Energy Deregulation: Status of Natural Gas Customer Choice Programs
(Letter Report, 12/15/98, GAO/RCED-99-30).

Pursuant to a congressional request, GAO provided information on: (1)
initial participation in natural gas customer choice programs; and (2)
the effect of these recent customer choice initiatives on residential
and small commercial customers.

GAO noted that: (1) 43 gas utilities in 16 states currently 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 saving 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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-30
     TITLE:  Energy Deregulation: Status of Natural Gas Customer Choice 
             Programs
      DATE:  12/15/98
   SUBJECT:  Natural gas
             Energy marketing
             Fuel gas industry
             Energy costs
             Public utilities
             Natural gas prices

             
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Cover
================================================================ COVER


Report to Congressional Requesters

December 1998

ENERGY DEREGULATION - STATUS OF
NATURAL GAS CUSTOMER CHOICE
PROGRAMS

GAO/RCED-99-30

Customer Choice Programs

(141182)


Abbreviations
=============================================================== ABBREV

  AGA - American Gas Association
  DOE - Department of Energy
  EIA - Energy Information Agency
  FERC - Federal Energy Regulatory Commission
  GAO - General Accounting Office
  mcf - 1,000 cubic feet of gas
  PUCO - Public Utility Commission of Ohio

Letter
=============================================================== LETTER


B-281423

December 15, 1998

The Honorable Jeff Bingaman
United States Senate

The Honorable Dale L.  Bumpers
United States Senate

In 1996, U.S.  residential and commercial natural gas users spent $45
billion on the fuel to heat and cool homes and offices, cook food,
and provide power to other household and business appliances.  Prior
to 1978, gas producers sold gas to interstate pipeline companies,
which, in turn, sold it to local gas utilities,\1 which then sold the
gas to end users such as residential customers and small businesses. 
The price at which producers could sell their gas to interstate
pipelines and the price at which interstate pipelines could sell
their gas to local gas utilities were regulated by the federal
government.  State authorities regulated the price that gas utilities
charged to their end users.  Gas utilities held long-term contracts
with interstate pipeline companies, while the latter held long-term
contracts with producers.  Both types of contracts were typically for
20 years or longer and were based on regulated prices. 

Under the Natural Gas Policy Act of 1978, the Congress began a
process that ended federal control over the price of gas at the
wellhead.\2 This process also set in motion a series of public policy
changes by the Federal Energy Regulatory Commission (FERC) and state
regulators that has culminated in "customer choice" programs\3 for
residential and small commercial natural gas users.\4 Under these
programs, homes and small businesses can choose their supplier of
natural gas, much as they now choose their long-distance telephone
provider.  Under a customer choice program, nonutility gas suppliers,
called gas marketers, purchase gas and arrange for its transportation
to the local gas utility.  Local gas utilities, while no longer
purchasing gas directly for their customers, continue to deliver it
to homes 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 purchasing gas on behalf of their customers. 

As requested, we are providing you with information on (1) initial
participation in customer choice programs and (2) the effect of these
recent customer choice initiatives on residential and small
commercial consumers.\5 In order to respond to these requests, we
conducted a survey of gas utilities that had customer choice programs
under way as of July 31, 1998.  In addition, we interviewed and
gathered information from state regulators, gas utility
representatives, and gas marketers. 


--------------------
\1 Natural gas utilities are referred to as local distribution
companies in industry publications. 

\2 For a more complete discussion of the federal laws and regulatory
orders since 1978 that have restructured the natural gas industry,
see Natural Gas:  Costs, Benefits, and Concerns Related to FERC's
Order 636 (GAO/RCED-94-11, Nov.  8, 1993). 

\3 Customer choice programs are also referred to as unbundling
programs.  Gas service consists of several separate
services--contracting for gas supplies and for interstate
transportation and storage and providing for local gas distribution
to homes and businesses--that were traditionally bundled into one
service provided by local gas utilities.  Under customer choice
programs, customers contract for their own gas supply, thereby
"unbundling" a part of the gas service historically provided by local
gas utilities. 

\4 Large industrial customers and electric utilities were given
access to competitively priced natural gas from nonutility gas
suppliers, or gas marketers, by state regulators beginning in the
early 1980s.  They are not a topic of this report. 

\5 Residential and small commercial customers are also referred to as
small-volume customers.  When they choose to buy their gas from a
marketer (either a marketer affiliated with the gas utility or an
independent third-party marketer), they are recorded as having
participated in a customer choice program. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Forty-three gas utilities in 16 states currently have customer choice
programs for either, or both, residential and small commercial
natural gas customers.\6 In addition, gas utilities in 11 other
states and the District of Columbia are beginning or considering
customer choice programs.  According to the results of our survey of
gas utilities with residential customer choice programs under way as
of July 31, 1998, roughly 553,000 residential gas users were
participating in customer choice programs in the United States.  This
total represents only about 4 percent of the residential customers
eligible to participate in these programs.  National figures for
participation in the small commercial programs could not be
determined because data were unavailable.  While overall
participation in residential customer choice programs is generally
low, participation rates vary dramatically among programs.  For
example, in Nebraska, the local gas utility sponsoring the state's
single program estimated that 70 percent of eligible residential
customers had selected a gas marketer, while in New York, a local gas
utility sponsoring one program reported that no residential customers
had selected a gas marketer in its program.  Customer participation
rates are determined by a variety of factors, such as the customers'
potential to save money by purchasing gas from a gas marketer rather
than a gas utility.  Other factors reported to us by gas utilities,
gas marketers, and state regulators include efforts to make customers
aware of programs, and program rules, such as limits on
participation.  Gas marketers told us their participation in customer
choice programs is influenced by their potential to earn a profit on
their gas sales.  The potential for gas marketers to earn profits can
be affected by program rules, such as whether gas marketers can
contract for their own transportation services to transport gas to a
gas utility for local distribution or whether they must use
transportation services previously contracted for by a gas utility. 

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.  As a result, information on these
programs' impacts on customers is limited.  Several gas utilities
that responded to our survey provided information on how these
programs are affecting cost savings, service reliability, and service
options.  These gas utilities reported that customers achieved
savings and greater service options with no apparent reduction in
reliability.  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.  Most gas
utilities in our survey did not provide an estimate of customer
savings, in part because their programs were in their initial stages
of operation and information on savings was unavailable from gas
marketers.  Savings estimates we did receive ranged from 1 to 15
percent on total gas bills and were said to come from lower
transportation and storage costs, lower gas costs, and savings on
state and local taxes.  Most gas utilities in our survey have set up
independent gas marketers, called marketing affiliates, to sell gas
as a separate service to residential and small commercial gas users. 
In several customer choice programs we surveyed, 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. 


--------------------
\6 The states are California, Colorado, Illinois, Indiana, Maryland,
Massachusetts, Michigan, Nebraska, New Jersey, New Mexico, New York,
Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The costs of natural gas, its transportation and storage, and
subsequent local delivery are incorporated into monthly gas bills. 
According to the Department of Energy (DOE), residential customers in
1997 were billed $34.6 billion for natural gas deliveries, or $617
per customer.  Figure 1 shows the separate components of the natural
gas delivery system from the wellhead, where natural gas is
extracted, to the burner tip, where the fuel is used in a home or
business. 

   Figure 1:  Natural Gas Delivery
   System From the Wellhead to the
   Burner Tip

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

   Source for all pictures: 
   American Gas Association (AGA).

   (See figure in printed
   edition.)

Before customer choice programs, the services shown in figure 1 were
arranged for or directly provided by local gas utilities.\7
Historically, gas utilities contracted with interstate and/or
intrastate pipeline companies for the natural gas and transportation
services (called upstream capacity) necessary to transport gas from
the producer's field to the start of the gas utilities' local
distribution system, called the city gate.\8 To guarantee the
availability of upstream pipeline and storage space, gas utilities
contracted with pipeline companies for priority upstream capacity,
called firm capacity, to meet the peak day requirements of their
customers.\9 The purchasing of firm capacity by gas utilities was
often done at the behest of state regulators, who wanted to ensure
that gas flowed to homes, schools, and businesses on the coldest days
of the year, regardless of additional demands placed on the gas
delivery system. 

Once gas reached the city gate, gas utilities provided for the local
distribution of gas through their network of local pipelines.  Local
gas utilities also provided other gas-related services, such as
billing and metering. 

Customer choice programs allow residential and small commercial
customers to choose their own provider of gas within this delivery
system.  Under a customer choice program, nonutility gas suppliers,
called gas marketers, purchase gas and arrange for its transportation
to the local gas utility.  Customers then purchase, from a gas
marketer, gas that is shipped along the local gas utility's network
of distribution pipes to their home or business.  The gas utility
still charges customers regulated rates for the costs of local gas
distribution and the related services it provides, such as billing
and metering. 

Until recently, customer choice opportunities were limited to large
industrial and large commercial customers, such as factories and
electric utilities that use gas for power generation.  These
opportunities allow these gas users to contract competitively for
gas, either directly with gas producers or with gas marketers, as
well as with interstate pipelines for upstream capacity.  According
to DOE, average gas prices paid by electric utilities and industrial
gas customers have fallen 36 and 24 percent, respectively, between
1990 and 1995, adjusted for inflation.\10 DOE noted that these
customers may have the option of multiple servers as well as the
capability of using fuels other than natural gas, which allows them
to be more aggressive in negotiating contracts and services. 

While natural gas deregulation has resulted in lower prices for
natural gas, it has also at times been associated with greater price
uncertainty.  According to DOE analysts, prior to deregulation, many
gas utilities' supply contracts were long-term--often for 20 years or
more--with little variability in price.\11 With deregulation, gas
utilities began to purchase gas on the spot market, which can
sometimes be highly volatile.  For example, in our report on natural
gas price volatility during the winter of 1996-97, we found that
residential gas prices in New Mexico were 68 percent higher in
January 1997 than in December 1996.\12 For some gas utilities we
spoke with, price spikes have sometimes resulted in discontented
customers and drawn the attention of state regulatory authorities. 
While state regulators allow gas utilities to recover their upstream
costs, including those for interstate transportation and storage and
the cost of gas, without profit or loss, regulators in some states
can disallow the recovery of costs when they believe gas utilities
have made imprudent gas-purchasing decisions. 

