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EEI Cities Problems With Retail Competition

Fortnightly Magazine - July 1 1997

Two studies examine marketers and direct-access pilots. Customers seen as "confused," dissatisfied," "frustrated."

The Edison Electric Institute has released two studies that examine increased competition in electric markets. One looks at the rapid growth of the power marketing industry, while the other examines the problems encountered by the first six retail access pilot programs in the U.S.

Power Marketers. According to Power Marketers Yearbook 1996: Sales, Purchases and Profiles, independent power marketers in 1996 sold 230 million megawatt-hours of electricity (em a 776-percent increase compared with the 26.5 million MWh they sold in 1995. The Federal Energy Regulatory Commission has certified 288 power marketers, which is an increase of 131 marketers since 1995. A total of 320 exist. The top 10 marketers were responsible for more than 70 percent of total sales. Enron Power Marketing Inc., the largest of the 10, accounted for more than 25 percent of the total of such sales (58.6 MWh).

The study attributes the growth of power marketers to the 1996 birth of the electric futures market. Power marketers are the most active buyers and sellers of electric contracts on the New York Mercantile Exchange. These marketers accounted for 67 percent of futures traded for delivery at the California-Oregon Border and 85 percent of futures traded for the Palo Verde delivery point in Arizona.

A much larger percentage of electric futures go to physical delivery than most other commodities contracts. That has caused changes in the use of transmission systems, which has implications for system reliability. For example, in December 1996, 3.8 percent of COB contracts and 15.6 percent of Palo Verde contracts went to delivery. This rate compares with 0.2 percent for heating oil, 0.2 percent for gasoline and 0.4 percent for natural gas in the same period.

Pilot Programs. EEI's study, Retail Pilot Programs: The First Six, details the six initial retail access pilot programs and their effect on utility operations. The study focused on demand levels, threshold price, operational concerns, marketing techniques and consumer perception. The six retail access pilots are run by: Central Illinois Light Co., Illinois Power Co., Massachusetts Electric Co., Orange & Rockland Utilities Inc., The Washington Water Power Co., and New Hampshire utilities.

EEI noted the pilots provided insight into the problems of retail access pilots. Following are a few examples:

• Subscriptions. Orange & Rockland was unable to subscribe fully its residential pilot despite a comprehensive education program. Ultimately, the company had to increase participation through additional mailings and publicity. When asked why they did not participate, 75 percent of residential customers said projected savings were not sufficient, while 75 percent said they did not have the time to compare rates.

• Price. Customers said price was the primary reason, in all the pilots, why they chose an alternative supplier. EEI notes that prices were often artificially lowered through below-cost power. New Hampshire required that utilities guarantee a

10-percent rate cut. Other factors, such as a supplier's greenness and its contribution to municipal funds, also affected customers' decisions.

• Marketing Tactics. While customers generally were content with the pilots, some were confused