Focus on O&M (May 2008)

TRENDS

Retail Competition

This “nuts and bolts” department doesn’t usually feature a conference report. But the one we’re including in this issue is about a unique conference: KEMA’s annual Executive Forum.

Change in the power generation industry is occurring at an unprecedented rate. POWER’s mission is to keep you apprised of the trends driving those changes, and events like KEMA’s conference tend to shed light on the big picture. For plant operators, the impact of today’s trends will be on tomorrow’s plant O&M practices.

Finding KEMA. Some readers may ask, “Who is KEMA?” KEMA is a big Netherlands-based consulting firm that provides technical and management services to the global energy industry. It was formed in 1927 as a testing laboratory, much like Underwriters Labs (UL) in the U.S. In fact, in Holland and many parts of Europe, there still exist appliances with a KEMA label certifying that they passed the company’s safety tests.

Later, KEMA started providing consulting services to European and Asian utilities. It opened shop in the U.S. during the 1970s. Today, with 700-plus consultants dedicated to the global power and natural gas industries, KEMA’s Retail Energy Markets advisory service is a leading source of business intelligence and market analysis to the competitive retail energy industry.

KEMA’s 19th annual Executive Forum brought to Dallas about 300 energy executives to discuss and debate the outlook for competitive retail electric markets. Currently, 20 states and the District of Columbia allow customer choice to some degree (Figure 1).

1. Clusters of competition. Twenty states and the District of Columbia currently let customers choose their power provider. Source: KEMA

According to Kristie Deiuliis, manager of KEMA’s Retail Energy Markets service, last year about 10% of all electricity sold in the U.S. was consumed by customers who had switched to competitive providers. In 2006 the figure was 9%.

At first glance, retail choice would seem to have a small “market share.” But as Taff Tschamler, director of KEMA’s Retail Energy practice, underscored at the forum, that 10% represents more annual consumption than all UK consumption. Competitive retail electricity sales in the U.S. are also larger than sales in all of Africa. Internationally, the U.S. competitive market ranks eighth, behind India’s and ahead of Brazil’s and France’s. America’s consumption of power bought on competitive markets has grown at an average annual rate of 20.8% since 2001 (Figure 2). The biggest percentage gains for competitive power during 2007 were in Connecticut and Illinois (Figure 3).

2. Choosing choice. Estimated retail competitive power sales, in terawatt-hours, from 2001 to 2007. Source: KEMA

3. Pent-up demand. These were the fastest-growing markets for competitive power last year. Source: KEMA

Without excluding other markets, the KEMA Executive Forum focused on the unique ERCOT market of Texas, where competition is exceptionally intense in all three sectors: industrial, commercial, and residential.

Most experts agree that customers within ERCOT have a greater choice of electricity providers than anywhere else in the U.S. The price for residential electricity in ERCOT is actually lower today than it was in 2001. If you consider that inflation has devalued the dollar 22% since 2001 and that the price of natural gas has risen 90% over the past seven years (and that 69% of ERCOT’s generation capacity is gas-powered), proponents of competition can justifiably claim that their theory works in practice.

So why aren’t other states copying the Texas model? Two reasons:

  • A perception in many parts of the U.S. that “deregulation” is bad public policy and that U.S. business in general needs to be more closely regulated.
  • Fear of “rate shock” when price caps are removed from a market that has been bottled up while fuel costs (gas, coal, and uranium) have escalated sharply.

Winners and losers. The forum’s keynote address—by Jim Burke, CEO of TXU Energy—focused on retail competition in ERCOT. In 2007, TXU Corp. was transformed from a publicly held company to a privately owned business with three discrete operations: Oncor, a regulated “wires and poles” (transmission and distribution) business; Luminant, responsible for operating and procuring generation capacity; and TXU Energy, a competitive retail electricity provider.

By the end of 2007, TXU had lost about 40% of the residential and small business customers that it had served prior to the arrival of competition in ERCOT in 2002. That’s a statistic that Burke wants to reverse. Without a doubt, the gloves have come off in the fight for customers in ERCOT.

For confirmation, visit a web site run by the Public Utility Commission of Texas: www.powertochoose.org. In the prized regions of metro Houston and Dallas, no fewer than 27 retail providers are slugging it out for residential customers. A customer can choose fixed rates for one or two years forward, rates that fluctuate monthly with changes in fuel prices, electricity that is sourced only from renewable generation, and rates that include frequent-flyer program airline miles credits. According to a TXU survey (Figure 4), 90% of residential customers in ERCOT are aware of their ability to choose their electricity provider and more than 80% support choice.

4. To know it is to love it. Awareness of and support for retail electricity competition are high in Texas. Will that support improve elsewhere? (The underlying survey was conducted in January 2008. It used random-digit telephone calls to contact households in these three areas. The sample size was 250 households per area.) Source: TXU Energy

Retail choice at the residential level in Texas has been phased in since 2002. On January 1, 2007, Texas electric companies in deregulated regions were released from the last part of government regulation involving the “price-to-beat.” All electricity prices now are determined by supply and demand. Since the residential power market was opened to competition in Texas, more than 80% of customers have either changed their rate plan or provider at least once since being offered choice (Figure 5), and 77% are very satisfied with their current provider (Figure 6).

5. Exercising their right. Since 2002, 80% of eligible Texans have opted for a different power provider or rate plan. Source: TXU Energy

6. No second thoughts. Most Texans are satisfied with their electricity provider. (The numbers come from a survey conducted in February 2008 that used random-digit telephone calls to contact households in all competitive areas of Texas. The sample size was 121 households per area.) Source: TXU Energy

The consensus of several speakers in plenary sessions was that:

  • Customers are smart.
  • Customers will pay for value.
  • Customers want to be able to fire their electric company and hire a new one.