For some gas utilities, extending customer choice programs to their
residential and small commercial customers has given them an
opportunity to reduce their regulatory risk and improve their public
image with their customer base.  Other gas utilities view gas
marketers' participation in customer choice programs as a way to
increase the demand for gas and therefore help expand their
distribution system.  Still other gas utilities view customer choice
programs as part of a process of change that will result in the
increasing importance of nonutility energy companies that market
natural gas, electricity, and even oil-based products in an
increasingly competitive environment.  Some observers believe that
mergers, acquisitions, and alliances are bringing diverse energy
companies together across energy markets.  Several gas utilities have
established marketing affiliates that are already active in both gas
and electricity markets. 


--------------------
\7 Natural gas utilities are regulated entities franchised by state
regulators to serve customers in a specific service area. 

\8 Transportation services include transportation and storage space
on interstate and/or intrastate pipeline systems.  These
transportation services are termed upstream capacity because they
occur between the source of gas supply and the beginning of a gas
utility's local distribution system.  In industry terminology, the
gas utility is often used as a reference point that is between the
source of gas supply and end users such as homes and businesses. 
Activities occurring between supply sources and the gas utility are
considered upstream activities, while activities occurring between
the gas utility and end users are considered downstream activities. 

\9 Gas utilities maintain portfolios of the gas supply and
transportation contracts necessary to bring gas to customers. 

\10 Natural Gas 1996 Issues and Trends, Energy Information Agency
(DOE/EIA-0560(96), Dec.  1996). 

\11 Mary E.  Carlson, Joan Heinkel, and John H.  Herbert,
"Contracting for Natural Gas Supplies," Energy Information Agency,
Natural Gas Monthly (Feb.  1994). 

\12 Natural Gas Prices During the Winter of 1996-97
(GAO/RCED-98-105R, Mar.  11, 1998). 


   OVERALL PARTICIPATION REMAINS
   LOW FOR SMALL-VOLUME CUSTOMER
   CHOICE PROGRAMS
------------------------------------------------------------ Letter :3

As of July 31, 1998, 43 gas utilities in 16 states had customer
choice programs under way for residential and/or small commercial
natural gas users.\13 In addition, gas utilities in 11 other states
and the District of Columbia were beginning or considering customer
choice programs for residential or small commercial gas users.  In
general, the customer choice programs under way are relatively new,
as most of these programs are less than 3 years old and several are
less than 1 year old.  Despite the likelihood of future growth,
participation in current programs is generally low.  According to our
survey of gas utilities, roughly 553,000 residential gas users, about
4 percent of the customers eligible to participate in customer choice
programs, are participating in them.  The figures for national
participation in small commercial programs could not be determined
because data were unavailable.  Participation rates in customer
choice programs vary dramatically; in some programs, over half of all
eligible customers participated, while other programs are still
awaiting their first participant. 

Customer participation rates are determined by a variety of factors,
such as the potential to save money through the purchase of gas from
a gas marketer rather than through a gas utility.  Other factors
reported to us by gas utilities, gas marketers, and state regulators
as influencing customers' participation include efforts by these
parties to make customers aware of the program, and program rules,
such as caps on participation, that can limit overall customer
participation.  Gas marketers told us their participation in customer
choice programs is influenced by the potential for them to earn a
profit on their gas sales.  Their potential to earn profits can be
affected by program rules, such as whether gas marketers can contract
for their own transportation services to transport gas to a local gas
utility. 


--------------------
\13 Through interviews with industry experts at DOE, the American Gas
Association, and local gas utilities, we determined that 43 gas
utilities offered customer choice programs for residential and/or
small commercial gas users.  The American Gas Association represents
natural gas utilities.  We mailed questionnaires to all 43 gas
utilities and received responses from 38 of them.  Information used
in this report on customers' and gas marketers' participation is
based on these responses. 


      SIXTEEN STATES HAVE
      SMALL-VOLUME CUSTOMER CHOICE
      PROGRAMS UNDER WAY, AND MORE
      WILL START SOON
---------------------------------------------------------- Letter :3.1

As shown in figure 2, small-volume customer choice programs--allowing
choice for residential and/or small commercial customers--are
concentrated in midwestern and eastern states.  As of July 31, 1998,
New York had 10 active customer choice programs, followed by
Michigan, which had 5.  New Jersey and Pennsylvania each had four
customer choice programs under way, and Ohio, Illinois, and Maryland
each had three active programs. 

   Figure 2:  Small-Volume Natural
   Gas Customer Choice Programs in
   the United States

   (See figure in printed
   edition.)

Figure 2 also shows that 11 additional states and the District of
Columbia are considering or beginning small-volume customer choice
programs.  Among these initiatives, a recent Georgia law allows
Atlanta Gas Light to begin a customer choice program for the 1.4
million residential and commercial customers in its service area in
November 1998.  Iowa will allow a statewide choice of gas suppliers
in February 1999.  In addition, in 1999, gas utilities in Montana
will begin customer choice programs that will offer a choice of gas
suppliers to most of their residential and commercial gas users.  The
other states that are considering or beginning programs are likely to
begin customer choice programs in 1999 or 2000. 

In addition, gas utilities and state regulators in Ohio, Illinois,
Massachusetts, Michigan, New Jersey, Virginia, and Wyoming are
expanding existing customer choice programs.  The American Gas
Association (AGA) reported that once all these programs are under
way, 33 percent, or 18.1 million, of the 54 million households in the
United States with natural gas service will be able to choose their
gas supplier.  AGA also estimated that more than 40 percent of the
country's commercial customers can now, or soon will be able to, buy
gas from a nonutility supplier.\14


--------------------
\14 Providing New Services to Residential Natural Gas Customers:  A
Summary of Customer Choice Pilot Programs and Initiatives 1998
Update, AGA Issue Brief 1998-03 (July 31, 1998). 


         STATUS OF RESIDENTIAL
         CUSTOMER CHOICE PROGRAMS
-------------------------------------------------------- Letter :3.1.1

Thirty-four of the 43 local gas utilities we surveyed reported that
they had residential customer choice programs under way as of July
31, 1998.\15 Thirty-one of these utilities reported that they began
their customer choice programs in 1996 or later.  In California,
three residential customer choice programs began in 1991.  Of the 34
residential customer choice programs, 14 had specific ending dates
and may be considered pilot programs.  Pilot programs may be limited
to one town or county within a gas utility's service area and can
restrict the number of customers eligible to participate in the
program.  State regulators may direct gas utilities to limit
eligibility to less than all customers in their service area so they
can gain experience in administering a choice program before
broadening it. 


--------------------
\15 Four gas utilities reported that they did not have residential
programs under way as of July 31, 1998.  We did not receive responses
from the other five gas utilities. 


         STATUS OF SMALL
         COMMERCIAL CUSTOMER
         CHOICE PROGRAMS
-------------------------------------------------------- Letter :3.1.2

Thirty-five gas utilities also reported that they had small
commercial choice programs under way as of July 31, 1998. 
Twenty-eight of these programs began in 1996 or later, while 7 began
in 1988 through 1995.  Of the 35 small commercial customer choice
programs, 15 had specific ending dates and may be considered pilot
programs.  Thirty-two gas utilities reported that they had both
residential and small commercial customer choice programs under way
as of July 31, 1998. 


      RESIDENTIAL PARTICIPATION
      RATES ARE LOW NATIONALLY AND
      VARY GREATLY AMONG PROGRAMS
---------------------------------------------------------- Letter :3.2

The 34 gas utilities that reported residential customer choice
programs under way as of July 31, 1998, provide over 21 million
residential customers with gas service.  Of these customers, over 15
million were eligible to participate.  However, only about 553,000,
or roughly 4 percent, of those eligible to participate had actually
selected a gas marketer as their new supplier of natural gas.  Table
1 provides information, by state, on the 34 residential customer
choice programs. 



                                Table 1
                
                Overview of Residential Customer Choice
                     Programs in the United States

                                      Eligible              Percent of
                         Number of  participan  Participan  participat
State                     programs          ts          ts       ion\a
----------------------  ----------  ----------  ----------  ----------
California                       3   8,494,185      44,088         0.5
Illinois                         1      10,081       1,705        16.9
Indiana                          1      83,000       3,258         3.9
Maryland                         3     640,000      44,900         7.0
Massachusetts                    1      83,000      23,100        27.8
Michigan                         3     145,000      33,903        23.4
Nebraska                         1      82,000      57,400        70.0
New Jersey                       1     350,000      22,000         6.3
New Mexico                       1     380,000           0           0
New York                         9   3,336,762      17,888         0.5
Ohio                             3     656,000      98,485        15.0
Pennsylvania                     4     847,001     194,439        23.0
Virginia                         1      23,500       4,243        18.1
Wisconsin                        1      10,996       1,500        13.6
Wyoming                          1      10,000       6,000        60.0
======================================================================
Total                           34  15,151,525     552,909         3.6
----------------------------------------------------------------------
Note:  Estimates of the number of participants in residential
customer choice programs are based on information we received from 38
gas utilities.  Most utilities provided us with estimates based on
information that was current as of July 31, 1998.  Reporting dates
for other utilities varied between Mar.  31, 1998, and Oct.  1, 1998. 
(See table I.1 in app.  I for the reporting dates of utilities
included in this table.)

\a The percent of participation was calculated by dividing the number
of residential customers that have chosen gas marketers by the number
of eligible participants in a customer choice program. 

