VaasaETT World Energy Retail Market Ranking 2007

World Energy Retail Market Ranking Third Edition - July 2007

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WORLD ENERGY RETAIL MARKET RANKING The Utility Customer Switching Research Project monitors customer switch rates and trends in over 30 competitive energy retail markets worldwide. Highlights of the new research include: The Australian state of Victoria is the new number one ranked energy retail market, relegating Great Britain to second place.

The Utility Customer Switching Research Project’s standardised definition of customer switching was recently adopted in the European Union by the European Regulators Group for Electricity and Gas (ERGEG) in their Best Practice Report on Customer Switching Processes

Successful utility retail competition is being sustained in markets around the world, as evidenced by the fact that nine active-rated markets have been open to full retail competition for at least five years and all except one have shown an uptrend in switching in the past year.

In the United States, accumulating evidence continues to highlight the success of the Texas electricity retail market, in stark contrast to the minimal activity in other states such as New York, Pennsylvania, Ohio and Maryland that employ a regulated-competitive hybrid market structure.

There continues to be a momentum in utility industry restructuring and liberalisation. Markets in Australia and Europe are opening to full retail competition during 2007 including France, Italy and the state of Queensland in Australia.

THE UTILIT Y CUSTOMER SWITCHING RESEARCH PROJEC T The Utility Customer Switching Research Project was founded jointly in 2004 by Paul Grey of First Data Utilities (formerly Peace Software), a world-leading developer of utility billing software and provider of outsourced billing and payment services, and Dr Philip E. Lewis, an international expert in the field of utility customer behaviour and the head of VaasaETT, an energy think tank for global markets. The Project monitors switch rates and trends in all fully-liberalised energy retail markets worldwide and has provided the first global view of utility customer switching activity. The Project continues to be the most comprehensive and uniform source of comparable switching statistics in the electricity and gas markets worldwide, and provides analysis of observed trends and explanations for utility customer switching behaviour.

Customer switch rates are an important dimension of energy market competitiveness and have the advantage of being objective, measurable and comparable between markets. Many energy market commentators tend to focus on the wholesale aspects of the utility value chain as a measure of restructured market success, such as generation sources, transmission interconnections and wholesale market trading. The Utility Customer Switching Research Project contends that both retail and wholesale markets must be successful for consumers to receive the full benefits of competition. In this context, the Project focuses its research on energy retail competition and those market participants that are all too frequently ignored: the customers.

For more information about the Utility Customer Switching Research Project, and a variety of downloadable information, please visit http://www.firstdatautilities.com/customer-switching

METHODOLOGY The Project’s customer switching rate metric is calculated by dividing the number of customers who switched suppliers in a given period by the total number of customers in the market, and the result is then converted to an annual rate. For example, if one percent of customers switch suppliers in a given month, that month would have a 12 percent annualised customer switch rate.

Hot market: over 15 percent of customers switching per year Active market: between five and 15 percent of customers switching per year Slow market: between one and five percent of customers switching per year Dormant market: less than one percent of customers switching per year

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“We use data from the Utility Customer Switching Research Project to evaluate the success of Australian markets and the level of competitive activity” – Cameron O’Reilly, Energy Retailers Association of Australia

Rank

Category

Market*

HOT

Victoria (Australia) Great Britain South Australia (Australia)

ACTIVE

Texas (USA) Norway New South Wales (Australia) New Zealand Sweden Finland Netherlands Flanders (Belgium)

4 5 6 7 8 9 10 11

SLOW

New York Germany

12 13

DORMANT

Austria; Denmark; Ireland; Portugal; Spain; Alberta, Ontario (Canada); California, Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, Pennsylvania, Rhode Island (USA)

1 2 3

Not ranked

* Designated by country, province, or state Source: First Data Utilities, VaasaETT

World Energy Retail Market Ranking

HOT MARKETS The Australian state of Victoria ranks as the hottest energy retail market in the world. Almost one in four Victorian utility customers switched suppliers during 2006.

While Great Britain has long been the pre-eminent energy market, it is now relegated to second place, followed closely by South Australia in third position. All three hot markets have separately-owned retail and distribution utilities, and support competition for both electricity and gas retail supply. This enables utilities in these markets to offer dual-fuel products and cross-sell both commodities to consumers who previously had to deal with separate electricity and gas suppliers.

Victoria There has been a consistently strong uptrend in switching activity in Victoria since full retail competition for electricity and gas was introduced in 2002. The continuation of this uptrend has made Victoria the single hottest market for switching activity in the world. Factors contributing to this dramatic level of switching activity include strong competition from out-of-state incumbents and new entrant energy retailers contending for market share, the introduction of lifestyle products and affinity programmes targeted at niche customer segments, and publicly accessible websites which allow customers to compare suppliers’ prices.

