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Electric Retailing: When Will I See Profits?

Deregulation Abroad: Still Reaching Its Potential
Fortnightly Magazine - June 1 2000

has brought profits for suppliers and savings for customers. But, at least in telecom, the greatest benefits of robust competition may be innovative products and services - and the higher margins they represent for service providers.

Natural Gas - Half Switch in Georgia. Industrial customers in the United States became eligible to choose their natural gas providers in 1978, following the passage of the Natural Gas Policy Act. Extensive switching occurred, and, according to the American Gas Association, 89 percent of total gas consumed by industrials was purchased from alternative providers by 1997.

Choice recently was introduced at the household level in some U.S. states. In Georgia, where all customers obtained the right to switch to competitive gas suppliers in October 1998, almost 50 percent of households switched providers during the first year of retail choice. Marketing was heavy during that year, and one provider, SCANA, even erected kiosks in shopping malls to facilitate face-to-face contact. This heavy marketing was driven in part by the mandatory nature of switching in Georgia. The regulatory rules state that if a customer has not switched after the first year, they would be allocated randomly to a competitive provider. Each competitive provider would get a percentage of customers from the pool of unswitched customers, with the percentage based on their market shares in the first year. (See "Lessons From Georgia: The Benefits of Retail Gas Choice," , May 15, 2000, p. 32.)

Telecom - Many Have Switched Twice. The telephone industry was deregulated in 1984, as part of a consent decree by Judge Harold H. Greene that broke AT&T into a competitive provider of long-distance telephony and several monopoly providers of local telephony. The long-distance company inherited the AT&T name. The local providers were given a monopoly in their franchise areas and became known as the regional Bell operating companies (RBOCs).

The new AT&T eventually began losing share in the long-distance market to MCI and other competitors. By 1998, its share of long-distance revenues was down to less than 50 percent. customer churn became a well-known phenomenon as customers began to "enjoy" the shopping experience. One study conducted about a decade after markets had been opened found that 44 percent of the customers had switched at least twice.

To acquire and retain customers, phone companies offered various new products and services, including call waiting, call forwarding, and voice mail. More recently, wireless service, Internet access, and cable TV have been added to the list of offerings.


Pennsylvania: Shopping Credits Galore. The state of Pennsylvania designed its pricing rules differently from California. It gave customers a "shopping credit" to facilitate switching. The amount of the credit depended on the incumbent utility's generation costs. The customer could then buy electricity from an alternative ESP at a price lower than the shopping credit, and keep the difference. This approach rewarded the customer for switching, as opposed to the California approach, which rewarded them with a 10 percent cut whether they switched or not.

Paul Joskow, Anne Selting, and other economists have argued that the "shopping credit" concept is