Table 1 shows that, by state, the number of eligible participants and
the participation rate vary widely among residential customer choice
programs.  For example, residential customer choice programs in
California and New York have by far the largest number of eligible
participants, but their programs, collectively, have relatively low
participation rates.  Eleven of the 12 residential programs in these
states had participation rates of under 1 percent.  The four
residential customer choice programs in Pennsylvania account for
about one-third of all such participants nationwide.  Residential
customer choice programs in Ohio, Michigan, and Maryland also account
for a large percentage of the total participation nationwide. 

Across individual programs, participation rates varied greatly.  For
instance, as of September 9, 1998, 70 percent of the 82,000
residential customers eligible to participate in Nebraska's KN Energy
choice program were participating.  In contrast, as of August 31,
1998, none of the 380,000 eligible residential customers were
participating in the Public Service Company of New Mexico's program
because of the unavailability of gas marketers.  (See table I.1, in
app.  I, for the number of participants and participation rates for
each of the 34 residential customer choice programs in our survey.)

National figures for participation in small commercial programs could
not be determined.  Several gas utilities that responded to our
survey kept information for commercial customers but did not keep
separate information for small commercial customers.  Also, several
programs had different gas usage requirements for small commercial
participation, making comparisons among programs unreliable.  For
instance, some programs were open to all commercial customers
regardless of annual gas usage, while others set annual limits on gas
usage for participation.  To the extent that information was
available, table I.2, in appendix I, identifies small commercial
customer choice programs by state, the number of eligible
participants, participants, and participation rates. 


      RESIDENTIAL PARTICIPATION
      RATES ARE DETERMINED BY A
      NUMBER OF FACTORS
---------------------------------------------------------- Letter :3.3

According to state regulators, gas utility representatives, and gas
marketers we spoke with, residential participation rates in customer
choice programs are determined by many factors.  An important factor
is the potential of residential customers to save money by purchasing
gas from a gas marketer rather than from a gas utility.  Savings are
defined as the difference between what the gas utility would charge
and what the gas marketer charges for gas delivered to a utility's
city gate.  As discussed in the next section, gas utilities told us
that customers' savings come from a combination of gas marketers'
savings on upstream transportation and storage costs and on the cost
of gas.  In some states, customers are also achieving savings because
natural gas sold by marketers is subject to fewer state and local
taxes than gas sold by local gas utilities.  To the extent gas
marketers pay lower taxes, they can charge lower prices. 

State regulators, gas utilities, and gas marketers told us that other
factors influencing customers' participation include efforts to make
customers aware of choice programs through education and outreach
activities.  In Massachusetts, Bay State Gas Company was able to
achieve a relatively high rate of customer participation partially
through public education efforts coordinated through a collaborative
process with state regulators, consumer representatives, and gas
marketers.  Bay State Gas Company offered customer choice to all its
residential customers in Springfield, Massachusetts, in the summer of
1997.  The collaborative promotion campaign that followed involved
direct mail and billing statement inserts from the gas utility, media
advertising in 10 newspapers, four television stations, and nine
radio stations, and individual campaigns by gas marketers.  As of
July 31, 1998, almost 28 percent of the residential customers in the
Springfield area had selected a gas marketer under the program. 

Another collaborative effort took place under Columbia Gas of Ohio's
program.  In this program, Columbia Gas of Ohio offered customer
choice to about 160,000 residential and 11,500 small business
customers in its Toledo, Ohio, service area beginning in April 1997. 
The gas utility also collaborated with state regulators, consumer
representatives, and gas marketers to find the best way to continue,
improve, and expand the choice program.  Public education efforts for
this program began with a 14-day advertising moratorium, during which
gas marketers voluntarily refrained from contacting or enrolling
customers.  During this moratorium, only Columbia Gas of Ohio, the
Public Utility Commission of Ohio (PUCO), and the Ohio Consumers'
Council could contact customers and inform them of the choice
program.\16 The moratorium and subsequent educational campaigns
included print, television, radio, billboard and mail advertising,
news releases, and community events.  As of July 31, 1998, 53,985
residential customers, or 34 percent of all eligible customers, had
chosen a gas marketer under the program. 

Other programs may have encouraged participation by making it easier
for customers to participate.  For example, in Nebraska and Wyoming,
KN Energy allowed customers to select gas suppliers through mail-in
balloting.  For these programs, KN Energy sent ballots to all
eligible residential and commercial customers in order for them to
select a gas marketer.  Balloting took place during 2-week open
seasons.\17

While potential savings and customer education and outreach efforts
can increase customers' participation, program rules, such as caps on
participation, can limit overall participation.  For instance, some
programs limit eligibility to less than all the customers in their
service area so that gas utilities can gain experience in
administering a program prior to broadening it.  Thirteen gas
utilities in our survey reported that eligibility was limited to
fewer than half of all the residential customers in their service
area.  For example, under the SEMCO Energy Gas Company's Battle Creek
Division program in Michigan, participation is capped at 1,000
residential customers, which is only 3 percent of the 32,400
residential customers in the utility's service area.  Under the
Baltimore Gas and Electric Company's customer choice program, while
all residential customers were eligible, participation was capped at
50,000 residential customers, which was only 9 percent of the 530,000
residential customers in the utility's service area.\18


--------------------
\16 Because of customers' initial confusion over pricing and
marketers' offers, PUCO later extended the moratorium's time frame
for the first 45 days of the Cincinnati Gas and Electric Company
program and for the first 90 days of the East Ohio Gas program.  In
addition, PUCO developed and distributed a price comparison chart to
help customers understand the pricing options available to them. 

\17 Aside from the two KN Energy programs, only five other gas
utilities in our survey--The Peoples Gas Light and Coke Company and
Nicor Gas of Illinois, Michigan Consolidated Gas, Wisconsin Gas
Company, and National Fuel Gas of Pennsylvania--required customer
choice participants to choose gas marketers during open seasons. 
Other gas utilities in our survey allowed participants to choose gas
marketers through rolling enrollment. 

\18 The utility reached this cap in Oct.  1998.  Data used in this
report for Baltimore Gas and Electric are current as of July 31,
1998. 


      MANY FACTORS AFFECT GAS
      MARKETERS' PARTICIPATION
---------------------------------------------------------- Letter :3.4

State regulators, gas utilities, and gas marketers told us that gas
marketers' participation in customer choice programs is influenced by
the potential for the gas marketers to earn a profit on their gas
sales.  They also said that limits on customers' participation in
some areas may be such that a marketer cannot expect to make a
profit.  For instance, some programs limit customers' eligibility,
and gas marketers may not offer service in these programs because
they may be unable to recover administrative and marketing costs. 
One marketer told us that it will not participate in a choice program
that has fewer than 100,000 eligible customers if the service area is
remote and the marketer cannot combine its marketing effort for a
remote area with its efforts to sell gas to other customers in
adjacent programs.  Generally, residential customer choice programs
that had fewer eligible customers had fewer marketers offering gas
services.  For example, the Central Illinois Light Company's choice
program limits participation to 10,081 customers, which is 6 percent
of the 183,058 customers in its service territory.  This choice
program is served by only one marketer. 

Geographical factors can also discourage marketers' participation. 
For example, in the New Mexico customer choice program, no gas
marketers are currently active for residential customers.  The New
Mexico Public Utility Commission and gas utility representatives in
the state reported that marketers did not see the potential for
financial benefit in the program, given the relatively low cost of
gas in the state.  One gas marketer that left the residential choice
program in New Mexico told us the administrative and advertising
costs it incurred in attracting residential customers exceeded the
profits it could make in selling gas to these customers. 

The potential for gas marketers to earn profits may also be affected
by program rules, such as whether gas marketers can contract for
their own transportation services to transport gas to the gas
utility.  Under two residential customer choice programs in New
York--New York State Electric and Gas and Rochester Gas and
Electric--only one gas marketer was participating in each program,
and the marketers were required to assume existing pipeline
contracts.  The New York Public Services Commission reported that gas
marketers may not be participating in some state customer choice
programs because their profit margins are too thin.  The commission
issued an order on November 3, 1998, that would allow, by April 1,
1999, gas marketers participating in any customer choice program in
the state to contract for their own transportation services.\19

Other program rules and fees may also limit gas marketers'
participation.  For instance, several customer choice programs
require gas marketers to sign up a minimum number of customers,
called aggregation requirements, in order to participate as
marketers.  If these aggregation requirements are set at a high
enough level, they can limit gas marketers' participation.  For
example, in California, gas marketers must meet a 250,000-therm\20
aggregation minimum in order to be able to offer services in the
state's customer choice programs.  In a January 1998 report, the
California Public Utility Commission recommended eliminating this
aggregation requirement because it hindered marketers'
participation.\21

Under the Central Illinois Gas Company program, gas marketers are
required to post a $300 bond per customer served.  According to the
utility, a gas marketer complained that the bond is a barrier to
marketers' participation.  This program is currently served by only
one gas marketer--the utility's marketing affiliate.  Gas marketers
have told us that other utilities require that marketers post
performance bonds or security deposits per customer served and that
these costs can constitute a financial barrier to entry for them. 
One gas marketer told us that a $10 per customer security deposit
requirement constituted a $200,000 "entry fee" if the marketer wanted
to supply gas to 20,000 customers in a customer choice program. 

Table I.3 in appendix I lists the number of gas marketers
participating in current small-volume customer choice programs. 


--------------------
\19 Policy Statement Concerning the Future of the Natural Gas
Industry in New York State and Order Terminating Capacity Assignment,
State of New York Public Service Commission (Case 93-G-0932 and Case
97-G-1380, Nov.  3, 1998). 

\20 A therm is a heat measurement for natural gas that is equivalent
to 100,000 British thermal units.  Each California residential
customer consumed about 532 therms annually in 1996. 

\21 Strategies for Natural Gas Reform:  Exploring Options for
Converging Energy Markets, Division of Strategic Planning, California
Public Utilities Commission (Jan.  21, 1998). 