Great Britain After extremely active early years up to 2001, competitive utility retail activity in Great Britain decreased during 2002. Industry commentators at the time attributed this reduction to a consolidation of customer bases by major utility retailers and some went so far as to predict the demise of energy retail competition.

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However, the 2002-2003 downturn proved to be short lived and switching activity has steadily risen since mid-2003. Highly-publicised increases in energy prices by utilities in recent years have motivated British utility customers to switch suppliers in search of less volatile pricing. This in turn has prompted the retail suppliers to launch aggressive customer win-back campaigns, all of which contributed to resurgent competitive activity and increasing switch rates. According to Chris Rix, a leading UK utility market expert, “Retail price reductions during the past year provided significant impetus to customer switching. The year also witnessed increasing use of innovative pricing, with nearly13 percent of customers now on cappedprice tariffs, 10 percent taking advantage of online-only tariffs, and one percent on green tariffs.”

Despite losing the number one spot, customer switching in Great Britain is today at its highest level in history and shows no signs of abating. Great Britain has been at the forefront of utility customer switching for over seven years, proving that high levels of activity can be sustained long term.

Key switching drivers in active energy retail markets include: Intensive direct marketing Powerful, autonomous, competition-oriented regulators Reduced incumbent price matching

South Australia South Australia opened to full retail competition for electricity and gas in 2003 and, after a slow start, switching activity vaulted to record levels in just the second year of competition. A drop in switching in 2005 has been followed by a renewed acceleration during 2006, winning South Australia third place in the ranking.

Principal reasons behind South Australia’s utility retail market success include a divestment of the electric retail customer base by the state government that removed the incumbent brand advantage, the granting of switching credits to a portion of the customer base during the first two years, new entrant retailers applying effective selling techniques gained in neighbouring Victoria, and the 2003 rise in energy retail prices that motivated customers to consider their retail supply options.

‘Critically aware’ customers Relatively equal major competitors Dual-fuel convergence Price and publicity shocks Political devolvement Extensive unbundling of retail, distribution and generation

AC TIVE MARKETS Active markets exhibit switching activity between five and 15 percent per year. Markets rated active are Texas (USA), Norway, New South Wales (Australia), New Zealand, Sweden, Finland, the Netherlands and Flanders (Belgium).

Texas Texas is carrying the energy retail flag for the United States and maintains its ranking as the fourth-most active market in the world. Switching activity in Texas has increased significantly, up one-third from the previous year, but even this acceleration in competitive activity is, as yet, insufficient to secure a higher ranking.

The Texas electricity market opened to full retail competition in January 2002 and has consistently been the most active North American energy retail market. It is the only US market to separate incumbent utility retail operations from distribution. It boasts a market structure aligned with successful energy retail markets in Australia and Europe, unlike the hybrid co-existence of regulated retail and competitive retail found in most other US states.

The Texas market continues to exhibit considerable seasonality in its switching patterns, with increased switching in the summer months a likely consequence of higher consumer electricity bills due to air conditioning load. A high bill draws consumer attention to energy use, leading to greater awareness of energy supply options and consequently provides more motivation to switch.

In recent years, new entrant mass market retailers have been achieving larger-scale success in the Texas market. While incumbent utility retailers TXU and Reliant retain a combined 70 percent market share, new entrants GEXA Energy and Stream Energy have each secured several hundred thousand customers, and at least 40 retailers are active in the market.

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Nor way Norway remains the fifth most active market in the world. It was one of the most active energy retail markets in the world in 2003 with customer switching rates of around 20 percent following a temporary but massive hike in wholesale prices, aggressive utility acquisition marketing and relatively high levels of customer awareness. Norway shows pronounced seasonal activity, with higher customer switching rates during the winter months.

A prominent characteristic of the Norwegian energy retail market is the frequency of retail price changes, with utilities able to alter prices as frequently as every two weeks. These changes lead to higher and lower wholesale energy costs, which are passed on to consumers. Energy price signals such as these are one of the key elements advocated by proponents of energy efficiency, demonstrating the joint roles which resource cost-reflecting retail prices can play in promoting energy efficiency and in stimulating customer switching. The highly fluctuating energy retail prices during 2006 led once again to an increase in switching.

Despite Norway’s prominent ranking, the recent increase in switching and the regular entrance of additional energy retailers, customer switching activity is nevertheless being constrained by market structural issues such as high concentration of market share amongst a few major utilities, vertical integration of incumbent retail and distribution, and the over-dependence of new entrant energy retailers on a volatile wholesale electricity market.

