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Electric Retailing: When Will I See Profits?

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

in total generation. As of late 1998, roughly 90,000 out of 2 million customers, or under 5 percent, had switched providers. Chain operations and large users were the first to switch.

Germany - Large Price Drops. Germany introduced choice simultaneously across all customer segments in 1998, and competition among the utilities is fierce. No payment was allowed for recovery of stranded costs. The presence of sizable excess capacity, and the fact that German prices were 25 percent to 35 percent higher than the average price in the European Union, has caused significant price drops. Large customers are seeing prices that are 30 percent to 60 percent lower than before the introduction of choice. 9

For example, the city-owned utility of Hamburg has promised to slash the electricity bill of a sporting goods store by 40 percent. Corporate customers are getting reductions of 30 percent and more, often without even switching providers. Even domestic customers are seeing reductions of 20 percent to 25 percent. 10

Deregulation at Home: Two Markets, Two Approaches

Media headlines proclaim that "99 percent of customers ignore deregulation in California." 11 The statement is a half-truth based on the fact that in the first year of deregulation, only 1 percent of the residential customers switched providers. It ignores the fact that switching among large industrial customers exceeded switching rates observed by AT&T in its long-distance business in the first year of telecom deregulation. Figure 3 plots switching rates across major customer segments in California.

As of February 2000, about 20 percent of large industrial customers, accounting for more than 30 percent of industrial energy sales, had switched providers. The percentages are about double their values in June 1998, when they were 11 percent and 16 percent. As shown in the figure, large commercial customers also have switched in significant numbers. Residential and small commercial customers have switched at the lowest rates.

There are many explanations for the variance in switching behavior across these customer segments.


Will Customers Pay for Value-Added Products?

Suppliers serving U.S. markets to date have offered little in the way of products differentiated by service level, reliability, convenience, or other features. They seem to believe that customers base their energy decisions solely on price and have no interest in such innovations. A new study from EPRI finds that just the opposite is true, however.

For this study, "ShareWars," almost 5,000 customers were interviewed by telephone about their preferences for a variety of product designs offered by retailers. Using advanced modeling techniques such as conjoint analysis and mixed logic modeling, researchers found that U.S. retail customers - and in particular, mass market retail customers - are very interested in buying electricity products tailored to their needs, even when those products cost significantly more than basic electricity products.

Discounts may not be enough. In one example, this research found that a "low price" offer of electricity service from a non-traditional provider had to be discounted by at least 15 percent before it acquired a significant market share (with at least 20 percent of all customers indicating a