Love the price, hate the company.However, while calling customers smart and cost- and quality-conscious, several speakers also said customers are often hard to understand.

For example, considering the revelation from TXU’s survey that Texas ratepayers are happy to have electricity competition, another survey by Fox News in Austin produced a surprising result. One of the questions it asked residential customers was, “Do you favor re-regulating utility companies?” More than half of respondents (54%) said yes, 25% said no, and 21% were unsure. Explaining this paradox may get down to focusing on the words. Consumers seem to want competition and choice, but they are far less keen on deregulation, at least as a concept.

One thing is sure about customers: Few know that most retail electricity providers are operating with gross margins of just 5% to 10% for residential customers and even less for commercial accounts. But even though the two big incumbents (TXU and Reliant) continue to lose market share, no new entrant has found the secret recipe for becoming the Southwest Airlines of the Texas retail electric market.

However, there may be an 800-pound gorilla on the horizon: Wal-Mart. Texas Retail Energy, LLC, a wholly owned subsidiary of Wal-Mart, currently provides electricity to all of the company’s stores in ERCOT with the option to choose their provider. Wal-Mart is essentially acting as an aggregator for its own stores and is not currently offering electricity to any other customers. The audience roared with laughter when the moderator of a panel discussion ended his introduction of a Wal-Mart representative with the following request, “Please don’t ask Chris Hendrix the question that you all want to ask.”

Cause and effect? In one forum session, Jim Ajello, a senior VP at Reliant, drew an interesting analogy between the deregulation of U.S. airlines and the utilization of industrial capacity. Since deregulation, the airlines have greatly improved their assets’ overall capacity utilization rate. Compared with airlines, refineries, and companies in other major industries, utilities are much less efficient in this regard (Figure 7).

7. Using their assets. Here are the average capacity utilization rates of various industries, 1997–2006 (the rate for power is for 2007). Source: Reliant Energy

Can we expect that competition will make utilities more efficient users of their generation fleets? With or without competition, adoption of plug-in hybrid vehicles will surely boost off-peak sales as customers recharge their cars overnight. The real question is, How long will it take for a meaningful percentage of America’s automobile fleet to become hybrid or pure electric? Projections of 20% by 2020 do not seem out of the question.

But let’s circle back to Texas. Not all Texans have the freedom to choose their electricity provider. The geographic regions of Texas outside of ERCOT are still regulated. In addition, within ERCOT there are 77 municipally owned power companies and another 76 electricity cooperatives. Nueces Electric Cooperative Inc., which serves the Victoria-Corpus Christi region, is the only publicly owned power company in ERCOT to offer retail choice. Nueces not only lets its incumbent customers choose their provider, it also has set up a retail division to sell power to customers anywhere in ERCOT.

Co-ops and competition. POWER discussed several aspects of retail power sales and customer choice with Sarah Fisher, communications manager for Nueces Electric Co-op (NEC):

POWER: A year ago, the incumbent Nueces territory had nine competitive retail electric providers for commercial and industrial customers and two representatives for residential customers. How many competitors do have on your home turf today?

Fisher: Twelve altogether, although only two, Texas Power and NEC’s Retail Division, are actively seeking residential consumers.

POWER: A year ago, Nueces had not lost many customers to competitors: only nine households and 113 small commercial accounts. What are these numbers today? What are your industrial, commercial, and residential meters’ market shares on your home turf?

Fisher: Sixty-six residential users (of 14,695 active residential services) and 155 small commercial users (of 2,109 active small commercial accounts) have chosen a non-incumbent provider.

POWER: Your retail division had 11,651 customers outside of Nueces service territory one year ago. What is your retail customer count today?

Fisher: Nueces Retail Division now serves 16,109 active services customers outside its traditional distribution territory.

POWER: Does Nueces own any generation assets? If you do, has their utilization rate increased during the last year, and do you attribute any of this increase to the expansion of your retail division?

Fisher: Nueces does not own generation assets but is a member of South Texas Electric Cooperative [STEC], headquartered in Nursery. So indirectly, Nueces has increased the utilization rate of STEC’s generation assets.

POWER: I heard that Nueces has expanded its coverage to all competitive choice regions within ERCOT. Is that true? Are there any regions in ERCOT open to customer choice that Nueces does not serve?

Fisher: NEC Retail has applied to ERCOT to serve customers in every competitive market in Texas. Presently, it actively markets its services only in the AEP Central and NEC distribution areas. They include the Rio Grande Valley, Corpus Christi, and Victoria markets.

POWER: Are the two decisions by Nueces—to allow customer choice in its incumbent region and to set up a retail division—regarded as successful by the company’s management and customers? For that matter, have you gathered customer satisfaction data to quantify “success”?

Fisher: NEC’s decision to offer retail choice has been a success in that we are able to offer an at-cost, customer-owned co-op provider option throughout the competitive areas of Texas. In addition, customers in NEC’s distribution area now can choose from 12 providers. Unfortunately, ongoing compliance with [the rules of] ERCOT’s competitive retail market continues to increase our cost of doing business. We hope in time that there will be economies of scale that can lessen the impact of these additional costs on our members.

POWER: There are 77 munis and 76 co-ops in Texas. Why do you think that none of these entities has joined Nueces by offering choice to its customers?

Fisher: Electricity cooperatives generally have the highest level of customer satisfaction of all utility types. If consumers are being taken care of, they may not necessarily demand “choice.” Electricity co-ops and munis also realize that it is expensive to make the transition to competitive markets, as we’re experiencing to maintain compliance with ERCOT.

—Mark Axford, contributing editor