a consultant for Operators Energy Services, a Baltimore gas supplier, said he objects to the utility having an affiliate competing in the market.

"BGE had a monopoly for more than 100 years, and everybody got to know that brand," Apple said. "It would take me $50 million for three or four years to ever achieve that awareness level."

While Apple and Williams believe legislation is not the answer, they say that BGE's advantage in the gas-deregulation process must be vastly curtailed.

"Our philosophy has been to embrace competition, not to the point of making it easier, but rather, making it fair," said Valavanis. "Marketers have to come in and earn their customers. We are not giving customers away."

Gas suppliers in the Baltimore market

Suppliers offering natural gas to customers in Baltimore Gas and Electric Co.'s service area (as of Oct. 1) and their terms. BGE charges 39 cents per therm and that is subject to change.

ACN Energy Inc., 1-877-226-3649

Headquarters: McLean, Va.

Variable rate: 2 percent less than BGE Home's rate, plus a $2.79 monthly fee, no contract

AGF Direct Gas Sales & Servicing Inc., 1-800-296-6427

Headquarters: Manchester, N.H.

Fixed rate: 33.9 cents per therm, one- or two-year contract

Variable rate: 5 percent less than BGE Home's rate, one- or two-year contract

BGE Home Products and Services, 1-888-243-4663

Headquarters: Columbia, Md.

Fixed rate: 37.9 cents per therm, one-year contract

Incentive: free 90-day service contract on a gas appliance

Burns and McBride Energy, 1-800-344-6934

Headquarters: Wilmington, Del.

Fixed rate: 36.5 cents per therm, one-year contract

Incentive: free gas in October 2000

Gasmark, 1-800-427-8545

Headquarters: Reading, Pa.

Fixed rate: 37.1 cents per therm, one-year contract

Keyspan Energy Services, 1-888-222-7359

Headquarters: Stamford, Conn.

Fixed rate: 37.5 cents per therm, one-year contract

MxEnergy.com Inc., 1-800-785-4373

Headquarters: Stamford, Conn.

Variable rate: 10 percent off gas commodity charge of BGE Co. (the utility), one-month to three-year contract

Incentive: Enroll by Dec. 31 and receive a $10 rebate, and enroll using the Web site (www. mxenergy.com) and an additional $10 will be donated to charity.

Operators Energy Services, 410-467-6000

Headquarters: Baltimore

Fixed rate: 36.4 cents per therm, one-year contract

Incentive: two-year furnace service contract for the price of a one-year contract

Total Gas & Electric Inc.; 1-800-517-9006

Headquarters: Fort Lauderdale, Fla.

Variable rate: changes monthly (October rate is 36.0 cents per therm), one-year contract

United Energy Inc., 1-800-726-9133

Headquarters: Millersville, Md.

Fixed rate: 36.5 cents per therm, one-year contract

Washington Gas Energy Services Inc., 1-888-884-9437

Headquarters: Herndon, Va.

Fixed rate: 37.9 cents per therm, one- or two-year contract

Variable rate: 9 cents above an industry energy index (index average for past 12 months: 22.7 cents), with a 48-cent cap, one-year contract

How pricing is determined

Pricing in the natural gas market historically has been extremely volatile, affected by weather, overall demand, the price of competing fuels and competition among gas companies, industry experts say.

Some analysts expect gas prices to be strong this winter, particularly because it is expected to be colder than last year. Also, gas storage levels are low because of a decrease in drilling when energy prices weakened about 18 months ago.

The U.S. Department of Energy recently projected an increase in "wellhead prices," or the cost of gas when it is taken from the ground, to about $2.50 per thousand cubit feet, compared with $1.79 per thousand cubit feet a year ago. As a result, the department forecast a 19 percent increase in heating bills this winter for homes that use natural gas.

The American Gas Association said price rises generally would not be immediate because much of this winter's supply already has been bought and stored.

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