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Enron Mail |
Signups stood up?
Jeff Felton Jul. 1, 2001 Public Utilities Fortnightly Page 18 Copyright © 2001 ProQuest Information and Learning. All rights reserved. Copyright Public Utilities Reports, Incorporated Summer 2001 Online ease and access are an empty promise in a flawed market. CLAMOR OVER THE recent market exit of Utility.com, billed as the world's first Internet utility, was a wake-up call for the energy industry. That failure, along with the energy debacle in California, raises questions about the viability of the Internet as a vehicle for retail energy sales, enrollments, and fulfillment in particular, and of electric and natural gas deregulation in general. In the United States, though nearly 40 million customers (90 percent of them residential) are eligible to choose their electric and/or gas supplier, more than 85 percent have remained with their incumbent utility distribution companies (UDCs). Of those who have switched, just 5 percent were residential customers, and fewer than 15 percent used the Internet for any part of the transaction. Another 10 million customers are expected to have choice by Jan. 1. Odds are, however, that switching will remain limited despite widespread access to the Internet and online signups that can make choice a simple matter of point and click. The question is, why? The problem goes beyond the Internet to the very foundations of energy deregulation. At the root, it's a question of customer value. Independent power producers, energy service providers (ESPs), and the utilities themselves sold energy restructuring on its promise of lower costs for consumers. However, the track record of other deregulated industries reveals that the reverse is often true-particularly for mass-- market customers. Making retail choice meaningful for customers depends on amending the ground rules of deregulation. Though many needed initiatives lie in the hands of regulators, it may be that the players that can be most influential in spurring action are the utilities and ESPs whose brands and fortunes are at stake during this transition. WHY CUSTOMERS AREN'T BITING As I see it, five fundamental problems are hindering the successful transition to competitive retail energy markets. 1. Risky Business. During regulation, when energy prices were cost-- based and fixed, UDCs generated supply to meet demand, up to capacity. Now many of the UDCs willingly have sold their generating assets and agreed to share the risk of price fluctuations. The result is an out-of-control wholesale market in which generators maximize profits by manipulating supply to drive up prices. UDCs and ESPs forced to buy on the wholesale spot market get killed when their retail price is fixed by contract. The result is that few ESPs are willing to risk taking title to wholesale energy for re-sale. Furthermore, the California Independent System Operator has evidence that the state's energy "crisis" actually arose not from increased demand, but from reduced supply. The reason, says the ISO, is that generating facilities have cut capacity from last year's levels for no apparent reason. Amidst such speculation, mass-- market customers are reluctant to switch from the "safe haven" of their incumbent utilities. 2. Where's the Choice? Industries such as airlines and telecom demonstrate that deregulation leads to price discrimination, with different customers being offered different prices. As a result, ESPs compete hotly for large customers with large loads that allow them to be creative strategically, and still be profitable. On the other hand, residential and small commercial customers present such thin margins (especially with mandated "price-to-beat" offers and rate reductions from the utility) that ESPs cannot serve them profitably without automated enrollment and customer self-service processes. Few ESPs have focused on automating these processes, however. During the regulated era, utilities subsidized the cost of serving these small customers with the revenues earned from large accounts. Now it seems no one wants them. For example, Enron completely abandoned the California residential market just three months after it opened. In Pennsylvania, ESPs are "dumping" residential customers back to their incumbent utilities. ESPs in Ohio were forced to delay service to enrolled customers when their market support generation agreements with the incumbent utilities were not in place as expected. All of this heightens fears among customers that their chosen ESP will not be able to serve them or will vacate the market. Because they haven't been educated to the contrary, they fear they would be left without service or with some cost for switching to a new ESP or back to their utility. 3. Online Liquidity Lacking. The much-touted retail auction exchanges are also struggling. One reason is that when customers compare bids in today's pricey market to last year's contract prices, they don't perceive any savings. Second, many commercial and industrial customers perceive no real price competition among retail suppliers for their contracts on an energy auction exchange. They believe they will get more competitive bids by preparing requests for proposal and soliciting bids directly from suppliers. 4. Patchwork Regulation. Because regulation varies by state and transactions vary by utility, it is expensive and complex for ESPs to expand into different markets. For example, an ESP willing to offer a franchise deal to a national chain, say, McDonald's restaurants, may find it virtually impossible to navigate the regulations and transactional requirements for working with the many utilities in all the states where the chain operates. 