   SOME CUSTOMER SAVINGS AND NEW
   SERVICE OPTIONS REPORTED FOR
   CUSTOMER CHOICE PROGRAMS
------------------------------------------------------------ Letter :4

Although customer choice programs are relatively new, some
information on the impacts of these programs exists.  Several gas
utilities in our survey reported that program participants achieved
savings and greater service options with no apparent reduction in
service reliability.  While gas utilities reported few reliability
problems with gas marketers' deliveries, some noted that customer
choice programs are less than 3 years old and the reliability of gas
marketers' deliveries has yet to be tested.  Most gas utilities in
our survey did not provide an estimate of customer savings, in part
because their programs were in their initial stages of operation and
information on savings were unavailable from gas marketers.  Savings
estimates ranged from 1 to 15 percent on total gas bills and were
estimated to come from lower transportation and storage costs, the
lower cost of gas, and savings on state and local taxes.  Most gas
utilities in our survey have set up independent marketing arms,
called affiliates, to sell gas as a separate service to residential
and small commercial gas users.  For several of the customer choice
programs that we surveyed, these marketing affiliates have large
market shares, raising concerns about how competitive these programs
are and thus their potential to reduce prices to customers. 


         ESTIMATES OF SAVINGS VARY
-------------------------------------------------------- Letter :4.0.1

Twelve of the 38 gas utilities that responded to our questionnaire
estimated savings for residential and small commercial customers
participating in their customer choice programs.  These estimates
ranged from savings of 1 to 15 percent on total gas bills compared
with the amounts that would have been paid under the prior regulated
rates.  Eleven of these utilities estimated savings of at least 5
percent on monthly gas bills.  Gas utilities in our survey responded
that these results likely came from a combination of marketers'
savings on interstate transportation and storage costs, savings on
the cost of gas itself, and savings that the marketers experience
because state and local taxes are levied on utilities' gas sales but
not on marketers' gas sales. 


         SAVINGS POTENTIAL MAY
         DEPEND ON COMPONENTS OF
         GAS BILL OPEN TO
         COMPETITION
-------------------------------------------------------- Letter :4.0.2

All customer choice programs allow gas marketers to attract customers
through price competition on the cost of gas.  However, not all
programs allow gas marketers to attract customers through price
competition on the cost of transportation services, called upstream
capacity.\22 Customer choice programs that allow for price
competition on both the cost of gas and upstream capacity open a
larger percentage of a gas bill to potential price savings than
customer choice programs that allow for price competition only on the
cost of gas.  Figure 3 illustrates this point by identifying the
service components and their estimated costs in an average annualized
residential gas bill in the Midwest. 

   Figure 3:  Annualized Costs in
   a Residential Gas
   Bill--Columbia Gas of Ohio

   (See figure in printed
   edition.)

Note:  Average annualized costs for residential customers were
estimated for May 1997 to May 1998. 

Source:  Columbia Gas of Ohio. 

In this example, an average residential customer in the Columbia Gas
of Ohio service area pays about $687 annually for natural gas
service.\23 As shown in the figure, the cost of gas amounts to 40.4
percent of the annualized bill, while interstate transportation and
storage costs (the upstream capacity costs) account for another 18.2
percent.  These costs, almost 59 percent of the annualized bill, are
pass-through costs\24 from the local gas utility to the customer.  It
is generally in these service components--the cost of the gas and its
delivery to the local gas utility--that price competition in customer
choice programs takes place.  Customer choice typically means a
choice in the gas supply to the local gas utility, called the city
gate.  The remaining 41 percent of the annualized bill includes costs
that occur after the gas utility receives the gas, such as costs for
local gas distribution through utility-owned pipelines, local gas
storage costs, the salaries of utility employees, return on
investment, billing, metering, and customer service.\25

Some gas marketers and gas utilities told us that savings on the cost
of gas are likely to be small.  They told us that the national market
for natural gas is competitive and that the commodity can be bought
by gas utilities and gas marketers at similar prices. 

However, several gas utilities and gas marketers told us that savings
on upstream capacity can be significant.  As noted earlier, to
guarantee the availability of pipeline and storage space necessary
for the delivery of their gas, gas utilities reserve upstream
capacity through negotiated contracts with pipeline companies.  These
contracts are often long-term--up to 20 years--for priority pipeline
and storage space (called firm capacity\26 ).  Gas utilities were
often required to purchase firm long-term transportation contracts by
state regulators to ensure that gas would be delivered to residential
and small commercial customers regardless of demand. 

In practice, firm capacity contracts have often meant that gas
utilities had unused capacity during off-peak periods, such as the
summer months, when the demand for gas heating is low.  In other
words, gas utilities reserved sufficient capacity to meet their
maximum loads, although this meant that for the rest of the year they
were paying for unused capacity and passing these costs to their
customers. 

In contrast to gas utilities, gas marketers have more flexibility to
serve their customers through a mix of firm and interruptible\27
capacity contracts.  In addition, gas marketers can buy capacity
released from gas utilities through a secondary market,\28 at rates
lower than those paid by the gas utilities.  Several gas marketers
told us they believe that they can deliver gas reliably and at less
cost than gas utilities through these contracting methods.  Some gas
utility representatives and state regulators question, however,
whether gas marketers have contracted for sufficient capacity to
ensure the reliable delivery of gas during periods of peak demand. 
Because of gas utilities' obligation to serve, they may not have the
flexibility to contract for short-term capacity that gas marketers
have. 

Figure 3 also highlights the fact that the relative size of these
cost components can limit the amount of potential customer savings. 
The cost structure shown in figure 3 varies regionally, depending
upon the need for interstate transportation and gas storage. 
Small-volume gas users in southwestern states pay low interstate
transportation and storage costs because of the proximity of
gas-producing fields.  In these states, any significant price
competition is likely to be limited to the pricing of gas among gas
marketers.  However, in midwestern and eastern states, interstate
transportation and storage costs can amount to a significant portion
of a gas bill, making competition on this portion of a gas bill a
larger source of potential savings.  For example, Bay State Gas
Company in Massachusetts estimates that its residential customers pay
about $293 annually for the natural gas itself and nearly $271
annually for the interstate transportation and storage of the gas
prior to its local distribution and consumption. 


--------------------
\22 As noted earlier, these costs include ones for pipeline
transportation and storage that occur between the source of gas
supply and the beginning of a gas utility's local distribution
system. 

\23 Average residential costs vary regionally on the basis of gas
usage and transportation costs.  Bay State Gas Company in
Massachusetts estimated annual residential costs for gas service to
be $1,024 for Nov.  1997 through Oct.  1998.  These costs exceed
estimated residential costs in the Columbia Gas of Ohio service area
because of greater gas usage and additional gas transportation costs,
given the greater distance from gas-producing areas in the Southwest. 

\24 Pass-through costs mean that regulators generally allow the
utility to fully recover such costs, with no opportunity for profit
or loss, unless regulators determine some portion of upstream costs
to be excessively high or not prudent.  Depending on state law, the
utility may be faced with some cost disallowances.  Gas utilities
generally earn profits through a regulated rate of return based on
their costs of providing local transportation for the gas and related
services. 

\25 On the basis of this example, a customer choice program that
resulted in a 10-percent annual savings for a residential customer on
the cost of gas, as well as on transportation and storage costs
before local distribution, would amount to about $40, or about $3.35
a month, for the customer. 

\26 Firm service is defined as gas sold or transported with an
obligation for delivery. 

\27 Interruptible service is defined as a low-priority service
subject to interruption when necessary to serve the needs of firm
customers or higher-priority interruptible customers. 

\28 In 1992, FERC Order 636 allowed, among other things, the holders
of firm capacity contracts to release capacity back to pipeline
companies for resale to others.  At that time, the price of resales
of pipeline capacity contracts in the secondary market were capped at
regulated tariff rates, which meant that the price paid in the
secondary market would not exceed what the gas utility had paid for
the capacity, even during peak-use periods.  In an Aug.  1998 notice
of proposed rulemaking, FERC proposed to remove this price cap for
the resales of short-term (less than 1-year) capacity contracts. 
FERC concluded that the price cap on released capacity had given gas
utilities a disincentive to release capacity in this market.  Several
gas marketers, gas utilities, and state regulators told us that
federal action to release the cap will enhance the efficiency of the
secondary market, thereby leading to potentially greater cost savings
and possible gains in reliability. 


         UTILITIES REPORT SAVINGS
         ON UPSTREAM CAPACITY
-------------------------------------------------------- Letter :4.0.3

Eleven gas utilities in our survey responded that customer choice
programs achieved some savings for customers because gas marketers
have lower upstream transportation and storage costs than do gas
utilities.  However, gas utilities were unsure of the amount of
savings resulting from these lower costs, given the unavailability of
information on gas marketers' sources of savings.  Of the 38 gas
utilities in our survey, 26 allow for savings on upstream capacity
because they allow gas marketers to contract, at least in part, for
their own transportation services.  Eleven other gas utilities in our
survey do not allow gas marketers to contract for their own
transportation services.  These utilities require gas marketers to
use transportation services previously contracted for by the
utilities.\29 In these instances, the gas marketer is required to
take this capacity at full regulated rates and use it to deliver the
gas to the gas utility.\30

(See table I.4 in app.  I for a listing of customer choice programs'
rules regarding the treatment of upstream capacity.)

As noted earlier, requiring gas marketers to use upstream capacity
previously contracted for by gas utilities is likely to mean lower
potential savings for customer choice participants.  Gas marketers
told us that requiring them to use the gas utility's existing
upstream transportation services at full regulated rates forces them
to copy the utility's gas service and limits their ability to offer
savings to customers.  Gas marketers told us that when they arrange
for their own upstream capacity, they can use a diverse portfolio of
upstream capacity contracts, including firm, interruptible, and
secondary market contracts.  As a result, they told us, they can
transport gas to customers at lower costs than gas utilities. 

