New Opportunities Abound for Retail Electric Suppliers

Following the conclusion of the KEMA conference (see previous story), Mark Axford had the opportunity to talk with Phillip Tonge, recently appointed president of Spark Energy LP. Spark Energy is a retail energy provider (REP) of electricity and natural gas in 16 states that have opened their markets to competition for industrial, commercial, or residential customers.

Axford: Did Spark Energy see a resurgence in retail electric markets during 2010?

Tonge: Absolutely. Texas has become a mature market that is working well after 10 years of competition. For Spark, 2010 was a “hold your own” year in Texas, but we saw lots of growth and excitement in other regions. Pennsylvania is perhaps the best example of a rapidly growing market. They are getting good media coverage and public awareness of competitive choice. As a result, large numbers of customers have switched to a new electric provider in a short time.

Axford: As Spark arranges its electricity supply for customers, what fraction is hedged in bilateral contracts versus spot market purchases? Would you consider your fraction to be typical for REPs?

Tonge: Our goal with managing the supply portfolio is to run a flat book, which means we endeavor to match our supply exactly to our load obligations as much as possible for any given hour. We do occasionally have a small amount of spot market exposure in the portfolio, but mainly in months where we see low price volatility. We typically enter a month no less than 95% to 100% hedged to expected load and will fill in the rest with either day-ahead or spot purchases. This is pretty typical practice for an REP running a well-managed supply portfolio.

Axford: Is it fair to say that Pennsylvania is looking like the next Texas for customer choice in retail electric markets?

Tonge: I think so. If you look at Pennsylvania, there are several things in common with the Texas market. First, the number of competitors—about 10 to15 providers in Harrisburg and Philadelphia markets. Second, the pace of switching in PPL and PECO territories has been staggering. Nearly 50% of all PPL residential customers have switched since the price caps were removed about 18 months ago. In Philadelphia, about 16% of PECO’s residential customers have switched since the price cap came off on January 1, 2011. Today, there’s market frenzy in Philadelphia because this is far and away the largest zone for households and meters in Pennsylvania.

Axford: Did Pennsylvania make a conscious effort to copy the Texas model? What are the major differences?

Tonge: Well, the [Public Utility Commission (PUC)] commissioners in Texas and Pennsylvania (Barry Smitherman and Robert Powelson, respectively) have exchanged compliments about how each state has handled the transition to customer choice. I think the major difference between the states is that Pennsylvania customers still have the old “utility rate to compare,” once known in Texas as the “price to beat.” Unlike Texas, the poles and wires have not been completely separated from the competing incumbent provider in Pennsylvania.

Another important difference is that most new entrants to the Pennsylvania market must bill their customers via the incumbent provider. One challenge that all REPs face is to develop strategies to build a relationship with the customer. In Pennsylvania, we don’t yet have an anchor, the monthly bill, to better establish that relationship. In Texas, all completive electric providers bill the customer by e-mail or direct mail, and customers see their logos, websites, and promotional programs. We will continue to look at billing options in Pennsylvania as well as other markets.

Axford: Why do you think Pennsylvania has such a robust market for switching while other states in the Northeast, such as Connecticut and New York, have had a less-exuberant response to competition?

Tonge: First, I think kudos must go out to the PUC in Pennsylvania. One thing Pennsylvania did very well was to conduct a series of consumer education seminars. There were opportunities for consumers who were sitting on the fence wondering, “What does all this mean?” to come in and hear about competition from the commission staff and the retail providers themselves. Second, I think the media in Pennsylvania latched on to the fact that this was a watershed event with a date certain for competition to begin. It was newsworthy. The media got on top of it and helped explain the consequences of switching, or not switching, to the average household customer. Of course, the media did not endorse a particular competitor, but they did help create a buzz in the marketplace.

Axford: Is there a critical mass needed in a competitive power market before the switching rate takes off? It seems like New York and Connecticut have not been able to achieve the critical mass like Texas and Pennsylvania.

Tonge: Spark Energy has been happy with the market in Connecticut, and we continue to add customers at a good clip. From my perspective, there is a little less certainty in Connecticut that all of the political forces are 100% on board for competition with no looking back to the old regulated model. If a company like Spark Energy does not see a commitment for market longevity, they will be more careful about their investments in that market.

New York is a bit different. There are many incumbent utilities, and the competitive dynamics are strongest around New York City. Other regions of the state have lower electric prices and are not as attractive targets for REPs. The statewide switching rate in New York is at 20.7%, which is a 12.5% year-over-year increase from December 2009.

I am optimistic about New York as a place for Spark Energy to do business because I feel that the PUC is committed to competitive markets. It just hasn’t generated the buzz that we are getting in Pennsylvania.

Axford: How does Spark Energy see the newly opened market in Illinois?

Tonge: We’re in the Chicago area right now. Like in Pennsylvania, we have taken an innovative approach to our marketing arrangements in Chicago. We want to look, feel, and act as part of the community. We have partnered with important local institutions to speed up our brand recognition. We are allowed to send our bills directly to customers in Illinois, but for now we are billing through ComEd while we grow our customer base.

Axford: Is the speed of switching in Illinois as fast as Pennsylvania or even more rapid?

Tonge: Illinois feels like Pennsylvania in some ways. Neither the Illinois Commerce Commission nor ComEd have published any switching statistics for the first 90 days of competition (since January 1, 2011). But consumers are getting the message and responding to it. The option of choice has not been covered by the media as broadly in Chicago as in Philadelphia.

Axford: If Pennsylvania is the next Texas and Illinois is the next Pennsylvania, where is the next big market for competitive retail power?

Tonge: Certainly, Florida would be of great interest to Spark Energy if it were to open up. They have a large population and larger-than-average consumption of electricity. It is interesting to note that Florida’s largest incumbent utility (NextEra) has a subsidiary (Gexa) that is aggressively seeking customers in Texas and other states open to competition. Based on some of the comments I heard at the KEMA conference, I asked our regulatory team look into both Florida and Arizona. If I was a regulator in another state looking at how to get competitive markets moving, I would look at Pennsylvania as the example.

Mark Axford is the principal of Axford Consultants LP and a POWER contributing editor.

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