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Energy Strategy: Flat Bills, Peak Satisfaction?

 

Why a risk-hedging product for small customers isn’t the gamble you may think.

Fortnightly's Energy Customer Management - Jan-Feb 2002

Flat pricing. Many small electric service customers want it, many electric companies do not think they can provide it. That creates a market opportunity for a convenient, flat electric bill.

We are not talking about flat rates per kilowatt-hour, nor about a budget bill program. These common products help customers to levelize monthly bill variance, but do not actually protect customers from price and billing risk. To “protect” means to shelter from risk and uncertainty. The difference between levelizing and actually protecting the customer is where the gap lies—and where a company can step in and capitalize.

What many small customers really want is a pure “flat bill.” A flat bill is a fixed annual bill that provides 12 months of equal payments with no year-end settlement. It can even be one annual bill. A flat bill also offers absolute predictability because it protects against any volatility in weather, behavior and energy costs for a specified period of time. In other words, the flat bill insures customers against the risk of increases in cost and quantity purchased.

This flat bill concept is not rocket science. It is not even considered innovative. It is, however, the pricing strategy of choice in many industries, including some that are similar to the electric industry. First, there is the capacity-constrained Internet service sector, which quickly transformed from volumetric pricing to flat bills. Then there is the cellular phone service market, which has evolved from pure volumetric pricing to a more customized menu of flat offerings. Even the volatile retail gas market has been experimenting with its version of residential flat bills. 

Not to be outdone, some innovators in the electric industry recently began offering financial hedging products that absorb risk from large customers. Why not offer this kind of protection to customers with small electric loads?

It may sound absurd. Sure, you might say, it’s fine for other industries, but not for the complex and dynamic electric industry. System capacity would become inefficient and unmanageable; peak loads would skyrocket, requiring new investments in existing plants; or it might even damage system reliability. Customers won’t pay for it. The absorbed financial risk would be too great. Regulators

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