Several gas utilities and state regulators told us that if they allow
gas marketers to contract for their own transportation services, gas
utilities may be unable to recover part of the cost of existing
upstream capacity contracts.  Gas utilities negotiated many of these
contracts on the basis of estimated volumes and use patterns for
existing and future customers prior to the beginning of customer
choice programs.  Customer choice programs that allow marketers to
contract for their own transportation services can result in gas
utilities' having smaller customer bases to recover their upstream
capacity contracts.  In other words, gas utilities must still pay for
the upstream capacity contracts they were required to purchase to
serve gas customers that no longer buy their gas and transportation
services from them.  This can result in inequities if gas utilities
recover the costs of capacity contracts from only those customers
currently using upstream transportation services contracted for by
the utilities.\31

In many cases, gas utilities charge their customers a surcharge in
order to recover costs associated with their customer choice
programs.  These costs may include program implementation costs, such
as advertising and customer education expenses, and unused upstream
capacity.  Nineteen gas utilities in our survey charge their
customers a surcharge in order to recover these costs.  Table I.5 in
appendix I identifies whether gas utilities charge customers to
recover transition costs resulting from customer choice programs. 
Importantly, such charges are often applied to all customers that use
the gas utility's local distribution service, whether they
participate in a customer choice program or not.  This can result in
an increased cost for gas service for those customers not
participating in customer choice programs. 


--------------------
\29 Also referred to as mandatory capacity assignment. 

\30 Gas utilities are tied to long-term contracts with interstate
pipeline companies at the cost-of-service regulated rates.  These
contracts can limit flexibility in bringing the lowest-cost gas to
the city gate with the lowest upstream capacity costs.  Even if a
choice program does not require mandatory assignment, it may limit
marketers' options by specifying limited receipt and delivery points
for bringing gas to the city gate. 

\31 Inequities can be mitigated in the short run by selling unused
capacity via the secondary market.  In the long run, upstream
capacity can be "turned back" to pipeline companies when capacity
contracts expire. 


         UTILITIES REPORT SAVINGS
         ON THE COST OF GAS
-------------------------------------------------------- Letter :4.0.4

Nine gas utilities in our survey responded that customer choice
programs achieve some cost savings because gas marketers may be able
to buy gas more cheaply than gas utilities can.  One respondent noted
that gas marketers are also more likely to purchase futures
contracts\32 for gas, which can minimize swings in the price of the
fuel.  Many gas utilities do not use these contracts when purchasing
natural gas supplies partly because of concerns that state regulators
will not allow them to recover futures trading costs.  As noted
earlier, other gas utility representatives and gas marketers have
told us that savings on the cost of gas itself are likely to be small
because gas utilities, like marketers and other major gas purchasers,
can buy gas at competitive prices. 


--------------------
\32 Futures contracts allow the purchasers of a commodity (natural
gas) to lock in a purchase price at some point in the future.  These
contracts can be used to guard against unforeseen price increases in
the commodity. 


         SAVINGS DUE TO TAX
         AVOIDANCE
-------------------------------------------------------- Letter :4.0.5

Sales taxes and other business taxes differ from state to state and
may even vary by locality.  The amount of tax savings would also vary
considerably.  Gas utilities in seven states--Illinois, Maryland,
Michigan, New Jersey, New Mexico, New York, and
Pennsylvania--reported to us that sales of natural gas by gas
marketers were subject to fewer state taxes than gas sales by local
gas utilities.  Thus, to the extent they paid lower taxes, gas
marketers were able to offer residential and small commercial
customers natural gas at a lower price than the local gas utility in
these states. 

In Pennsylvania, local gas utilities pay a 5-percent gross receipts
tax on both the cost of gas and their local delivery charge.  Gas
utilities and other businesses pass this tax on to consumers and
often itemize it on their monthly bills.  According to gas utility
representatives in Pennsylvania, if customers purchase gas from gas
marketers that do not do business in Pennsylvania or that are not
regulated by the state's Public Utility Commission, they avoid the
tax on both the cost of gas and the delivery charge.  We were told
this tax is avoided even though the local gas utility charges for
local gas delivery whether customers buy the gas from a gas marketer
or the utility.  A state regulatory official told us that gas
marketers are passing this tax savings along to program customers,
and this tax savings may amount to more than half of the savings in
some of the Pennsylvania programs. 

In Maryland, gas companies pay a 2-percent gross receipts tax on both
the cost of gas and the utilities' delivery charge.  However,
according to gas utility representatives in Maryland, when customers
purchase gas from a gas marketer not subject to the Maryland gross
receipts tax, they avoid the tax on the cost of gas but still pay the
tax on the utility's local delivery charge.  In Michigan, the reverse
was reported by a gas utility. 

In New York, local sales taxes can affect the amount of savings that
participants can expect in a customer choice program.  Residential
participants in Brooklyn Union Gas's two programs pay different sales
taxes because of local sales tax differences between counties.  These
differences can range from 1 to 4 percent on the cost of gas and the
local delivery charge.  In Illinois, a gas utility representative
reported that gas marketers' sales are exempt from the state sales
tax. 

Until a 1998 tax change, New Jersey residential customers avoided the
state's 13.5-percent gross receipts and franchise tax by purchasing
gas from a gas marketer rather than a gas utility.  Beginning in
January 1998, New Jersey replaced this tax with separate taxes that
applied equally to gas sales from nonutilities and utilities. 

As happened in New Jersey, other states may close gaps in tax
treatment between utilities' and gas marketers' gas sales in order to
preclude the loss of tax revenues.  According to state regulators we
spoke with, it is unlikely that differential tax treatment will
continue to be a significant source of savings in customer choice
programs.  For the Columbia Gas of Ohio program, the gas utility
itself structured its local distribution charges to customers to
effectively equalize the tax burden for all customers, whether they
purchased gas from the utility or a gas marketer. 


      MANY MARKETING AFFILIATES
      HAVE LARGE MARKET SHARES
---------------------------------------------------------- Letter :4.1

In many states, state regulators permit gas utilities to create their
own gas marketers, called marketing affiliates, to compete with other
nonutility gas marketers for customers in customer choice
programs.\33 These marketing affiliates are wholly or partly owned by
the gas utility or its parent company.  For several customer choice
programs that we surveyed, these marketing affiliates had large
market shares, raising concerns among state regulators about how
competitive these programs are and thus their potential to reduce
prices.  Of the 38 utilities that responded to our survey, 33 had
marketing affiliates that offer gas services, while 5 did not have
marketing affiliates.  Of the 33 gas utilities with marketing
affiliates, several had substantial customer participation, largely
because of the customer sign-ups initiated by the marketing
affiliates. 

For instance, the concentration of the affiliates' market share has
been relatively high in three of the four Pennsylvania residential
customer choice programs.  The affiliate for the Equitable Gas
residential choice program served all 42,000 residential customers
participating in the gas utility's choice program as of August 31,
1998.  As of July 31, 1998, the Peoples Natural Gas affiliate served
79 percent of all residential customers participating in the
utility's program.  As of September 10, 1998, the National Fuel Gas
affiliate served 63 percent of all residential customers
participating in the utility's program.  These choice programs
account for a significant portion of residential customers'
participation nationwide--159,000, or 27 percent, of residential
participants in customer choice programs.  Only the affiliate for the
Pennsylvania Columbia Gas program did not have the largest market
share. 

Another large customer choice program with a relatively high
affiliate market share is the East Ohio Gas choice program.  For this
program, the East Ohio Gas marketing affiliate served 83 percent of
the 32,000 participating residential customers as of March 31, 1998. 
All the programs mentioned above that have high market concentrations
also require that gas marketers use the gas utility's existing
upstream transportation and storage.  The marketing affiliate in the
fourth Pennsylvania program--the Columbia Gas of Pennsylvania
program--had only the third largest market share among marketers in
the program, and the program allows marketers the option of using the
gas utility's existing upstream transportation and storage or
contracting for their own. 

In our review of the three Ohio customer choice programs, we found
the only program that required gas marketers to use the gas utility's
existing upstream transportation and storage--the East Ohio Gas
program--also had the highest market concentration by its affiliate. 
The two other Ohio programs--the Cincinnati Gas and Electric program
and the Columbia Gas of Ohio program--gave gas marketers the option
to use the gas utility's existing upstream transportation and storage
or to contract for their own. 

Anticompetitive factors are a concern among state regulators we
interviewed.  Gas marketers and regulators have raised concerns about
the marketing affiliates of gas utilities operating in their parent
company's service area.  Concerns include the potential for a gas
utility to subsidize its affiliate with rate-payer funds or to extend
to its affiliate preferential treatment over other marketers for any
services or information.  In many states, regulators have instituted
affiliate rules or codes of conduct aimed at preventing and
penalizing abuses in relationships between gas utilities and their
affiliates. 


--------------------
\33 FERC also prescribes standards of conduct applicable to
transactions between interstate pipeline companies and their
marketing affiliates. 


      GAS UTILITIES REPORT SOME
      PROBLEMS WITH MARKETERS'
      RELIABILITY AND BEHAVIOR
---------------------------------------------------------- Letter :4.2

Three gas utilities in our survey reported reliability problems with
marketers, and 11 gas utilities reported problems with marketers'
conduct.  In one case, the problem reported was a failure by a gas
marketer to deliver gas to the gas utility for local distribution
when required. 

While some gas utilities reported few reliability problems with gas
marketers' deliveries, some utilities and state regulators noted that
customer choice programs are less than 3 years old and the
reliability of gas marketers' deliveries has yet to be tested.  A
study by the staff of the Public Utility Commission of Ohio (PUCO)
found that while marketers demonstrated their ability to deliver
directed quantities of gas to city gates during the 1997-98 winter,
that winter was unseasonably warm, and marketers' ability to supply
quantities of gas at or above peak conditions was not tested.  The
report concluded that because of limited information, the PUCO staff
could not state with any certainty that marketers' ability to deliver
daily quantities under severe weather conditions would mirror their
performance during the 1997-98 winter.\34

While some gas utilities have concerns about gas marketers'
reliability, particularly if gas marketers are allowed to arrange for
their own transportation of gas to a utility's city gate, gas
utilities can use enforcement mechanisms to ensure the reliability of
service.  All of the gas utilities responding to our survey reported
that they have the authority to either suspend marketers from
programs or levy penalties on marketers for failing to deliver gas
according to set delivery schedules. 

