"This legislation represents a piecemeal approach to a problem which requires deliberate and thoughtful consideration .... [It] could lead to 'cream-skimming,' which would result in increased rates for the remaining business and residential customers" (Lincoln Almond, Governor of Rhode Island).
Words to this effect are likely to grace vetoes of retail wheeling legislation by governors and maybe the President of the United States for the foreseeable future. Too many people trying to push the deregulation envelope in the electric power industry are leaving small customers, and the ability to profit by serving them, out of the equation.
Unless deregulation enables households and small businesses to shop for power, direct access isn't going to materialize. And that means that opportunities to make money and create genuinely value-added products and services could be delayed indefinitely. That's bad for suppliers, marketers, and customers of all shapes and sizes.
We can wade through the many proposals emerging from states and special interest groups and the patchwork of state deregulation blueprints. And we can continue meeting through venues such as the DOE/NARUC Electricity Forum ad infinitum. Or, stakeholders can begin articulating a plan to speed up the transition to a more competitive and value-driven energy market for all customers.
Rhode Island Gov. Lincoln Almond vetoed retail wheeling legislation last year because it would have exclusively benefited large industrial companies. And if California's recent decision is any indication, households and small businesses in other states may be left behind.
Which begs the question: When will consumer advocates step up to the plate and offer a plan that realistically advances the debate rather than protecting subsidies for their pet causes? If certain private-sector interests continue to frame the debate without offering any means for small customers to shop, the consumer backlash could stop deregulation cold (em and special interests with it.
None of the major consumer groups (see sidebar on page 15) (em with perhaps one exception (em are prepared to put forth specific ideas to engage commissioners and lawmakers on deregulation. Collectively they appear more bent on stopping the Electricity Consumers Resource Council (ELCON) and Enron Corp. than on becoming part of the solution. More than one consumer advocate willing to tackle the subject admitted, "We're just counting on our friends [in state legislatures and Congress] to stop any retail wheeling amendments."
Consumer groups that lack resources can be excused for hesitating to tackle electric power deregulation. Competition for foundation grants to even study the issue is fierce. And the prospect of nonprofit entities losing their tax-advantaged status (em even for substantive research and advocacy (em is disheartening. But I'd like to think that several groups combined, perhaps with the advice of some far-sighted utilities and power marketers, might be able to devise a win-win-win solution that could at least advance the ball.
Ultimately, retail wheeling will have to pass muster politically. I doubt a single retail wheeling proposal will succeed unless customers of all sizes stand to benefit within a relatively tight timeframe.
I therefore challenge the public and private sectors to put forth a realistic plan that can benefit small customers by giving them the aggregate market power to shop. I also challenge electricity providers to leapfrog the natural gas and telecommunications industries to devise an efficient means to market and differentiate their products and services for small customers that could (em indeed, want to (em be aggregated.
To that end I offer the following examples and lessons:
Buyers Being Wary . . .
In California. Southern California Gas Co. (SoCalGas), the nation's largest gas utility, has
offered a limited customer-choice program throughout its service territory since 1991. The commodity cost of natural gas is open to competition from an unlimited number of alternative providers; the responsibility and costs of transportation and billing remain with SoCalGas. Here's what happened:
Where the competing provider can save the customer no more than 20 percent of the commodity cost, participation is minimal. At that price break, the typical monthly savings from the average SoCalGas customer is only about $2. Even at a 50-percent commodity savings, the monthly savings is only about $4.50, or $54 annually.
The limited price advantage and the prohibition on transportation and billing services has forced competing suppliers to segment the market by targeting the highest-use customers. It has also compressed as many as 10 competing alternative suppliers down to three. Most of the activity, consequently, now targets the small commercial sector. Typical facilities being served include schools, hospitals, hotels, restaurants, laundromats, and master-metered apartments.
Lesson: The lack of a viable market (em compounded by the absence of a requirement to choose (em will severely limit any differentiation by the private sector unless gas prices rise and heighten interest in competing offers.
In Iowa. When Rock Valley's existing gas utility, now a part of MidAmerican Energy, intended to give up its franchise rights to become an unregulated distributor, residents had to decide whether to remain with MidAmerican or select an alternative supplier. After a series of public meetings, door-to-door solicitations, newspaper ads, and community events, customers chose from among four companies: MidAmerican, Equitable Gas, a subsidiary of NorAm Corp., and an affiliate of UtiliCorp United.
Even though it guaranteed a 10-percent savings off the previous MidAmerican rate, UtiliCorp United earned too few customers to make the first cut, which required a minimum of 50 customers. The company that garnered the most customers also offered the most savings: Equitable Gas.
The Iowa experience is marked by the absence of a default option. Iowa put a premium on marketing initiatives and the company's efforts to identify what the market really wanted. The requirement to choose drew more interest from potential suppliers. Consequently, customers had more to choose from.
Lesson: Existing suppliers have the experience and information to forge an increasingly valuable relationship with their customers. But if they don't focus on what the customer really can use and what he's willing to pay, then mandatory shopping may be the only way to include small customers in a meaningful way.
