August 2009 Retail Market Monitor Executive Spotlight - Interview with Harry Warren, President, Washington Gas Energy Services, Inc. (WGES)

1. What is your outlook for WGES?

WGES has been serving customers in the Mid-Atlantic region since 1996 and now serves approximately 250,000 electric and natural gas customers throughout Maryland, Virginia, Delaware and the District of Columbia. Our business has been expanding significantly in 2009, and we added over 35,000 new accounts in the second quarter of the calendar year alone.

We are very well positioned to continue our leading role in the Mid-Atlantic region. Our thorough understanding of the regional energy market and the various market rules of the individual states allow us to offer commercial, industrial and residential customers energy products and services that meet their needs.

Over time we've expanded our offerings to include innovative pricing plans and have developed a suite of renewable energy and energy efficiency products and services including our CleanSteps^SM Wind renewable energy offer and our CleanSteps^SM Conserve residential energy audit. We've constructed our first solar power project, and we remain excited about the prospects of expanding our offerings even further.

2. How well is retail energy competition working in the Mid-Atlantic?

Competition is working very well for commercial, industrial, and governmental customers throughout the Mid-Atlantic region in both the gas and electric markets. A large majority (roughly 75%) of the non-residential electric load takes service from competitive retail suppliers. The largest electric customers have hourly priced default service, and most others have pricing that changes on an annual or quarterly basis. Whenever commercial customers have market-reflective default service pricing, competitive suppliers win large market shares by virtue of the broad supply options we can offer.

The residential markets for both gas and electricity are much less developed, but shopping is rising, and a number of promising developments are on the horizon. For example, Maryland electric utilities have proposed purchase-of-receivables programs in response to recent rules adopted by the Maryland Public Service Commission. While the filings are still under consideration, when these programs are finally implemented greater supplier interest in this market will certainly follow. New rules in the natural gas market are also under development in Maryland, and some utilities in the region provide customer lists. The coming year should see a lot of progress across the board.

Of course, there are still some impediments to broader participation by residential and small commercial customers. Little customer education has taken place for years in the region, and we are painfully aware through our marketing efforts that most residential customers don't know they can shop. And rapidly rising energy prices over the past few years, coinciding with the expiration of electric rate caps, have led to a widespread misperception among policy makers and the public that deregulation has failed in a “promise” to lower prices.

3. How do you think electric restructuring policy in Maryland will evolve over the next couple of years? What are the chances of some form of re-regulation?

I am hopeful that a number of important positive developments in the Maryland electric market will convince the majority of policy makers that competitive markets work best in the long term, but at this time the interest of some elected officials in re-regulation has not been quelled.

Among the positive developments are the high levels of switching by large and mid-sized commercial customers and the increasing number of smaller customers purchasing from competitive suppliers. Certainly, commercial customers of all types made it clear to Maryland legislators earlier this year that they had no appetite for returning to a regulated environment.

Concerns about electric reliability in this region have also been addressed in a number of ways. In addition to the reductions in demand forecasts brought on by the recession, increased participation in demand response programs, evolving regional energy efficiency programs, and major new transmission projects have combined to bolster reliability forecasts well into the future.

The fact that customers of all types are capturing the lower energy prices available in today's market through competitive suppliers, at a time when utility electricity prices for smaller customers are suffering from high-priced, long-term power purchases that will persist for the foreseeable future, also speaks very strongly against re-regulation. In fact, energy markets over the last 18 months have demonstrated pretty clearly that long-term pricing structures for default service, while they appear attractive in a rising price environment, put consumers in the position of overpaying – sometimes significantly – for power in a declining price environment. Moving to a shorter-term pricing structure not only will provide consumers with more market-reflective prices that ensure they will not over or under pay for power, but also bring more competitors in the market who will begin to offer consumers even more options for purchasing electricity.

Finally, we are hoping that Pennsylvania's commitment to competitive markets will help galvanize support for a consistent regional market structure.

With all of that said, however, customers and industry participants must continue to communicate with their elected officials about the benefits of competition. This issue is still highly politicized in the region.

4. What else needs to happen to convince policy makers in Maryland that competition results in a better outcome for consumers than regulation?

I should first note that a growing group of thoughtful and influential legislators in the region have, in fact, determined that re-regulation is not likely to bring their constituents any clear benefits. All policy makers need to carefully consider whether regulation could realistically improve outcomes going forward, or if it merely "sounds good."

It became very clear in the debate in the Maryland legislature last year that the proponents of re-regulation were unwilling to commit that it would actually lower prices in any foreseeable time frame. Very little new generation would actually be built under a regulated model in Maryland, and the cost of new generation is likely to be much too high to lower electric rates under cost-of-service pricing. And there was substantial agreement that buying up aging, existing power plants made little sense.

Our industry can help policy makers to support competition in at least one significant way. Certainly as regional market rules improve (e.g. when purchase-of-receivables programs are introduced) our industry needs to come forward with expanded supplier interest and more offers for their constituents. Market conditions and market rules for both gas and electricity are quite similar across Maryland, Delaware, Virginia (for gas supply) and the District of Columbia and expanded supplier activity across the whole region is critical to changing perceptions about competitive markets.

5. How strong is the demand among your customers for renewable energy and energy efficiency services? Can you share your experience to date providing these services?

WGES has been supplying renewable energy to its customers since 2002, and we have included 5% wind energy in our basic residential product and 3.5% wind energy in our basic small commercial offering for several years. The percentages are above and beyond any renewable portfolio standard requirement. Despite the poor economy, we continue to see exceptional demand for even larger renewable energy commitments. Over the past several months one in seven of our new residential electric customers have chosen to purchase 50% or 100% wind energy.

Governmental and larger commercial customers are exhibiting consistent and growing demand for renewable energy as well, and we recently installed our first solar power system, a 150 kilowatt project, in Maryland.

With regard to efficiency services, WGES has a sister company, Washington Gas Energy Systems, that has a large and growing business in governmental and commercial energy efficiency projects, while we continue to experiment with residential efficiency services such as the energy audit product I mentioned earlier.