In addition to the mechanisms available to gas utilities to ensure
gas marketers' reliability, the emergence of a secondary market for
released capacity gives gas marketers access to pipeline
transportation.  As noted earlier, in 1992, FERC issued Order 636,
which, among other things, allowed holders of firm capacity
reservations to release unused capacity back to pipeline companies
for resale to others.  While this market has been somewhat limited
because of a FERC-required price cap on the resales of pipeline
contracts, FERC has recently proposed to remove this price cap.  In a
May 1998 report, DOE concluded that "the unused capability of the
interstate pipeline system for transportation service appears to be
substantial."\35 DOE reported that during the 1996-97 heating year,
37 percent of the nation's gas pipeline system capacity went unused. 


--------------------
\34 Staff Evaluation of Ohio's Natural Gas Customer Choice Programs: 
Columbia Gas of Ohio, East Ohio Gas, and Cincinnati Gas and Electric
Companies, submitted by the staff of PUCO (May 1998). 

\35 Deliverability on the Interstate Natural Gas Pipeline System,
(DOE/EIA-0618(98), May 1998). 


      GAS MARKETERS OFFER
      CUSTOMERS ADDITIONAL SERVICE
      OPTIONS
---------------------------------------------------------- Letter :4.3

Thirty-one gas utilities in our survey responded that gas marketers
were offering residential and small commercial customers additional
service choices.  Most of these choices provide residential and small
commercial gas users with an opportunity to reduce their exposure to
wide swings in the price of gas.  Among the service choices, gas
marketers most often offered customer choice participants the option
of buying their gas at a fixed price--30 of the 31 utilities
responding to our survey.  Six gas utilities responded that gas
marketers were offering customers the option of a fixed monthly bill. 
Gas utilities also noted that gas marketers were offering customers
nongas services, such as free carbon monoxide detectors and the
option to buy electricity and other fuels, such as propane and fuel
oil.  For 27 of the programs we surveyed, gas marketers were allowed
to bill the customer directly for marketer-provided services. 


   OBSERVATIONS
------------------------------------------------------------ Letter :5

Competition for residential and small commercial natural gas users is
gradually emerging in the United States.  Regulators, gas utilities,
and gas marketers are currently experimenting with ways to create
small-volume customer choice programs that attract gas marketers,
offer savings to customers, and ensure the reliability of service. 
While efficient, competitive programs that fully tap the potential
for customer savings and ensure reliable service are taking time to
develop, the speed of this development may be sensitive to certain
key features of program design.  Key program design features include
customer education efforts, the removal of barriers to entry for gas
marketers, and the arrangement of the upstream transportation of gas
that increases the potential for customer savings while ensuring
reliability.  Given geographical limitations and the savings already
achieved through past deregulation efforts, some gas utilities, state
regulators, and state legislatures may struggle with ways to find
additional savings for customers.  However, in other states,
opportunities for savings exist, and collaborative efforts among
regulators, utilities, and marketers in a few programs have shown
that key design features can be successfully addressed.  Competition
for residential and small commercial gas users may also provide an
incentive for those utilities wishing to continue selling natural gas
to find ways to reduce the prices they charge and offer additional
services.  In this way, even those customers choosing not to switch
to marketers may benefit. 

Customer choice programs provide gas utilities with the opportunity
to position themselves for a more competitive environment.  Some
observers believe that the changing regulatory environment and
competition across energy markets will favor utility companies that
are creating energy marketing affiliates or forging alliances with
other complementary energy companies. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided the Department of Energy with a copy of a draft of this
report for review and comment.  We met with the Director and staff of
the Natural Gas Division, Energy Information Agency, as well as staff
of the Policy Office, to obtain the Department's comments.  The
Department agreed with the facts presented and provided some
technical clarifications where appropriate.  The Department's
comments are presented in appendix III. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

Through interviews with industry experts at DOE, AGA, and local gas
utilities, we determined there were 43 gas utilities that offered
customer choice programs for residential and/or small commercial gas
users.  To identify the initial experiences of competition in retail
gas markets and to identify the impacts of these initiatives on
small-volume customers, we surveyed all natural gas utilities in the
United States that had customer choice programs under way as of July
31, 1998, for residential or small commercial customers.  We designed
and mailed a questionnaire to all 43 utilities that covered areas of
customers' and gas marketers' participation, the regulation of gas
marketers, customer savings, and quality of service.  We surveyed gas
utilities because they were the most available source of information
for the rules of customer choice programs and the levels of
customer's and gas marketers' participation. 

We received responses from 38 of the 43 gas utilities.  Information
presented in the report on customers' and gas marketers'
participation, program rules, and projected customer savings are
based on these 38 responses.  The results of the survey are shown in
appendix II.  In addition, we conducted follow-up telephone
interviews with questionnaire respondents to clarify and add to the
information gathered in the questionnaires.\36

In addition to the questionnaire, we conducted case studies on
individual programs in Ohio, Massachusetts, and New Mexico.  We
reviewed customer choice programs in Ohio because industry observers
noted that the state had among the most developed programs in the
country.  We selected programs in New Mexico and Massachusetts for
review because of their proximity to, and long distance from, natural
gas production areas, respectively.  We interviewed natural gas
utility officials, gas marketers, state regulators, and industry
experts in these states.  We also reviewed existing evaluations of
gas utility customer choice programs from state regulators, DOE's
Energy Information Agency, and AGA. 

We performed our review from March through November 1998 in
accordance with generally accepted government auditing standards. 


--------------------
\36 Thirty-four of the 38 gas utilities responding reported they had
residential customer choice programs under way as of July 31, 1998. 


---------------------------------------------------------- Letter :7.1

As arranged with your offices, we will send copies of this report to
the appropriate Senate and House committees.  We will also make
copies available to others on request. 

Please call me at (202) 512-3841 if you have any questions about this
report.  Major contributors to this report are listed in appendix IV. 

Susan D.  Kladiva
Associate Director, Energy,
 Resources, and Science Issues


SELECTED RESULTS FROM SURVEY
QUESTIONNAIRE
=========================================================== Appendix I

The tables in this appendix list selected results from our survey of
43 gas utilities that had small-volume customer choice programs under
way as of July 31, 1998.  Table I.1 identifies participating
customers and participation rates for residential customer choice
programs.  Table I.2 identifies participating customers and
participation rates for small commercial customer choice programs. 
Table I.3 identifies the number of gas marketers selling gas to
small-volume customers in these customer choice programs.  Table I.4
identifies customer choice programs' rules on the treatment of
upstream capacity.  The table identifies whether gas marketers are
allowed to arrange, at least in part, for their own upstream
transportation and storage of gas or whether they are required to use
transportation services previously contracted for by the gas utility. 
Finally, table I.5 identifies whether gas utilities with small-volume
customer choice programs charge fees to recover costs associated with
their programs.  These costs may include program implementation
costs, such as advertising and customer education expenses and unused
upstream capacity. 



                                        Table I.1
                         
                          Participation in Residential Customer
                                     Choice Programs

               Informatio  Date                                  Participat
State and gas  n current   program     Customers in    Eligible         ing  Participatio
utility        as of       began       service area   customers   customers  n percentage
-------------  ----------  ----------  ------------  ----------  ----------  ------------
California
-----------------------------------------------------------------------------------------
Pacific Gas    July 31,    Sept. 1,       3,000,000   3,000,000       2,000           0.1
and Electric   1998        1991
Co.

San Diego Gas  Sept. 1,    Aug. 1,          694,185     694,185         288             0
and Electric   1998        1991
Co.

Southern       Sept. 1,    Aug. 1,        4,800,000   4,800,000      41,800           0.9
California     1998        1991
Gas Co.


Illinois
-----------------------------------------------------------------------------------------
Central        Sept. 11,   Sept.            183,058      10,081       1,705          16.9
Illinois       1998        1,1996
Light Co.


Indiana
-----------------------------------------------------------------------------------------
Northern       July 31,    Nov. 1,          602,269      83,000       3,258           3.9
Indiana        1998        1997
Public
Service Co.


Maryland
-----------------------------------------------------------------------------------------
Baltimore Gas  July 31,    Nov. 1,          530,000     530,000      25,000           4.7
and Electric   1998        1997

Columbia Gas   July 31,    Nov. 1,           27,600      10,000       2,500          25.0
of Maryland    1998        1996

Washington     June 30,    Nov. 1,          300,000     100,000      17,400          17.4
Gas of         1998        1996
Maryland


Massachusetts
-----------------------------------------------------------------------------------------
Bay State Gas  July 31,    Nov. 1,          180,000      83,000      23,100          27.8
Co.            1998        1996


Michigan
-----------------------------------------------------------------------------------------
SEMCO Energy   July 31,    Apr. 1,           32,400       1,000     1,003\a         100.3
Gas Co.-       1998        1997
Battle Creek
Div.

Consumers      Sept. 1,    Apr. 1,        1,400,000     100,000      30,000          30.0
Energy         1998        1998

Michigan       July 31,    Apr. 1,        1,100,000      44,000       2,900           6.6
Consolidated   1998        1997
Gas Co.


Nebraska
-----------------------------------------------------------------------------------------
KN Energy      Sept. 9,    June 1,           92,000      82,000      57,400          70.0
               1998        1998


New Jersey
-----------------------------------------------------------------------------------------
New Jersey     July 31,    Apr. 1,          350,000     350,000      22,000           6.3
Natural Gas    1998        1997
Co.