Norway is also notable for having the highest measured rate of re-switching in the world; approximately three switches for every customer who has switched. That is, if a Norwegian customer has ever switched then they have switched between suppliers an average of three times. A significant part of this reswitching is switch-back activity, wherein a consumer returns to the previous supplier.

New South Wales Gaining three places from last year’s rankings to secure sixth place, the state of New South Wales in Australia has exhibited a steady increase in customer switching levels since reaching full retail competition in 2002. Despite this positive achievement, switching activity in New South Wales remains considerably lower than its neighbouring states Victoria and South Australia. This has been attributed in varying degrees to the continuing state ownership of New South Wales’ incumbent utilities, lower historical retail margins that discourage incumbents from aggressively competing for customers, continued retail price regulation, and the fact that the incumbent utilities remain vertically integrated across retail and distribution.

New Zealand New Zealand was the first market to reach full retail competition in 1994. However, many market commentators consider the New Zealand electricity retail market to have commenced in a meaningful way only from 1999; the year the electricity wholesale market was revamped and customer switching reached five per cent. In 2001 the New Zealand electricity retail market recorded the highest-ever electricity customer switch rate for a single quarter, when from April to June customers switched retail supplier at the staggering rate of 27 percent. Retail customer switching activity has since declined and New Zealand is now ranked in seventh position.

Sweden Sweden is placed eighth in the energy retail rankings and has shown an uptrend from last year in its switching activity, despite competition being constrained by many of the same market inhibitors as Norway.

Sweden has the largest number of energy customers in the Nordic region who are no longer served by their incumbent supplier. Switching activity has been encouraged by such factors as media coverage of benefits available to customers for switching, negative publicity for some incumbent suppliers, and price volatility. Sweden recently introduced a national web-based price information and switching service, which has further boosted switching activity by giving consumers better access to information about their supply options.

Retail electricity prices in Sweden have varied considerably in recent years, however Sweden’s lower retail price volatility compared to Norway is believed to have resulted in lower switching activity, given the many structural similarities between the two markets.

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Norway Netherlands Britain Opened: 1999 Customers: 48 million

Ireland Opened: 2005 Customers: 1.5 million

Opened: 1997 Customers: 2.6 million

Opened: 2004 Customers: 7.4 million

Hot market Sweden

Active market

Opened: 1999 Customers: 5.3 million

Slow market

Finland

Industrial retail competition

Dormant market

Opened: 1998 Customers: 3 million

Spain Opened: 2003 Customers: 28 million Germany Opened: 1998 Customers: 42 million

New Zealand Opened: 1993 Customers: 1.9 million Texas Electricity Opened 2002 Customers: 6 million

New York

South Australia South Australia

Opened: 1997 Customers: 6.5 million

Opened: 2003 Opened: 20030.7 million Customers: Customers: million 2004 churn:0.750% Victoria Opened: 2002 Customers: 3.6 million

Source: First Data Utilities, VaasaETT

New South Wales Opened: 2002 Customers: 3.9 million

World view: Competitive utility retail markets indicating hot, active, slow and dormant classification

Finland Finland has previously been rated a slow market with low customer awareness and a lack of aggressive acquisition marketing. Since 2004, however, Finland has exhibited a slow yet steady uptrend and in 2006, has achieved an active market rating for the first time. Like other Nordic markets, seasonality produces pronounced patterns in customer switching, with the first and fourth quarters showing higher rates.

Publicity shocks can be a major factor in energy retail customer switching activity, dramatically illustrated in Finland when a media frenzy surrounding energy price increases and large payouts to utility company directors led to higher levels of customer switching during late 2006 and early 2007. The negative publicity caused utilities to cancel price rises and in at least one case necessitated increased spending on marketing and public relations to bolster the utility’s reputation.

Netherlands The Netherlands has dropped three places to tenth position in the ranking, and Dutch experiences provide evidence that high levels of market concentration are bad news for competition.

Partial energy retail competition was introduced in 1998 and mass market competition arrived in 2001, with all consumers able to choose green energy suppliers. This ‘green period’ continued until 2004 and in that year customer switching reached a level of 10 percent per year, leading to the Netherlands being ranked the sixth most active market in the world at that time.

New entrant energy retailers such as Oxxio, Shell Groene Stroom and Green Choice capitalized on the popularity of green energy and won significant market share from the incumbent utilities. The new entrants’ advantage was strengthened through their cost-to-serve advantage in competing with incumbents bogged down with expensive and inefficient systems. In this environment all four of the major Dutch incumbent utilities have sought to merge. REMU and Eneco Energie merged in 2002, and in 2006 the two largest utilities Nuon and Essent announced their merger plans.

