Alternative natural gas market showing little energy in Pa. and N.J.

By Andrew Maykuth

INQUIRER STAFF WRITER

Amid this year's excitement about electric deregulation in Pennsylvania, some customers might have wondered if they also could choose their natural gas supplier.

Short answer: They can.

For more than a decade, alternative natural gas suppliers have been free to market to all utility customers in Pennsylvania and New Jersey.

Here's the rub: Though the market for industrial and commercial customers is strong, few suppliers actually try to sell to residential customers.

Right now there is little profit in it, but that could change in the next year.

"The small customers are a tough sell," said Matthew Sommer, a vice president of Shipley Energy Co., a York, Pa., supplier. "The margins are so tight."

In 2005, the Pennsylvania Public Utility Commission reported to the legislature that the 1999 deregulation law had failed to create "effective competition."

However, the PUC is reworking its rules "to create a more level playing field" for alternative suppliers.

By the end of 2010, only 7.6 percent of residential gas customers statewide were being served by alternative suppliers - a percentage that has steadily decreased since deregulation began. Most of those customers are in Western Pennsylvania.

In Southeastern Pennsylvania, competition barely exists. According to the Pennsylvania Office of Consumer Advocate, no competitive suppliers are making offers for customers of Philadelphia Gas Works, the state's largest gas utility.

Suburban gas customers served by Peco Energy Co. have a few more choices. Two suppliers are now making offers at slight discounts to Peco's rates, but the offers are for variable rates, so there's no guarantee the savings will be sustained. Shipley's variable-rate offer would save a customer about $5 a month.

Shipley this year stepped up its marketing efforts by signing up Peco customers online through a group buying service called Alphabuyer that is fashioned on the Groupon business model.

At the end of 2010, less than half a percent of Peco's residential customers had switched to an alternative supplier - a mere 1,981 of Peco's 448,384 residential gas customers.

That number actually represents a fivefold increase from a year ago when 385 Peco residential customers had switched.

Peco attributes the growth to an increasing public appetite for energy choices.

"The overall increase in awareness of electricity shopping also has some of our customers proactively asking if they can shop for their natural gas service as well," said Cathy Engel Menendez, Peco's spokeswoman.

In New Jersey, gas customers have a limited number of alternative choices. According to energyshop.com, the competitive offerings are no cheaper than the current rates of Public Service Electric & Gas Co. and South Jersey Gas Co.

As with deregulated electricity markets, natural gas customers can shop only for the supplier of the commodity. They are still captive customers of the local utility that owns the pipes that deliver the gas.

While utilities collect a distribution charge from all customers that reflects the cost of maintaining the pipes and providing billing and customer service, they are prohibited by law from making profits on the commodity itself.

Since the utilities are required to buy gas at the lowest possible price and to pass along the cost without adding any markup, it is challenging for an alternative supplier to provide gas at a lower price and still earn a profit.

"Peco and PGW are obligated to supply gas at the lowest cost under the law, and if a marketer can beat those prices, that's fine," said Irwin A. "Sonny" Popowsky, Pennsylvania's consumer advocate.

Peco and PGW have nearly identical commodity charges - the "price to compare" that is open to competition by alternative suppliers. Peco's current price-to-compare is 66.7 cents per hundred cubic feet of natural gas. PGW's is 66.8 cents.

Alternative suppliers have complained that the rules are structured to stifle competition and give utilities inherent advantages.

The PUC agreed in January to change some rules to remove obstacles to suppliers to enter the market and also to shift some costs to make it easier for suppliers to compete with utilities on price.

The new rules require additional filings and reviews and might take up to a year to go into effect, said Denise McCracken, a PUC spokeswoman.

Engel Menendez, the Peco spokeswoman, said the new rules would shift a "very small percentage" of the cost of procuring gas supplies to the "price to compare." That would effectively make it easier for the suppliers to beat the utility's price.

The PUC is also considering a new round of rule changes to restrict the ability of utilities to impose some charges and penalties on suppliers, additional burdens that inhibit their ability to compete.

The next round of rule changes may trigger "really robust competition," McCracken said. But there is no timetable to complete the work.

Already more suppliers are applying for licenses or are expanding their territories, she said. "So the signs are good."

But the new rules are complex and contentious.

The commission approved the January changes by a narrow 3-2 vote. Dissenting commissioners said they believed the changes would give an advantage to customers who shop.

Commissioner Wayne E. Gardner and Commissioner Tyrone J. Christy voted against the changes.

"The result of this is that customers who choose to stay with the default supplier will subsidize shopping customers," Gardner wrote in his dissent.

Pennsylvania Office of Consumer Advocate's Residential Natural Gas Shopping Guide. Call 1-800-684-6560 or check on the web: http://is.gd/1QHIgX

New Jersey Board of Public Utilities lists alternative suppliers: http://is.gd/4GnNzU

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