In Ontario. Industrial gas customers in Ontario have been able to shop since 1985. So when that market became saturated with providers around 1990, the industry began to focus on commercial and then residential customers. Since then, numerous gas brokers have sprouted up to entice residents with offers of significant savings. About one-quarter of the roughly 2 million residential customers in Ontario last year received gas from one of 25 or so brokers.
When prices rose in early 1994, however, some brokers hadn't covered their exposure to higher prices and found themselves without sufficient
supplies to deliver on their contracts. Ontario utilities stepped in to make up the difference, but lawmakers revisited the law deregulating the industry. They crafted a Code of Conduct regulating broker marketing practices and sales pitches. They also moved to require at least three years of supply and transportation capability.
Lesson: A shakeout period among suppliers is almost inevitable as "fly-by-nighters" wrestle with problems in a developing market. Consumer protection may need to be codified.
In Telecom. Despite nearly a decade of intense competition between AT&T, MCI, and Sprint, approximately 60 percent of small telephone customers have yet to change long-distance carriers in the United States. Perhaps the biggest reason is that consumers have no means of comparing competing plans and measuring their savings.
A handful of consumer groups in California have tried to quantify the differences between leading carriers, to no avail. If electricity faces the same fate, consumers will probably react similarly and remain with their existing supplier. All we will have gained will be a lot of additional advertising noise.
Electricity can be differentiated in myriad ways to specific groups of customers with common traits. For example, a company could emphasize that its electricity is generated with renewables, or bundled with energy-using products. With electrotechnologies and the booming information economy, the value of electricity from a known and trusted supplier can grow. The quality of one company's power can deliver value that customers are willing to pay a little extra for (em if they are given choices and industry is freed up enough to serve them.
Lesson: Small consumers need access to credible information to decide for themselves the value of competitive offerings.
Neighbors Getting Together . . .
About this time last year, I was asked to research for my neighborhood association the possibility of connecting our all-electric homes with natural gas. As an aggregated customer group, we wanted to compare the relative merits of each form of energy. We invited both the local gas and electric utilities (em Washington Gas and Potomac Electric Power (em to make presentations at a homeowners meeting about the cost and quality of their heating service and the products that could deliver it.
Potomac Electric Power, sent two representatives; Washington Gas asked a contractor to stand in. Trouble was, the contractor was a member of the regional heat pump association and was caught having to talk for the gas utility with an affiliated electric utility peering over his shoulder.
In the end, my neighbors and I got most of the information we felt we needed to decide, including materials left by the gas utility in a plastic bag on our front door knobs. But why Washington Gas elected not to send a representative and assess the situation itself is perplexing. Who knows, there might have been a lot more potential business bubbling under the surface, such as gas ranges and even gas hearths to replace burning logs.
Washington Gas will not likely have the opportunity to tap this potential revenue stream for at least another decade because all of us in the market opted to invest in the latest version of the most efficient heat pump suitable for our homes. And while oil heat contractors and gas appliance manufacturers continue to beat up on the heat pump in local advertising, the new equipment (em with the help of a humidifier (em delivered comfort throughout the January blizzard and the arctic cold spell in early February without a hitch.
Had we waited almost two years for Baltimore Gas & Electric to complete its pending merger with Potomac Electric Power (expected in Spring 1997) (em thereby introducing at least the notion of a future choice of gas suppliers (em perhaps the response by Washington Gas would have been different.
Technology may soon leap to the small customer's rescue in despite of utility indifference. High-tech companies are developing (em some even mass-producing (em relatively inexpensive remote meter-reading devices that use either fiber-optic cable or radio waves. A handful of utilities are already testing these applications. Even lower-cost options on the boards would use existing telephone lines to access customer load electronically. If households and small commercial customers gain access to these technologies, particularly at an "introductory rate," aggregation could become moot. t
James Pierobon counsels energy providers and other companies on strategic marketing initiatives through Potomac Communications Group, Inc., in Washington, DC.
Consumer Advocates: Where's the Beef?
. American Association of Retired Persons, Washington, DC. Published a booklet with a sometimes subjective definition of electricity terms.
. Citizen Action, Washington, DC. Searching for foundation money to mount a defense against retail wheeling.
. Consumer Federation of America, Washington, DC/Austin, TX. Researching deregulation. Hoping to devote at least a panel discussion at its annual Consumer Assembly this spring.
. Consumers Union, Austin, TX. Opposes environmental subsidies that aren't cost-effective. Plans to present options for aggregating small customers to the 1997 Texas Legislature.
. Electric Consumers' Alliance, Indianapolis, IN. Outlined an electric customer's Bill of Rights.
. National Association of State Utility Consumer Advocates, Washington, DC. Has scheduled panel discussion this month, "Bringing Competition into the Home."
. National Consumers League, Washington, DC. Trying to forge a common position through consumer summits, including one this spring.
. Tellus Institute, Boston, MA. Drafted a plan that would enable small customers to shop and pay their share of stranded costs.
. Toward Utility Rate Normalization (TURN), San Francisco, CA. Pushing legislation in General Assembly that would permit small customers to aggregate.
. Utility Consumer's Action Network, San Diego, CA. Helped fund a baseline analysis and methodology for marketing to aggregated residential users and small businesses.
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