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Standard Offer By Utilities: Making Competition Work For All

The introduction of competition into the utility industry is intended to afford consumers a right to choose among different suppliers of a utility product such as natural gas or electricity. What happens to those consumers for whom no choice exists, or who are satisfied with their current utility service? How will they receive utility service and the benefits of competition? This study looks at how it might be possible to protect the inert customer market and afford it some of the benefits from competition through the use of a standard offer or standard supply service provided by the utility.

60 pages $15.00

Introduction

Since the 1980s, there has been a general trend towards deregulation and privatization in North America. Canadian public utilities such as telecommunications, energy and transportation have been greatly affected by this trend. Change has been brought about through both legislation and regulation. Regardless of the source of change, the introduction of competition into historically regulated areas will continue to have a significant impact on Canadian consumers. Changes made now will determine how consumers are supplied with commodities which are essential to sustaining their standard of living in the future.

The experience with natural gas deregulation in North America shows that once competition is introduced into one sector of the industry, it almost inevitably flows into other sectors. Once competition is introduced at the wholesale level, plans are made for a transition to retail customer choice. Electricity restructuring has exhibited the same trend. In many jurisdictions, energy marketers have been, or will be, permitted to sell natural gas and electricity directly to retail consumers.

All energy industry players and types of consumers will encounter changing circumstances. Both low income residential and large industrial energy consumers will be faced with choice concerning who to buy their energy from, and under what terms. The number of players involved in the industry will increase, with potentially confusing results. Regulators will need to change how they regulate in accordance with the altered environment. Existing utilities will have to come to terms with a changed role, and in many instances, new corporate structures.

Deregulation is premised on the notion that competition will provide consumers with a wider variety of ‘unbundled’ energy options at lower prices than exist under regulation. Only monopoly functions will remain regulated. Competing energy marketers will supply consumers with energy, and utilities will simply transmit and distribute the commodity. Thus, following a transition period, utilities will exit the ‘merchant’ function; they will no longer sell energy directly to the end user. Monopoly and competitive services will be separated, thereby decreasing the potential for market power abuse. The utilities’ traditional obligation to serve must therefore be redefined, as system supply will be largely dismantled.

The assumption that all consumers will benefit by making choices within the competitive marketplace itself assumes that consumers will make choices. This line of thinking does not recognize that consumers may choose not to choose a competitive supplier. Preliminary study in energy, (and in other deregulated industries), illustrate that consumers often do not want to ‘switch’ to competitive suppliers, especially in the short term. They are satisfied with traditional regulated service and unsure of how the new environment operates. A “wait and see” attitude is adopted.

Given the restructuring agenda, the question then becomes: who should supply consumers who have not chosen an energy supplier, and how? The following discussion proposes to answer such questions. In doing so, an emphasis is placed on ensuring that the positive benefits of competition are passed on to all users, including the low volume residential consumer.

Chapter One discusses the existence of consumer inertia, its potential explanations, and why an inert market is problematic. Chapter Two describes alternative means of dealing with consumer inertia through the facilitation of consumer mobility. In this respect the Ontario Standard Supply Draft Code will be examined and the implementation of a standard offer supplied by a competitive bidding process will be recommended. Chapter Three will compare and contrast the competitive bidding processes envisioned and implemented in Maine, Ohio, and Massachusetts. Chapter Four will discuss insights which may be drawn from the case studies, as well as from competitive bidding in other industries and the traditional activities of municipal governments. The study will conclude with ‘best priority’ recommendations for the design and implementation of a standard offer supplied through a competitive bidding process.

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