Retail Electricity and Gas Restructuring

Traditionally, both gas and electric utilities have been monopolies subject to government regulation. This helps ensure that all customers in the service area receive reliable service under fair terms, conditions, and prices. Since the mid-1990s, one-third of states have opened up part of these markets to competition. These states have opened energy generation to competition. The existing electric utility has been required to sell its generation facilities to unregulated companies. Consumers in these states can now purchase electricity, natural gas, or both from competing providers. The distribution part of the system remains under state regulation with traditional cost-of-service regulation.

Although some states have adopted licensing and consumer protections for retail energy providers, customer complaints remain high. Studies in most states have documented higher prices and unfair marketing tactics. A key concern has been unaffordable bills. Additional consumer challenges in restructured markets include:

• misleading marketing practices.
• variable-rate contracts that can result in exceptionally high bills during periods of price volatility.
• threats to eliminate standard offer service (described in further detail below).
• bailouts to maintain high-cost nuclear and coal generation plants that cannot compete in deregulated wholesale markets.

Regulators play a key oversight role in all states, regardless of the regulatory approach. Vigorous oversight is essential to ensure fair treatment of consumers (see also Ethics and Public Participation).

Aggregation occurs when an entity brings together retail electric or natural gas customers into buying groups. The purpose is to increase each consumer’s purchasing power. Local governments may implement aggregation by allowing residents of the entire city to band together for more purchasing power or to ensure that most of their power comes only from renewable sources. State regulators typically establish and enforce rules and policies related to aggregation.

Standard offer service (SOS): Sometimes known as default service, SOS is offered to residential customers in nearly all deregulated states. The only exception is the deregulated part of Texas. SOS is what consumers receive when they do not select an alternative provider or when they select a provider who later goes out of business. It is intended to provide service at stable rates approved by regulators. The contracts to provide this service are selected from competitive bids from the wholesale market.

Some industry groups representing retail energy providers have sought to end SOS. This would require residential customers to select a provider from the unregulated price market. Consumer advocates have strongly opposed such action. Many believe that all consumers should receive SOS. This is because most studies have documented that retail energy providers charge more than default service over a reasonable period of time. These higher prices have especially harmed customers with lower incomes. This has, in turn, increased the costs of the ratepayer-funded bill-payment assistance programs. In addition, several states have documented that retail energy providers engaged in deceptive marketing practices while engaged in door-to-door marketing in neighborhoods with lower incomes.