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Improving Default Service

This presentation discusses strategies to improve the default service in order to better meet the needs of customers and facilitate market development. It highlights the strengths and weaknesses of the current default service design and recommends procurement changes to enhance market responsiveness and reduce price volatility. The presentation also outlines customer protections and improvements for default service customers, as well as changes to enable retail competition.

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Improving Default Service

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  1. Improving Default Service A Strategy to Meet Customer Needs and Facilitate Market Development David L. O’Connor Commissioner Massachusetts Division of Energy Resources June 21, 2002 T:p-info/presentations/restructuring/2002/default 062102

  2. Statewide Electricity by Service Type (% of Load) 22% 18% 60% Source: DOER Customer Migration Numbers

  3. Statewide Electricity by Service Type (% of Customers) 1% 28% 71% Source: DOER Customer Migration Numbers

  4. Current Default Service Design • Strengths • Monthly prices, competitively bid • Prices reflect class-specific load curves and migration risks • Reasonable migration rules address gaming • Appropriate notice of price changes • More market responsive than Standard OfferWeaknesses • Rate reflects only wholesale power supply prices • Prices do not reflect class-specific contract lengths • Potential for significant price discontinuity every 6 months • Distribution companies remain “strategic” buyers • Large, infrequent procurements (few buyers and sellers) • Customers receive no more than 6 mos. of price info

  5. Changes in Default Service Prices Source: DOER / Massachusetts Electric Company prices

  6. Re-Design Goals • Maintain timely reflection of market conditions in price • Reduce short-term price volatility • Minimize price relative to value of the product provided • Facilitate sustainable migration to competitive suppliers • Provide a forward “price-to-beat” for buyers & sellers • Minimize opportunities for "gaming" the product • Enhance wholesale market liquidity

  7. Recommended Procurement Changes • For all classes, procure supply on a “staggered” schedule in • smaller quantities, more frequently. • For residential customers, lengthen the term of procurements to • 2 years. • - E.g. Every 3 months, procure 1/8 load for 2-year term • For Standard Offer customers, contracts beyond February 2005 • serve a prorata share of their demand. • Limit amount of demand one supplier can serve at one time.

  8. Default Service Procurement for Residential and Small C&I Customers • Staggered Procurements: • Procured quarterly, • 2-year supply contracts for 1/8th of demand, • Contracts A-3 and after absorb S.O. customers in 3/05. Residential and Small C&I Transition Contracts Existing March 1, 2005 3.75 = Average Monthly Price

  9. A New Retail Relationship • Reduce “fixed price” option to 3 months. • Reflect supply-related bad debt in price. • Require suppliers to be licensed competitive suppliers. • Identify all current suppliers on customer’s bill. • Designate a “servicing supplier” for each customer. • Require each supplier to provide supply-related • customer service (e.g. 800# call center).

  10. A Customer-Supplier Relationship

  11. Customer Protections Continue • Uniform price for all customers of the same class. • No barrier to migration in or out (beyond current “anti-gaming” reconciliation). • No additional deposit requirements. • No late payment penalties. • Full panoply of utility service cutoff protections. • Additional protections possible.

  12. Improvements for Default Service Customers • Staggered contracts provide a more stable price path. • More frequent contracts maintain market responsiveness • of price. • Longer contract terms provide: • a more predictable price for Default Service customers, • and for Standard Offer customers, beyond February 2005 • a hedge against risks of migration, as well as market and • regulatory changes. • Smaller volume contracts should increase competition • among suppliers.

  13. Changes to Enable Retail Competition • Longer term contracts provide better forward price information. • Contract prices reflect the value of the hedge against risks of • migration, regulatory and market changes. • Inclusion of supply-related bad debt increases similarity to • other retail products. • Shorter fixed price option encourages customer shopping to get • fixed prices for longer terms. • Identification of suppliers makes clearer who provides the supply. • Designation of a “servicing supplier” establishes a • customer-supplier relationship. • Customer service call center enables customer-suppler • interaction.

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