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Electric Retailing: When Will I See Profits?

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

as represented by the price on the California Power Exchange. Until it has been recovered fully, and the rate freeze lifted, full retail competition will remain a chimerical possibility.

Other ESPs such as PG&E Energy Services and New Energy Ventures never even put the residential and small commercial market on their radar screens. That was partly because of the steep incumbency bias mentioned, and partly because of the high marketing costs associated with this market segment. The only providers that had some modest success in this market were providers of green power. Customers in California have signed up for green power at prices 10 percent to 20 percent above CalPX prices. That may not occur in other parts of the country, however. Even in California, the provision of green power has been subsidized by the state. It remains to be seen how many customers will pay more for green power when these subsidies go away.

A significant barrier to providing the benefits of competition in mass markets has been the inability to provide such customers "virtual direct access." This phrase, coined by Daniel Fessler, who presided over the California Public Utilities Commission at the time of deregulation, would give small customers access to the wholesale spot market through real-time pricing. Such access has been hampered by the lack of interval metering. Most customers are billed monthly, and some are even billed every other month. They don't see the time-varying nature of electricity costs, and have no incentives to modify their usage patterns. 13 In this regard the electricity industry in mass markets significantly trails the telecom industry, where each call and its time are metered in real time.

Another barrier to switching has been the general lack of awareness among residential customers about the existence of customer choice. A final barrier is the small share of electricity costs in the household budget. The typical electric bill for residential customers in California is $65 per month.

More recently, new providers such as Utility.Com are pursuing the mass market using Internet-enabled capabilities such as real-time metering and billing, as well as by providing value-added services such as price-sensitive thermostats. This development represents a major innovation, and will be discussed further.

AB 1890 made no provision for an automatic price cut to medium and large commercial and industrial customers. These customers were interested in saving money, and ESPs courted them with various packages and offers. One ESP, Montana Power Group, signed up the California Manufacturers Association by offering the association a price that was 8 percent below the wholesale price. It is estimated that the typical ESP offered customers a price cut of 3 to 8 percentage points. Often, energy efficiency services were bundled with the price cuts. In response, medium and large customers switched in significant numbers.


Lessons from Gas, Telecom: Competition Doesn't Happen Overnight

Electric service providers can learn plenty from the experience of other U.S. industries that have been opened to competition. Although widespread switching by mass-market customers took over a decade in both the natural gas and telecommunications industries, competition