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DECEMBER 1998

Power Marketers, Utilities Seek to Buy and Sell Captive Customers in Deregulated Markets

In the first deal of its kind, an American-owned electric company in England is "selling" its customers, signalling a new role for consumers in the deregulated market: as property to be bought and sold without consent or knowledge by power companies.

GPU, a Morristown, NJ-based utility holding company, and Cinergy Corporation, a Cincinnati-based energy company, has announced that they will sell their 2.2 million British electricity customers for 180 million British pounds ($300 million) while continuing to own and operate Midlands' distribution lines and substations. "We're going to focus on the wires business, the asset management business and the infrastructure business," said Bruce L. Levy, president of GPU International, a GPU subsidiary.

Under British law, the sale of customers as a discreet property is illegal. However, the British Government has allegedly "promised" to change its laws in the near future to make the transaction legal. This is the first time a regional electricity company's retail supply business has been separated from its distribution business, signalling an emerging phenomenon under electric deregulation in which captive customers are bought and sold as a form of property.

"Deregulation is being sold to voters on the promise that consumers will have a choice of power suppliers," says Eugene Coyle, a San Francisco energy economist. "In reality the opposite is occuring: captive consumers with no choice of suppliers are themselves being bought and sold in blocks by deregulated power companies."

National Power is paying 81 pounds ($135) a head for each British consumer. Its chief executive Keith Henry said his company wanted to enter the retail power supply market without "tying up 1.5 billion pounds (UK) in capital in buying a low-return distribution business as well". With the expected close of the deal in March, National will hold 12 percent of electric supply in England and Wales.

"This is an innovative deal that's good for all involved," said Fred D. Hafer, GPU's chief executive officer. Would the Britons sold without their consent agree with Mr. Hafer?

The sale of Captive Customers as utility property under deregulation is not limited to the UK, but is already being attempted in the United States. California's deregulation law, AB1890, provides that consumers who are unable to find a supplier shall automatically "belong" to their incumbent utility, designated as the "default provider." In other words, if customers do not switch their service provider, the existing investor-owned utility will retain them as "default" customers.

Recognizing that 99.3% of Californians remain Captive Customers with "default provider" service in the new deregulated market, Enron is lobbying the California Public Utilities Commission and the legislature to facilitate competitive bidding for the purchase the rights to Default Service.

Enron Chairman Kenneth Lay explained that under their proposal, "If no supplier can beat the incumbents' rate, then the incumbent will continue to serve and no one will be any worse off. (But) if a competing service provider can beat the monopoly's rate, than aggregated customers will be better off." Enron will pursue their California strategy on a city-by-city basis, attempting to convince each community to sign up with them as the default service provider.

Enron made a similar bid toward the end of Pennsylvania's deregulation negotiations, asking the Pennsylvania Public Utility Commission for authorization to purchase Default Provider status from incumbent utility Philadelphia Electric Company (PECO) by transfering their captive consumers to a customer pool "owned" by Enron. In return, Enron offered to pay $5.46 billion to PECO and promised a 20% rate reduction to its 1.5 million consumers. The PAPUC refused, however, awaring Default Provider Status to PECO free of charge.

More recently, the PAPUC has voted to allow that state's ten Default Providers to conceal the number of customers who are able to escape Default Provider service with an alternative supplier making the Captive Customer blocks both proprietary and secret.


Copyright (c) 1998 by the American Local Power Project.