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Market Share in Generation: The Impact of Retail Competition on Investor-Owned Utilities

Fortnightly Magazine - July 1 1998

to choose another (retail) supplier and only industrial customers see benefits from competitive wholesale transactions. However, with the advent of retail competition, customer price sensitivity will increase as the availability of acceptable alternatives grows.

Scenario #2


Territories, Greater Risk

The moderate customer choice case is drawn from customer responsiveness to price changes in various parts of the country where two utilities compete for joint service territory. If these customers show a strong propensity to switch suppliers when confronted with a single alternative supplier, then the "lower bound" market share losses shown in Table 1 will understate potential declines.

Information exists about a group of nonstandard utility markets where two electric companies currently provide retail service to a single city or town. There are at least 46 such communities in the U.S. where limited retail competition exists, allowing new and/or current customers to choose their electricity supplier usually at no cost, with as little as three day's notice before switching, and with no time commitment to the chosen utility. Among the cities in this sample are Cleveland, Traverse City, Mich., Culpeper, Va., and Duncan, Okla.

Three observations drawn from these markets where retail competition exists offer a useful middle ground for understanding how a competitive retail environment might affect utility market share.

NONUNIFORM PRICES. First, communities served by two utilities usually do not face sustained uniform electricity prices. In Cleveland, two utilities compete at retail and the sustained price difference ranges from 7 to 10 percent.

INFREQUENT SWITCHING. Second, despite a persistent price difference between sellers, customer switching at any point in time is infrequent, ranging from as little as 0.3 percent per year on average in Columbus, Ohio, to 6 percent in Duncan, Okla.

CUSTOMER INERTIA. Third, additional evidence also suggests this customer inertia cannot be completely overcome in the short run by competitive strategies like new service offerings or reduced prices. In Ohio, local municipal provider, Newton Falls Utility Department, competes with Ohio Edison for customers within city limits. Despite NFUD's 30-percent lower electricity price, only a few customers have left Ohio Edison.

A Digression: The Drug

Industry Example

The case for estimated market share losses under full retail competition relies on a combination of evidence from existing generators, beginning with ÑiMo, and other industries that have undergone the transition from protected to competitive markets.

Arguably the most germane example comes from the patented drug industry where the product is protected - like a utility's service territory - from competition for the 17-year term of the patent. However, once the protection is lifted, the full force of competition is brought to bear on the determinants of supply and demand for the drug. In that way, "pioneer" drugs, those protected by a patent, provide a setting similar to the introduction of retail electric competition in which the conditions of market entry and competition change radically on a given date set by law or regulatory policy. %n5%n

Shared industry characteristics between patented drugs and regulated electric markets are strikingly similar:

Consist of many firms with products serving exclusive markets;

Exchange large up-front