New Mexico
-----------------------------------------------------------------------------------------
Public         Aug. 31,    Dec. 1,          380,000     380,000           0             0
Service        1998        1997
Company of
New Mexico


New York
-----------------------------------------------------------------------------------------
Brooklyn       Sept. 1,    Apr. 1,          410,922     410,922         608           0.2
Union-Long     1998        1996
Island

Brooklyn       July 31,    May 1,         1,090,800   1,090,800      11,614           1.1
Union-         1998        1996
Brooklyn,
Queens,
Staten Island

Central        July 31,    May 1,            55,000      55,000           0             0
Hudson Gas     1998        1996
and Electric
Corp.

Consolidated   July 31,    May 1,           935,301     935,301       4,619           0.5
Edison Co. of  1998        1996
New York,
Inc.

Corning        July 31,    May 1,            12,891      12,891           3             0
Natural Gas    1998        1996
Corp.

New York       July 31,    May 1,           213,180     213,180          81             0
State          1998        1996
Electric and
Gas Corp.

Niagara        July 31,    Nov. 1,          488,168     488,168         393           0.1
Mohawk Power   1998        1996
Corp.

Orange and     Oct. 1,     Nov. 1,          104,500     104,500         570           0.6
Rockland       1998        1996
Utilities,
Inc.

Rochester Gas  Aug. 20,    Nov. 1,          260,000      26,000           0             0
and Electric   1998        1996
Corp.


Ohio
-----------------------------------------------------------------------------------------
Cincinnati     June 30,    Nov. 1,          337,500     337,500      12,500           3.7
Gas and        1998        1997
Electric Co.

Columbia Gas   July 31,    Apr. 1,        1,200,000     158,500      53,985          34.1
of Ohio        1998        1997

East Ohio Gas  Mar. 31,    Dec. 1,        1,100,000     160,000      32,000          20.0
               1998        1997


Pennsylvania
-----------------------------------------------------------------------------------------
Columbia Gas   July 31,    Nov. 1,          380,000     278,000      35,489          12.8
of             1998        1996
Pennsylvania

Equitable Gas  Aug. 31,    Apr. 1,          233,500     233,500      42,000          18.0
               1998        1998

National Fuel  Sept. 10,   Sept. 1,         176,010      18,501      18,501         100.0
Gas Co.        1998        1997

Peoples        July 31,    Apr. 1,          317,000     317,000      98,449          31.1
Natural Gas    1998        1997
Co.


Virginia
-----------------------------------------------------------------------------------------
Columbia Gas   July 31,    Oct. 1,               \b      23,500       4,243          18.1
of Virginia    1998        1998


Wisconsin
-----------------------------------------------------------------------------------------
Wisconsin Gas  Sept. 22,   Nov. 1,          450,000      10,996       1,500          13.6
Co.            1998        1996


Wyoming
-----------------------------------------------------------------------------------------
KN Energy      July 31,    July 1,           10,000      10,000       6,000          60.0
               1998        1996

=========================================================================================
Total                                    21,446,284  15,151,525     552,909           3.6
-----------------------------------------------------------------------------------------
\a Program slightly exceeded its participation cap. 

\b Information unavailable. 



                                        Table I.2
                         
                            Participation in Small Commercial
                                 Customer Choice Programs

               Informatio  Date                                  Participat
State and gas  n current   program     Customers in    Eligible         ing  Participatio
utility        as of       began       service area   customers   customers  n percentage
-------------  ----------  ----------  ------------  ----------  ----------  ------------
California
-----------------------------------------------------------------------------------------
Pacific Gas    July 31,    Sept 1,          270,000     270,000       9,000           3.3
and Electric   1998        1991
Co.

San Diego Gas  Sept. 1,    Aug. 1,           27,540      27,540         657           2.4
and Electric   1998        1991
Co.

Southern       Sept. 1,    Aug. 1,          200,000     200,000       8,000           4.0
California     1998        1991
Gas Co.


Illinois
-----------------------------------------------------------------------------------------
Nicor Gas      July 31,    May 1,           162,000     162,000      32,617          20.1
               1998        1998

The Peoples    July 31,    Nov. 1,           86,170      72,616      13,585          18.7
Gas Light and  1998        1997
Coke Co.


Indiana
-----------------------------------------------------------------------------------------
Northern       July 31,    Nov. 1,               \a          \a          \a            \a
Indiana        1998        1997
Public
Service Co.


Maryland
-----------------------------------------------------------------------------------------
Columbia Gas   July 31,    June 1,            3,500       1,000         388          38.8
of Maryland    1998        1996

Washington     June 30,    June 1,           23,000      23,000       4,300          18.7
Gas of         1998        1996
Maryland


Massachusetts
-----------------------------------------------------------------------------------------
Bay State Gas  July 31,    Nov. 1,           18,000      16,000       3,450          21.6
Co.            1998        1997


Michigan
-----------------------------------------------------------------------------------------
SEMCO Energy   July 31,    Apr.               2,100       2,100         411          19.6
Gas Co.-       1998        1,1997
Battle Creek
Div.

Consumers      Sept. 1,    Apr. 1,          100,000     100,000       4,000           4.0
Energy         1998        1998

Michigan       July 31,    Apr. 1,           90,000       3,000         400          13.3
Consolidated   1998        1997
Gas Co.

SEMCO Energy   July 31,    Mar. 1,           22,000      22,000       3,850          17.5
Gas Co.        1998        1998


Nebraska
-----------------------------------------------------------------------------------------
KN Energy      Sept. 9,    June 1,               \a          \a          \a            \a
               1998        1998


New Jersey
-----------------------------------------------------------------------------------------
New Jersey     July 31,    Nov. 1,               \a          \a          \a            \a
Natural Gas    1998        1994
Co.

Public         July 31,    Feb. 1,          176,000     176,000      17,294           9.8
Service        1998        1995
Electric and
Gas Co.


New Mexico
-----------------------------------------------------------------------------------------
Public         Aug. 31,    >Dec. 1,          30,000      27,000         113           0.4
Service        1998        1997
Company of
New Mexico


New York
-----------------------------------------------------------------------------------------
Brooklyn       Sept. 1,    Apr. 1,           45,987      45,987       3,629           7.9
Union-Long     1998        1996
Island

Brooklyn       July 31,    May 1,            38,500      38,500       5,036          13.1
Union-         1998        1996
Brooklyn,
Queens,
Staten Island

Central        July 31,    May 1,                \a          \a          \a            \a
Hudson Gas     1998        1996
and Electric
Corp.

Consolidated   July 31,    May 1,            98,146      98,146       6,657           6.8
Edison         1998        1996
Company of
New York,
Inc.

Corning        July 31,    May 1,               901         901          56           6.2
Natural Gas    1998        1996
Corp.

New York       July 31,    May 1,            25,132      25,132         620           2.5
State          1998        1996
Electric and
Gas Corp.

Niagara        July 31,    Nov. 1,           39,525      39,525       2,508           6.3
Mohawk Power   1998        1996
Corp.

Orange and     Oct. 1,     Nov. 1,            9,563       9,563         604           6.3
Rockland       1998        1996
Utilities,
Inc.

Rochester Gas  Aug. 20,    Nov. 1,           20,000       2,000         584          29.2
and Electric   1998        1996
Corp.


Ohio
-----------------------------------------------------------------------------------------
Cincinnati     June 30,    Sept. 1,              \a          \a          \a            \a
Gas and        1998        1994
Electric Co.

Columbia Gas   July 31,    Apr. 1,           94,000      11,500       5,226          45.4
of Ohio        1998        1997

East Ohio Gas  Mar. 31,    Dec. 1,           80,000      12,500       2,300          18.4
               1998        1997


Pennsylvania
-----------------------------------------------------------------------------------------
Columbia Gas   July 31,    Nov. 1,            1,514          \a          \a            \a
of             1998        1996
Pennsylvania

National Fuel  Sept. 10,   Sept. 1,           7,469       1,271       1,271         100.0
Gas Co.        1998        1997

Peoples        July 31,    June 1,               \a          \a          \a            \a
Natural Gas    1998        1988
Co.


Virginia
-----------------------------------------------------------------------------------------
Columbia Gas   July 31,    Oct. 1,               \a       3,017         480          15.9
of Virginia    1998        1997


Wisconsin
-----------------------------------------------------------------------------------------
Wisconsin Gas  Sept. 22,   Nov. 1,           30,000       1,018         730          71.7
Co.            1998        1996


Wyoming
-----------------------------------------------------------------------------------------
KN Energy      July 31,    July 1,               \a          \a          \a            \a
               1998        1996
-----------------------------------------------------------------------------------------
\a Information on small commercial customers was unavailable from the
gas utility. 



                               Table I.3
                
                Gas Marketers' Participation in Customer
                            Choice Programs

                                     Gas marketers       Gas marketers
                                    selling gas to      selling gas to
                                       residential    small commercial
                                   customer choice     customer choice
State and gas utility                 participants        participants
------------------------------  ------------------  ------------------
California
----------------------------------------------------------------------
Pacific Gas and Electric Co.                     2                  16
San Diego Gas and Electric Co.                   4                   8
Southern California Gas Co.                      7                  12

Illinois
----------------------------------------------------------------------
Central Illinois Light Co.                       1                  \a
Nicor Gas                                       \b                  11
The Peoples Gas Light and Coke                  \b                   8
 Co.

Indiana
----------------------------------------------------------------------
Northern Indiana Public                          3                   4
 Service Co.

Maryland
----------------------------------------------------------------------
Baltimore Gas and Electric                      10                  \a
Columbia Gas of Maryland                         4                   2
Washington Gas of Maryland                       4                   8

Massachusetts
----------------------------------------------------------------------
Bay State Gas Co.                                9                  10

Michigan
----------------------------------------------------------------------
SEMCO Energy Gas Co.-Battle                      2                   2
 Creek Div.
Consumers Energy                                 3                   9
Michigan Consolidated Gas Co.                    3                   3
SEMCO Energy Gas Co.                            \b                   3

Nebraska
----------------------------------------------------------------------
KN Energy                                        4                  \c

New Jersey
----------------------------------------------------------------------
New Jersey Natural Gas Co.                       8                  32
Public Service Electric and                     \b                  46
 Gas Co.