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Flanders, Belgium A recent increase in switching activity in the Belgian province of Flanders has elevated it into the active markets category. New market entrants such as Nuon, Essent and E.ON have won a sizable market share from Flanders’ primary incumbent electricity and gas retailer Electrabel. However, Electrabel continues to dominate the market share and this market dominance will continue to inhibit retail competition.

The other two regions of Belgium, Brussels and Wallonia, have more recently opened to full retail competition for both gas and electricity.

Victoria (Hot)

Texas (Active)

New York (Slow)

Finland (Active)

Annualised percentage of customer switching supplier

40%

Source: First Data Utilities, VaasaETT

30%

20%

10%

0

Mar

Jun

Sep

2002

Dec

Mar

Jun

Sep

2003

Dec

Mar

Jun

Sep

2004

Dec

Mar

Jun

Sep

2005

Dec

Mar

Jun

Sep

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2006

Examples of Hot, Active, Slow and Dormant category markets

SLOW In the slow category are the markets of New York (USA) and Germany, with customer switching levels of less than five percent.

New York New York is one of many US markets employing a hybrid regulated-competitive energy retail market structure. New entrant competitive retailers not only compete with each other but with regulated vertically-integrated incumbent utilities. Those incumbent utilities generally retain control of the customer billing, payment and customer service retail functions in their territories, relegating the new entrant retailers largely to the roles of marketing, sales and wholesale energy procurement. This hybrid structure places barriers between competitive energy retailers and their customers, and the inconsistency of pricing, regulation, market transactions and customer interactions between the various incumbent utilities’ territories severely inhibits opportunities for competitive energy retail success.

Nevertheless, New York, alone amongst the so-called hybrid-structure markets, has achieved a ranking amongst the world’s competitive energy retail markets. Ranked 12th, New York is categorised as a slow market even though switching activity has increased by more than half from previous years. All other hybrid-structure markets remain dormant.

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One of the reasons for the recent increase in activity in New York is the introduction of the ‘purchase of receivables’ plan, whereby the incumbent regulated utilities offer to purchase the receivables of the competitive retailers’ proportion of the billings in their territories at a discount, thereby taking on the bad debt risk. This option mitigates the bad debt risk faced by retailers who are often constrained in managing their customer relationships due to hybrid market structure constraints.

Germany The German market was one of the first to open and houses two of the world’s biggest multi-utilities, E.ON and RWE. However, as a result of factors such as inconsistent mechanisms for switching, a poorly implemented market structure and the lack of a centralised market registry infrastructure, Germany’s switching levels have remained lower than two percent per year. After many years of being rated as a dormant market with little to no significant customer switching activity, Germany is now rated as a slow market.

DORMANT Dormant markets are those that have reached full retail competition, with all customers having a choice of energy retail supplier, but which do not exhibit any significant customer switching activity. More than half of the markets monitored by First Data Utilities and VaasaETT remain dormant, with switching levels of less than one percent per year. Dormant markets in 2006 included Austria, Denmark, Ireland, Portugal, Spain and almost all North American markets such as Ontario, California, Pennsylvania and Ohio.

There are many factors inhibiting successful retail competition in these nominally open markets, including the role of incumbent regulated utilities as ‘last resort’ suppliers, incumbent utilities’ control of retail billing, payment and customer service functions within their territories, regulated retail pricing failing to reflect wholesale energy prices, continued vertical integration of utility retail and distribution, and retail market dominance by incumbent utilities.

Denmark Denmark was previously ranked as a slow market but has now dropped to the dormant category. While switching in Denmark has always been low compared to its Nordic peers, retail competition has been stifled by the recent merger of six leading Danish utilities: DONG, Elsam, ENERGI E2, NESA, Copenhagen Energy’s power activities and Frederiksberg Forsyning. Danish consumers now have little choice of energy retail supplier.

More information on the data collection and analysis method can be found at www.firstdatautilities. com/customerswitching

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ABOUT THE AUTHORS Paul Grey

Chief Market Strategist, First Data Utilities Co-founder of the award winning Peace utility billing system, Paul Grey has overseen utility customer information system development, deployment and implementation for major utilities in 35 markets worldwide. Paul is a co-founder of the Utility Customer Switching Research Project and serves on several notable editorial and advisory boards including: the Energyforum Board; the editorial council of the Global Energyforum Report, and the Advisory Board of the Energy Utilities Project.

Paul is regularly invited to present at energy industry forums and conferences on topics such as customer information systems technology, collection best practices, revenue assurance, meter data management, and competitive energy retail market trends. Paul’s articles and white papers have been published in a number of prestigious energy publications in North America, Europe and Australia.

