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Electric Retailing: When Will I See Profits?

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

move beyond being sellers of commodity energy. The key to success is product differentiation. At the most basic level, they can provide a menu of pricing products that allows customers to match their risk preferences with the likely price volatility of different products. At the next level, they can move beyond risk management by bundling energy with some combination of service and related features. They may even offer value-added products with their core energy products.

Most importantly, companies need to move from cost-based pricing to market-based pricing. But rather than competing in price wars, that move requires marketing imagination, innovative product design, and an understanding of the company's financial and philosophical approach to market strategy. Energy companies need to determine the value that customers place on various product features, and the level of interest customers have in various service and corporate attributes. To be successful in the emerging energy markets, ESPs need to understand unarticulated customer needs and develop products and services for meeting those needs. 3

Deregulation Abroad: Still Reaching Its Potential

Overseas markets that have deregulated offer important lessons for electric retailers in the United States. This discussion follows the chronological sequence of events in Australia, Britain, Germany, and Norway.

Great Britain - Expect More Switching. In the 1980s, Prime Minister Margaret Thatcher embarked on an ambitious program of privatization and liberalization. The objective was to improve economic performance by "reversing the corrosive and corrupting effects of socialism." Shares in a range of nationalized industries, including the electric utility business, were sold to the public. 4

According to the British Office of Electricity Regulation (OFFER), the Electricity Act 1989 provided the framework for the introduction of competition. The OFFER reported last June that the monopoly held by each of the 14 public electricity suppliers (PESs) to engage in electricity retailing was "withdrawn in stages. In 1990 customers with a maximum demand above 1 megawatt (MW) were able to choose their supplier. ... [T]his was extended in [April] 1994 to all customers with a maximum demand over 100 kilowatts (kW). The monopoly over customers below 100 kW has been removed in stages with competition being phased in [for some 26 million customers] between 14 September 1998 and 24 May 1999."

Large customers responded aggressively to the opportunities to lower their costs by switching to providers other than their local, regional electricity companies (RECs). In the first year, the share of energy being sold by RECs to their native customers plunged from 98 percent to 57 percent. The major generators picked up many of the switching customers, but over time, as RECs began to compete with one another, they started picking up customers as well. The share of such "second-tier" RECs reached 26 percent in 1998.

Figure 1 shows the trend in market share in the large customer market, and Figure 2 shows trends in the medium customer market. Both figures reveal an inexorable downward sloping trend in the market share for incumbent providers.

By contrast, Britain's household market has been slow to switching providers. As of late April, about 5 million