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Energizing Massachusetts Electric Choice

Massachusetts retail electric customers have enjoyed the power to choose their generation provider since 1998.  Customers have the benefit of being able to select from a growing number of competitive electricity suppliers or remain on basic service with their distribution utility.  The majority of commercial and industrial retail electric customers have participated in the electric choice program.

Residential Electricity Shopping

However, while competitive suppliers offer a wide array of innovative rate structures and value-added services, most residential energy consumers remain on basic service.  Why are businesses taking advantage of the opportunity to manage their energy rates while residential electric customers remain on the sideline?  The answer lies in several subtle issues in the market structure.

Purchase of Receivables

First, one of the principal risks facing competitive suppliers is the ability to collect amounts due from retail electric customers.  To manage their bad debt exposure, competitive suppliers must conduct a selective enrollment process using credit screening.  Receivables risk also increases competitive supplier prices, which, in turn, reduces incentives to switch away from utility basic service.

In 2008, the Massachusetts Green Communities Act required distribution utilities to purchase the receivables of competitive suppliers choosing to bill the customer through the utility.  This Purchase of Receivables (POR) program was intended to reduce supplier risk, encourage more suppliers to enter the market, and increase the number of customers participating in retail electric choice.  The problem was that it took until March 2014 for issuance of the final order implementing the program.  The POR program is now up and running and should have a positive impact on residential customer market participation.

Recalculation of Elecricity Bills

Second, the Massachusetts Department of Public Utilities (DPU) established a rule in 2000 for customers receiving basic service from their distribution utility.  The rule required recalculation of electricity bills for basic supply customers who switched to competitive supply during a fixed rate pricing period.  Customers would be rebilled as if they had been on a monthly variable rate rather than the basic service fixed rate.  For example, if the basic service rate was valid for six months and the customer switched away after the fourth month, the customer’s bill would be recalculated for the first four months using the variable rates applicable during each of those months.  While the rebilling could favor the customer, it typically went against the customer.

The purpose of rebilling was to ensure that basic service customers paid their fair share of the cost of service.  It also discouraged customers from taking advantage of the system by going on default service for expensive winter months and then switching to competitive suppliers for the rest of the year.  The reality of the bill recalculation rule, however, was that it served as a competitive shopping penalty and reduced residential and small commercial customer participation in the retail electric market.

As of April 13, 2015, the DPU has suspended the bill recalculation rule with the understanding that utilities will monitor customer switching behavior for evidence of seasonal gaming.  If seasonal gaming does not emerge as a significant problem, the bill recalculation rule will stay off the table.  This should help breathe some life into the Massachusetts electric choice market.

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