SPARK
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F O R T N I G H T LY ’ S
Letter #31 July 2006
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ELECTRICITY CUSTOMER SWITCHING
Texas Is The Rising Star By Paul Grey In May I took a look at DOE’s proceeding on designation of National Interest Electric Transmission Corridors (NIETCs), as required by the Energy Policy Act of 2005 (see May Spark, p. 3). Since then, the FERC has issued proposed rules to coordinate all federal authorizations and related environmental reviews of proposed transmission facilities in the NIETCs. (Docket No. RM06-12-000, 18 CFR Parts 50 and 380) Another proceeding on rights-of-way designation for all types of transmission facilities, including pipelines, on federal land in eleven Western states is the subject in this issue, as the need to reinforce our nation’s energy infrastructure takes center stage.
L. A. Burkhart
ustomer switching activity in the Texas electricity retail market places Texas at number one in the United States and number four worldwide, the latest research from the Peace SoftwareVaasaEmg Utility Customer Switching Research Project reveals. The Utility Customer Switching Research Project compares customer switch data for over 30 competitive energy retail markets to arrive at a ranking of the world’s most active energy retail markets. The Texas electricity market, now in its fifth year of full retail competition, is a rising star on the world ranking chart. It has moved from eighth to fourth position in the last year, overtaking Sweden, Norway, Netherlands, and New Zealand. Notwithstanding Texas’s well-earned “number one energy retail market in America” reputation, electricity customer switching levels in Texas fall far short of customer switching levels in the world’s hottest two energy retail markets. Ten percent of electric-
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Editor
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1 Electricity 3 Customer Switching: Texas Is The Rising Star
ity customers in Texas switched supplier during 2005, compared with over 20 percent of customers switching energy supplier in the leading markets, Great Britain and Victoria in Australia. The strength of customer switching in Great Britain and Victoria sets a precedent, suggesting it is not only conceivable that Texas’s current switching performance can be sustained in years to come, but also that there is significant room for improvement.
Texas Stands Alone Texas is one of a cluster of active, healthy energy retail markets; a group that includes South Australia, Norway, New Zealand, the Netherlands, Sweden, New South Wales and Finland (see Fig. 2). Texas stands alone amongst U.S. energy retail markets as an exemplar of truly successful retail energy competition. Texas’s leading position is no surprise. In having separated its utility retail operations from distribution, it employs a market structure that has more in common with Great »
The Future 6 Perspective: Environmentalists State of AMI: Stymie Electricity Asking All the Efficiency and Right Questions Innovation
8 Federal Energy Corridors: Rights-of-Way Designations Taking Shape PRINT
SPARK Britain and Victoria than with other U.S. states, which persevere with competition-inhibiting vertical integration of distribution and retail business functions.
Initial Spike in Switching Texas opened its doors to full electricity retail competition in January 2002. Preceding this milestone was a series of pilots aimed at proving the market processes and systems. In addition to encouraging new entrant electricity retailers to enroll customers in the pilot program, the regulators had encouraged the retailers to sign up customers ahead of market opening. Anxious to switch their newly won customers and generate revenue, a number of retailers obliged and, upon market opening, submitted their customer-switch requests, which initially swamped the market-switching systems. The backlog
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largely had been cleared by the end of the first month. This one-off situation accounts for the market-opening spike in electricity customer switching, prominent in Figure 1. A further five percent of Texas electricity customers switched supplier during the remainder of the first quarter of 2002. Switching continued in the five-to-10 percent range for the rest of the first year of full retail competition, and since then the Texas electricity retail market has experienced a general upward trend in customer switching.
Seasonality The Texas electricity market now has been open to full retail competition for four years, a period that provides sufficient history to detect seasonality in customer-switching patterns. Visible in Figure 1 is a distinct seasonal variation,
Source: Peace Software, Vassa EMG
Trend in electricity customer switching activity in Texas quarter-by-quarter since 2002 market opening.
FIG.1
Annualized percentage of customers switching per quarter 20%
15%
10%
5%
Comings and Goings
0% Jan
Mar 2002
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with switching consistently higher in the third quarter and lower in the fourth quarter of each year. The statistical research cannot confirm the cause of the seasonal variation but a likely contributing factor is air conditioning. Texas consumers’ electricity bills are at their highest in the summer months when air conditioning is at its peak. A high bill draws a consumer’s attention to energy use, leading to greater awareness of energy supply options and consequently provides more motivation to switch. According to Dr. Philip Lewis, Group Director, VaasaEMG, customers’ “critical awareness” of their energy options has been shown to contribute to utility customer switching in many energy markets around the world. Texas customers are likely to be less focused on electricity costs in the cooler months towards the end of the year, particularly during the Thanksgiving and end-of-year holiday season.