Dr. Philip E. Lewis

Managing Director, VaasaETT Global Energy Think Tank Dr Philip E. Lewis is a specialist in Utility Customer Psychology and Behavior. Formerly the head of Market Research and Analysis for a UK-based retailing subsidiary of Amoco (now BP Amoco) and Seeboard (now EDF), Dr Lewis has worked as a researcher and consultant for 10 years in over 40 countries, for more than 300 energy and utility organisations including Shell, EDF, ABB, Fortum, ENECO, RAO, E.ON, Electrabel and others like Nokia.

Dr Lewis has extensive industry and market-wide experience, having written reports for European Regulator’s Group for Electricity and Gas (ERGEG), Finnish Ministry of Trade and Industry, and the Finnish Parliament. He also serves on the editorial board of the ‘Energy Efficiency’ Journal published by Springer, was recently a keynote speaker at Metering/Billing/ CRM Europe 2006 and has been a member of the WWF (European) Green Power Partnership Advisory Committee.

Arunima Manchanda

Marketing Program Manager, First Data Utilities Arunima Manchanda is a researcher for the Utility Customer Switching Research Project, exploring global utility market shifts and statistics to provide analysis of observed trends, market activity comparisons and explanations for utility customer switching behaviour. As well as managing the content of the report, Arunima promotes the Project at events throughout the United States, Australia, Europe and New Zealand, and has achieved extensive coverage of the Project in publications worldwide. Based in New Zealand, Arunima is the Marketing Program Manager for First Data Utilities.

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ABOUT FIRST DATA UTILITIES First Data Utilities is a global outsourcer of utility billing and payment transaction services. Utilities select from a wide portfolio of outsource services which can be deployed individually or as part of an integrated outsource solution spanning the entire meter-to-cash transaction cycle.

First Data Utilities’ off-the-shelf billing software product, Peace, is used by regulated utilities, competitive energy retailers and utility distribution companies in 35 markets worldwide for acquiring, billing and serving electricity, gas and water customers. First Data Utilities is at the forefront of software development with its adoption of world-class Agile development techniques and Service Oriented Architecture.

First Data Utilities is part of First Data Corporation, a Fortune 500 company with 29,000 employees in 70 countries and annual revenue of USD 7 billion. The company has more than 300 utility clients ranging from entrepreneurial new entrant energy retailers to the largest dual-fuel utilities with millions of customers and multiple market operations.

For more information, please visit www.firstdatautilities.com

ABOUT VaasaETT VaasaETT is an independent international think-tank for the global energy and utility industry, with networking expertise in utility markets. VaasaETT augment global knowledge to generate practical strategic solutions for our customers around the world.

The core focus of VaasaETT is efficient management of the psychology and behaviour of customers in response to changes in their environment (e.g. prices, services, regulation, liberalisation etc.). The main areas of specialisation are customer value development, market development and executive development.

The VaasaETT network consists of nearly 700 contacts and 250 active relationships with utilities, regulators, researchers, consultants, authorities and other interest groups. Long-term working relationships include First Data Utilities, Cap Gemini, Energyforum, Synergy Events and Energy Market Research Limited.

For more information, please visit www.vaasaett.com

ACKNOWLEDGEMENTS First Data Utilities and VaasaETT would like to thank all those people around the world who have supported the Utility Customer Switching Research Project with data, advice, reviews and feedback, and welcome all further contributions. We would like to acknowledge the following people for their input to the World Energy Retail Rankings Report: Chris Rix (Energy Market Research Limited), Ben Smithers (OFGEM), Henry Edwardes- Evans (Platts McGraw-Hill), Tor Arnt Johnsen (NVE/Norwegian School of Management), CRE (France), Dansk Energi, Datamonitor, Delta N.V., E-Control, ECH, Elradgivningsbyran, ENECO, Energie Nederlands, ERSE, GRD (France), Gestionnaire du Réseau de Transport d’Electricité (RTE), GreenPrices.com, Irish Commission for Energy Regulation (CER), Katrien Gielis (VREG), La Comisión Nacional de Energía (CNE), Mark Schutz (LogicaCMG), Norwegian Water Resources and Energy Directorate, PA Consulting, Verband der Elektrizitätswirtschaft, David Lipshut (Energy Reform Consulting Pty Ltd.)

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www.firstdatautilities.com/customer-switching information@firstdatautilities.com

Š 2006-2007 First Data Utilities and VaasaETT Note: Use of content and graphics from this report must reference the source as First Data Utilities and VaasaETT Utility Customer Switching Research Project