Subject: CAEM - Default Provider
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked]
Date: Mon, 22 Oct 2001 16:38:58 -0700 (PDT)

The paper about the Role of the Default Provider is consistent with, what I understand as Enron?s positions: it advocates for the Georgia model (the utility exiting the merchant function) and against price caps.
Its main purpose is to assess the relative risks of alternative default provider models.  It states that most of the risks are not inherent in the default provider models, but with other terms of restructuring (i.e., price caps).  In the Atlanta Gas case, the utility was the default provider for several months, and then an alternative provider was appointed.  There is no evidence of a problem with either model.  However, when a default provider faces price caps below market prices, risks and inefficiencies are the likely result, regardless whether the utility or an independent merchant is the default provider. 

Below are the remaining conclusions:

(1) Almost all consideration of default provider by the various states relates to the transition period.  There is almost no consideration of default provider in the long run.
 
(2) In most states, the local utility is the default provider and provider of last resort during the transition period.  This choice appears reasonable, considering the utility's historical obligation to serve.  If the local utility becomes a minor participant as a provider, the feasibility of using alternative providers for default service increases.

(3) Another purpose of the paper is to link the choice of default provider to the development of competitive markets.  The link is that the states' view of a competitive model influences the choice of default provider.  If the perceived competitive model achieves competition at the fringe (the contestable market model, i.e. a large number of competitive providers are not essential), the local utility will remain the provider of last resort.  The alternative view of the fully competitive model (effective competition between numerous providers) will result in an alternative provider being the POLR.  In the case studies considered in the paper, Texas electric utilities and AGLC are exiting the merchant function.  In these cases, the POLR is an alternative to the local utility.

(4) The approach of AGLC to providing default service is highly successful because of its use of incentives. By exiting the merchant function within a year, AGLC created strong incentives for merchants to enter the market and attract customers.  Customers had equally strong incentives to select a provider.  With these incentives for customers and marketers to do business, there is little likelihood of actually needing default service.  (I do not agree with this statement, but it is in our favor)

(5) The rate cap provision that applies to most states is encouraging marketers to exit natural gas and electric service.  This regulatory failure increases the need for a default provider and, at the same time, decreases the feasibility of obtaining default providers.  A highly successful approach to a default provider is a deregulatory scheme that imparts incentives for marketers to serve customers, and thereby diminishes the need for default service.

The paper mentions that Enron abandoned California market as an example that competition was not developing as expected (page 12).

Please let me know if you need further details.

Guille