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1.2.2.3.3 “Default” service poses risks for consumers

In every state that has opened up its electricity markets to retail competition, customers who are not on competitive supply are placed on what is variously called “default,” “standard offer,” “basic,” or “provider of last resort” (POLR) service. Under this rate structure, customers are given access to a source of electric generation supply even if no competitive company is willing to offer that supply or if the customer chooses not to switch.

In many states, residential customers in fact have few options but to choose default placement. Enron, which had early on become a licensed competitive supplier in several states, collapsed under the weight of its own chicanery in late 2001/early 2002. Other suppliers, such as Utility.com and Essential.com, that at first solicited residential and small business customers also went bankrupt or stopped doing business as competitive suppliers. In the handful of states that have fully opened their markets to competition, only a fraction of residential customers have switched to competitive supply—ranging from 3% or less in Massachusetts and parts of New York and Pennsylvania, to a maximum of 30% to 35% in the service territory of Duquesne in Pennsylvania.

Depending on the state in which they live, consumers have sometimes been ill-served by default service. In Texas, POLR service is for those who are temporarily without a source of supply—for example, in the midst of switching from one supplier to another—and those who are considered credit risks. These customers have at times charged a premium by providers for service, as much as 40% above rates paid by other customers. In Massachusetts, consumers remain on a more closely regulated rate called standard offer if they have not moved location or been served by a competitive supplier since the opening of the competitive market in 1998; if consumers have moved or been competitively supplied, they are placed on a default service rate. Through 2002, default service proved very volatile and generally more expensive than “standard offer” service. In New York, Consolidated Edison, unlike other utilities in that state, devised a default rate through which wholesale power fuel costs were passed directly onto customers. This resulted in substantially higher rate increases for ConEd’s customers than elsewhere in the state.