5. But Is That Rate Better? A customer who visits a popular retail energy website such as Essential.com or Energy.com may be presented with a standard offer price from one ESP. Is that a good price? How does it compare to what he pays now? Most massmarket energy customers don't know. Add the fact that 65 percent of all Internet shoppers do not complete their purchase transactions, and the problem is clear. Price discovery must be enhanced, and the shopping and enrollment processes need to be simplified to attract novice energy buyers. A TO-DO LIST FOR BUILDING REAL CHOICE The challenges I describe are formidable; no one solution will address them all. Here are some important actions necessary to help break the logjam. Utilities and ESPs in particular can play a critical role in encouraging regulators at the state and federal levels to make needed changes. Cap Wholesale Prices. Energy companies are at the mercy of federal regulators to dampen wholesale market volatility. They, and state regulators, should continue pressuring the Federal Energy Regulatory Commission to consider short-term regional price caps on wholesale electricity. To mitigate gaming of the markets, the FERC also should require generators to publish their annual plans for scheduled downtime, and force them to explain unplanned downtime. Form A Mega-Exchange. To promote liquidity in retail energy exchanges, the operators of the various exchanges should consider pooling their resources to develop a universal exchange portal-or at least a virtual exchange-that most or all of the largest customers could use. That way customers and suppliers could go to one site and see all deals, even if the deals were posted regionally behind the scenes. Such an exchange would offer various procurement vehicles, including auction, bid/ask, and standard offer. Suppliers also would welcome a single site where they could see all qualified deals. Educate the Public. Consumer education in deregulating markets clearly needs to go further. Regulators in these states could follow a strategy that's been moderately successful in several states: collecting money from all participating utilities and ESPs to launch a campaign to increase the public's understanding of retail choice. Radio, TV, and print ads would explain the merits of deregulation, demystifying the enrollment process and calming the fears of apprehensive customers. Through this type of program, for example, Pennsylvania regulators saw mass-- market awareness of retail electric choice soar to 94 percent in just over a year. Utilities and ESPs can enhance these public awareness efforts by coordinating their own educational materials with the statewide campaign. Redouble Marketing. In line with the objectives to increase consumer awareness, energy service providers need to do a better job of branding their service, communicating their value proposition, facilitating price discovery, and targeting the actual buyer within commercial organizations. This is a job for the professionals. ESPs should hire and consult with Madison Avenue talent to develop branding and advertising campaigns. ESP websites should allow a prospective customer to enter basic information from their utility bill, and calculate both the commodity charge and the distribution charge, demonstrating the clear impact of switching on one month's bill. Accuracy is critical. Often, the ESPs have difficulty getting this calculation right themselves. Standardize Transactions. Utilities and ESPs, backed by a FERC directive, should take the lead in developing national standards for electronic transactions, including switching. That would ease apprehension among customers, make national contracting easier, and reduce the investment required by energy suppliers to enter new markets. Phase out "Standard Offers." State regulators should consider speeding the elimination of UDC "price to beat" and "standard offers." This price rigging creates a false economy with the customer, adds undue price pressure to commodity prices, and puts severe earnings pressure on utilities. The crisis situation in California has made such potential consequences crystal dear. Aggregate the Apathetic. Some municipalities have begun aggregating their residents to form residential aggregation pools that are attractive to ESPs and wholesale suppliers. If the municipality successfully addresses customer apprehension, and allows disinterested customers to opt out, these aggregations can be an effective way to force choice in a community... at least until the next general election. Energy companies and state regulators may be able to encourage aggregations by educating local officials on the benefits of such buying pools and providing materials for marketing to residents. Force Choice. State regulators can force all customers to choose an ESP, and/or bar the incumbent utility from acting as an ESP. In Texas, for example, utilities cannot prospect for new energy supply customers outside their territory until at least 40 percent of their franchise customers have chosen an alternative ESP For gas deregulation in Georgia, all customers were assigned an ESP in proportion to the market share each ESP garnered in a pilot period. Energy companies may influence legislators in deregulating states, as well as federal legislators, to pursue this approach. Consider Re-Regulation. The FERC should consider guidelines to encourage states with volatile supply networks to re-regulate, or defer deregulation, until the wholesale markets stabilize and the bugs have been ironed out of the deregulation process. Simplify Rates. State regulators should encourage utilities to simplify their rates for residential and small commercial customers. That would allow retail suppliers and customers to more easily understand the rates and potential savings of switching to an ESP. Deregulation will succeed only when all stakeholders put the success of the program before partisan interests. Without the undivided support of all parties, there can be little improvement on the pseudo-competitive mire we see today. It just doesn't work. Jeff Felton is a consultant based in Naples, Fla. He has 22 years of consuIting experience, the last 15 in the utilities/energy industry. Felton was a partner in the energy practice at BusinessEdge Solutions Inc. from 1999 until May. Before that, he was senior vice president and Energy Practice director at DMR Consulting Group, and a partner in the National Utility Consulting Services (NUCS) Group at Price Waterhouse, now PriceWaterhouseCoopers. Contact Felton at JeffFelton@aol.com
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