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Energy Marketing: Is There Added Value in Value Added?

Fortnightly Magazine - September 15 1997

accomplished with electricity. ... This suggests that utilities should examine (em and plan for (em product lines of service options that arise from those customer preferences.

Finally the report gave examples of value-added products and services under the headings: "Product-Related Risk Management," "Facility Operations Management," "Price-Related Risk Management," and "Customer Convenience."

An examination of these services in a competitive market shows that some are available automatically as part of an electricity market. Services such as reliability of supply are related more to the monopoly wires business than to competitive power retailing. Those items that were essentially subsidies were eliminated in a competitive market. A service such as advice is either expected as part of customer service, or is part of consultancy services that are financially insignificant compared with supplying electricity. Other services, such as comprehensible bills, are what customers expect from a competitive and competent supplier. If a power retailer makes it difficult to do business, then it will have few customers.

Integrated value-based planning was useful in helping with the slow process of refocusing the industry from production to a customer-orientated view. Most of the analogies drawn with other markets, however, were not relevant to the regulated monopoly environment in which electric companies operated. Many utility costs are scrambled together and smeared across the system. Prices can discriminate and cross subsidize. And political and regulatory management skills have been more important than commercial competence.

A Valid Example: Power Retailing

With the development of competitive electricity markets in England and Wales, which is a poolco system, and in Norway (and Sweden, see below), which is a bilateral trading system, we need to speculate no longer. Now we can examine how retailers and customers with a load of more than 100 kilowatts really behave when there is choice. In both countries, the electricity supply industry is unbundled into five components:

• generation;

• a wholesale market;

• transmission (as a common carrier);

• distribution wires (as a common carrier); and

• power retailing.

The retailer pays for use of transmission and distribution networks, which are unbundled and provide nondiscriminatory common carriage services at regulated prices. In England and Wales, power retailing involves buying from the pool (through which all electricity traded wholesale flows) and hedging volatility with financial contracts for differences, and selling to end use customers. In Norway, power retailers can buy from generators and from a spot market at the margin. They can also buy futures contracts to manage risk. A key feature of both markets (as in other commodity markets) is that customers can access the pool or spot market. They can do this either directly by becoming a member of the respective markets, or indirectly by seeking a competitive agency service from a member.

Although the commercial trading relationships are different, the characteristics of power retailing are similar in both markets:

• The margin is slim (em it is like any other merchanting business with a large turnover, a slim gross margin and an even slimmer operating profit margin. In England and Wales, the gross margin supplying large customers is comparable to the margin in