New Mexico
----------------------------------------------------------------------
Public Service Company of New                    0                   1
 Mexico

New York
----------------------------------------------------------------------
Brooklyn Union-Long Island                       8                  21
Brooklyn Union-Brooklyn,                        23                  33
 Queens, Staten Island
Central Hudson Gas and                           0                  \c
 Electric Corp.
Consolidated Edison Company of                  12                  21
 New York, Inc.
Corning Natural Gas Corp.                        1                   1
New York State Electric and                      1                   8
 Gas Corp.
Niagara Mohawk Power Corp.                       8                  18
Orange and Rockland Utilities,                   2                  13
 Inc.
Rochester Gas and Electric                       1                   4
 Corp.

Ohio
----------------------------------------------------------------------
Cincinnati Gas and Electric                      9                  \c
 Co.
Columbia Gas of Ohio                            10                  10
East Ohio Gas                                   11                  12

Pennsylvania
----------------------------------------------------------------------
Columbia Gas of Pennsylvania                     7                   7
Equitable Gas                                    2                  \a
National Fuel Gas Co.                            4                   4
Peoples Natural Gas Co.                          4                  20

Virginia
----------------------------------------------------------------------
Columbia Gas of Virginia                         5                   7

Wisconsin
----------------------------------------------------------------------
Wisconsin Gas Co.                                2                   6

Wyoming
----------------------------------------------------------------------
KN Energy                                        3                  \c
----------------------------------------------------------------------
\a Gas utility not offering small commercial customer choice program,
as of July 31, 1998. 

\b Gas utility not offering residential customer choice program, as
of July 31, 1998. 

\c Information unavailable from gas utility. 



                               Table I.4
                
                    Natural Gas Utility Treatment of
                  Upstream Capacity in Customer Choice
                                Programs

                                                     Marketers arrange
                                  Marketers assume      some or all of
                                  utility upstream      their upstream
                                transportation and  transportation and
State and gas utility                storage costs             storage
------------------------------  ------------------  ------------------
California
----------------------------------------------------------------------
Pacific Gas and Electric Co.                                         X
San Diego Gas and Electric Co.                                     X\a
Southern California Gas Co.                                          X

Illinois
----------------------------------------------------------------------
Central Illinois Light Co.                                           X
Nicor Gas                                                          X\b
The Peoples Gas Light and Coke                                       X
 Co.

Indiana
----------------------------------------------------------------------
Northern Indiana Public                                            X\c
 Service Co.

Maryland
----------------------------------------------------------------------
Baltimore Gas and Electric                                           X
Columbia Gas of Maryland                         X
Washington Gas of Maryland                                           X

Massachusetts
----------------------------------------------------------------------
Bay State Gas Company                                                X

Michigan
----------------------------------------------------------------------
SEMCO Energy Gas Co.-Battle                                          X
 Creek Div.
Consumers Energy                                                   X\d
Michigan Consolidated Gas Co.                                      X\e
SEMCO Energy Gas Co.                                                 X

Nebraska
----------------------------------------------------------------------
KN Energy                                        X

New Jersey
----------------------------------------------------------------------
New Jersey Natural Gas Co.                                           X
Public Service Electric and                                          X
 Gas Co.

New Mexico
----------------------------------------------------------------------
Public Service Company of New                                       \f
 Mexico

New York
----------------------------------------------------------------------
Brooklyn Union-Long Island                                           X
Brooklyn Union-Brooklyn,                                             X
 Queens, Staten Island
Central Hudson Gas and                           X
 Electric Corp.
Consolidated Edison Company of                                       X
 New York, Inc.
Corning Natural Gas Corp.                                            X
New York State Electric and                      X
 Gas Corp.
Niagara Mohawk Power Corp.                       X
Orange and Rockland Utilities,                                       X
 Inc.
Rochester Gas and Electric                       X
 Corp.

Ohio
----------------------------------------------------------------------
Cincinnati Gas and Electric                                          X
 Co.
Columbia Gas of Ohio                                                 X
East Ohio Gas                                    X

Pennsylvania
----------------------------------------------------------------------
Columbia Gas of Pennsylvania                                         X
Equitable Gas                                    X
National Fuel Gas Co.                            X
Peoples Natural Gas Co.                        X\g

Virginia
----------------------------------------------------------------------
Columbia Gas of Virginia                                             X

Wisconsin
----------------------------------------------------------------------
Wisconsin Gas Co.                                                  X\h

Wyoming
----------------------------------------------------------------------
KN Energy                                        X
----------------------------------------------------------------------
\a Marketers are required to use pro-rata storage assignment for
reliability. 

\b Marketers obtain their own upstream capacity, and they are
provided with gas utility storage. 

\c Marketers can choose from two different delivery options. 

\d Marketers are required to deliver gas to the utility's system
according to a prescribed schedule. 

\e Marketers have access to utility-owned storage capacity. 

\f Capacity assignment is not an issue in New Mexico, given the
location of gas fields in the state. 

\g Mandatory assignment of capacity is for residential customers
only. 

\h Assignment of capacity is part mandatory and part voluntary. 



                               Table I.5
                
                    Natural Gas Utility Treatment of
                   Transitional Costs Resulting From
                        Customer Choice Programs

                                  Customer charges
                                        to recover      No charges for
State and gas utility           transitional costs  transitional costs
------------------------------  ------------------  ------------------
California
----------------------------------------------------------------------
Pacific Gas and Electric Co.                   X\a
San Diego Gas and Electric Co.                   X
Southern California Gas Co.                      X

Illinois
----------------------------------------------------------------------
Central Illinois Light Co.                                           X
Nicor Gas                                                            X
The Peoples Gas Light and Coke                                       X
 Co.

Indiana
----------------------------------------------------------------------
Northern Indiana Public                                              X
 Service Co.

Maryland
----------------------------------------------------------------------
Baltimore Gas and Electric                                         X\b
Columbia Gas of Maryland                                             X
Washington Gas of Maryland                     X\c

Massachusetts
----------------------------------------------------------------------
Bay State Gas Co.                                                    X

Michigan
----------------------------------------------------------------------
SEMCO Energy Gas Co.-Battle                    X\d
 Creek Div.
Consumers Energy                                                     X
Michigan Consolidated Gas Co.                                        X
SEMCO Energy Gas Co.                           X\d

Nebraska
----------------------------------------------------------------------
KN Energy                                        X

New Jersey
----------------------------------------------------------------------
New Jersey Natural Gas Co.                                           X
Public Service Electric and                      X
 Gas Co.

New Mexico
----------------------------------------------------------------------
Public Service Company of New                    X
 Mexico

New York
----------------------------------------------------------------------
Brooklyn Union-Long Island                                           X
Brooklyn Union-Brooklyn,                       X\e
 Queens, Staten Island
Central Hudson Gas and                           X
 Electric Corp.
Consolidated Edison Company of                                       X
 New York, Inc.
Corning Natural Gas Corp.                        X
New York State Electric and                                          X
 Gas Corp.
Niagara Mohawk Power Corp.                                           X
Orange and Rockland Utilities,                   X
 Inc.
Rochester Gas and Electric                       X
 Corp.

Ohio
----------------------------------------------------------------------
Cincinnati Gas and Electric                      X
Columbia Gas of Ohio                             X
East Ohio Gas                                                        X

Pennsylvania
----------------------------------------------------------------------
Columbia Gas of Pennsylvania                   X\f
Equitable Gas                                                        X
National Fuel Gas Co.                                                X
Peoples Natural Gas Co.                                              X

Virginia
----------------------------------------------------------------------
Columbia Gas of Virginia                                            \g

Wisconsin
----------------------------------------------------------------------
Wisconsin Gas Co.                                X

Wyoming
----------------------------------------------------------------------
KN Energy                                        X
----------------------------------------------------------------------
Note:  These costs may include program implementation costs, such as
advertising and customer education expenses, and unused upstream
capacity. 

\a Transition costs are shared between customers and shareholders. 

\b Beginning November 1, 1998, there will be a charge for all
commercial and residential customers. 

\c Charge based on level of therms that have gone to transportation
service. 

\d Surcharge applicable to customer choice participants. 

\e Dual fuel customers (those that can switch between fuels) pay less
than firm customers (residentials). 

\f Surcharge applied to all customers using less than 6,000 mcf
(1,000 cubic feet of gas) a year. 

\g Information not provided. 


CUSTOMER CHOICE SURVEY AND RESULTS
========================================================== Appendix II

We mailed a questionnaire to 43 gas utilities that had either, or
both, residential or small commercial customer choice programs under
way as of July 31, 1998.  The questionnaire, reprinted below,
contained 41 questions covering customers' and marketers'
participation, marketers' certification and regulation, customer
savings, and quality of service.  We received responses from 38 gas
utilities. 

For most of the questions in the reprinted survey, we identified the
number of gas utilities that marked each box in each question.  For
the questions on customers' and marketers' participation, we included
the results in the tables in appendix I and referred the reader to
these tables.  For some questions on marketers' participation and the
estimates of customer savings, we identified the range of responses. 
Also, several gas utilities did not respond to all of the questions,
so some questions have fewer total respondents than others. 




(See figure in printed edition.)Appendix II
CUSTOMER CHOICE SURVEY AND RESULTS
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)





(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
ENERGY
========================================================== Appendix II



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

RESOURCES, COMMUNITY AND ECONOMIC
DEVELOPMENT DIVISION

Charles W.  Bausell, Jr., Assistant Director
Timothy L.  Minelli, Evaluator-in-Charge
Philip G.  Farah, Senior Economist
Lynne L.  Goldfarb, Publishing Advisor
Lynn M.  Musser, Senior Social Science Analyst

*** End of document. ***
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