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PublicUtilities Reports, Inc. 8229 Boone Blvd., Suite 400 Vienna, VA 22182 Phone: 703–847–7720 800–368–5001 Fax: 703–847–0683 http://www.pur.com
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A significant number of electricity retailers exited the Texas market during the last 18 months. These (Cont.on p.12)
Bruce Radford, Publisher radford@pur.com Lori A. Burkhart, Editor lab@pur.com Alex Stephen, Designer astephen@pur.com
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July 2006 January 2004
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TEXAS
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(Cont. from p. 2) include Ampro, Utility Choice, Franklin, Azor Energy and 10 or more others, which departed the Texas retail market and forfeited their retail certification, leaving thousands of customers to find new suppliers. Anecdotally, a primary contributor to retailer business failure has been poor billing systems, leading to cashflow problems. This high level of retailer exits might ring alarm bells in some minds, but others would remark that companies exiting and entering a market is a sign of true competition. New-entrant energy retailers continue to enter Texas
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RANKING OF WORLD RETAIL ENERGY MARKETS BY LEVEL OF CUSTOMER SWITCHING ACTIVITY. Category
Market *
HOT
Great Britain Victoria (Australia)
ACTIVE
South Australia (Australia) Texas (USA) Norway New Zealand Netherlands Sweden New South Wales (Australia) Finland
3 4 5 6 7 8 9 10
Flanders (Belgium) New York Denmark
11 12 13
SLOW
DORMANT
Austria; Germany; Spain; Ireland; Portugal; Alberta, Ontario (Canada); Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, California, New Jersey, New Hampshire, Ohio, Pennsylvania, Rhode Island (USA)
The August issue of Fortnightly magazine takes on some big issues as Christian Hamaker delves into the present status of cyber security and what the future holds with forthcoming mandatory cyber standards. He explores expectations for the new protections, as well as FERC’s role in enforcement, and talks to energy industry insiders in, “Waiting on NERC: What’s Next for Cyber-Security?”
Rank 1 1
Not ranked
Source: Peace Software, Vassa EMG
FIG.2
FORTNIGHTLY
today. Notable among recent arrivals is Stream Energy which, in its first 18 months, has amassed 170,000 customers and a three percent market share, with multi-level marketing as its primary sales channel. Over 40 electricity retailers are active in the Texas market. The large number of retail market participants has been a defining characteristic of Texas since market opening, and contrasts with many other active retail markets, which tend to be dominated by five or six major retailers leveraging incumbent customer bases. For example, the
Another staff writer, Michael T. Burr, in “Facing the Climate Challenge,” explains how utilities are eager to invest in new power capacity— in part to build rate base and in part because they recognize the danger of relying too much on a single fuel source. Environmental issues, however, are adding greater complexity to company strategies for achieving fuel diversity. Here is more of what you will find:
䊳 NERC’s Reliability Standards: The Good, the Bad, and the Fill-in-theBlanks FERC staff’s Preliminary Assessment of NERC’s proposed reliability standards identified a number of potential deficiencies, many of which NERC plans to address. What adjustments must be made by users, owners, and operators of the bulk power system in the new era of mandatory compliance?
䊳 The Top 10 Utility Tech Challenges An EPRI vice president names several areas of concern in each part of the electricity value chain. How can IOUs overcome the formidable difficulties ahead of them?
PLUS PJM Fights Back Against Va. SCC Two Authors Dispute Goldman Sachs’ Kellerman
* Designated by country, province, or state
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July 2006
SPARK British market is dominated by a handful of energy retailers each with at least five million customers. The Texas market, where a large number of niche electricity retailers have sustained operations for over four years, explodes the myth that only very large-scale energy retailers can survive.
Utility Customer Switching Research Project The Utility Customer Switching Research Project monitors customer switch rates and trends in competitive energy retail markets worldwide. The project was founded jointly in 2004 by Peace Software (www.peace.com), a world-leading developer of utility customer information software, and VaasaEmg (www.vaasaemg.com),
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a university-based research center in Europe that specializes in modelling utility consumer loyalty and marketing. The Utility Customer Switching Research Project contends that customer switch rates are an important dimension of energy market competitiveness and have the advantage of being measurable and comparable between markets. This view is shared in the European Union where the project’s metric framework recently was adopted to measure the relative success of deregulation in European Union member states. The research project’s customer switch rate metric is being increasingly adopted worldwide and 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 further information visit www.peace.com/customer-switching. Paul Grey is Chief Market Strategist at Peace Software, a world-leading developer of utility customer information software for competitive energy retailers and regulated utilities. Grey and his team research the dynamics of energy retail markets so as to be able to develop advanced software products that anticipate and support utilities’ business needs. Grey has had articles and white papers published on a wide variety of energy and technology topics and he is a regular speaker at industry conferences.
July 2006