Signups stood up? 
Jeff Felton 

Jul. 1, 2001 
Public Utilities Fortnightly 
Page 18 
Copyright (c) 2001 ProQuest Information and Learning. All rights reserved. 
Copyright Public Utilities Reports, Incorporated Summer 2001 

Online ease and access are an empty promise in a flawed market. CLAMOR OVER 
THE recent market exit of Utility.com, billed as the world's first Internet 
utility, was a wake-up call for the energy industry. That failure, along with 
the energy debacle in California, raises questions about the viability of the 
Internet as a vehicle for retail energy sales, enrollments, and fulfillment 
in particular, and of electric and natural gas deregulation in general. 

In the United States, though nearly 40 million customers (90 percent of them 
residential) are eligible to choose their electric and/or gas supplier, more 
than 85 percent have remained with their incumbent utility distribution 
companies (UDCs). Of those who have switched, just 5 percent were residential 
customers, and fewer than 15 percent used the Internet for any part of the 
transaction. Another 10 million customers are expected to have choice by Jan. 
1. Odds are, however, that switching will remain limited despite widespread 
access to the Internet and online signups that can make choice a simple 
matter of point and click. The question is, why? 

The problem goes beyond the Internet to the very foundations of energy 
deregulation. At the root, it's a question of customer value. Independent 
power producers, energy service providers (ESPs), and the utilities 
themselves sold energy restructuring on its promise of lower costs for 
consumers. However, the track record of other deregulated industries reveals 
that the reverse is often true-particularly for mass-- market customers. 

Making retail choice meaningful for customers depends on amending the ground 
rules of deregulation. Though many needed initiatives lie in the hands of 
regulators, it may be that the players that can be most influential in 
spurring action are the utilities and ESPs whose brands and fortunes are at 
stake during this transition. 

WHY CUSTOMERS AREN'T BITING 

As I see it, five fundamental problems are hindering the successful 
transition to competitive retail energy markets. 

1. Risky Business. During regulation, when energy prices were cost-- based 
and fixed, UDCs generated supply to meet demand, up to capacity. Now many of 
the UDCs willingly have sold their generating assets and agreed to share the 
risk of price fluctuations. The result is an out-of-control wholesale market 
in which generators maximize profits by manipulating supply to drive up 
prices. UDCs and ESPs forced to buy on the wholesale spot market get killed 
when their retail price is fixed by contract. The result is that few ESPs are 
willing to risk taking title to wholesale energy for re-sale. Furthermore, 
the California Independent System Operator has evidence that the state's 
energy "crisis" actually arose not from increased demand, but from reduced 
supply. The reason, says the ISO, is that generating facilities have cut 
capacity from last year's levels for no apparent reason. 

Amidst such speculation, mass-- market customers are reluctant to switch from 
the "safe haven" of their incumbent utilities. 

2. Where's the Choice? Industries such as airlines and telecom demonstrate 
that deregulation leads to price discrimination, with different customers 
being offered different prices. As a result, ESPs compete hotly for large 
customers with large loads that allow them to be creative strategically, and 
still be profitable. On the other hand, residential and small commercial 
customers present such thin margins (especially with mandated "price-to-beat" 
offers and rate reductions from the utility) that ESPs cannot serve them 
profitably without automated enrollment and customer self-service processes. 
Few ESPs have focused on automating these processes, however. During the 
regulated era, utilities subsidized the cost of serving these small customers 
with the revenues earned from large accounts. Now it seems no one wants them. 

For example, Enron completely abandoned the California residential market 
just three months after it opened. In Pennsylvania, ESPs are "dumping" 
residential customers back to their incumbent utilities. ESPs in Ohio were 
forced to delay service to enrolled customers when their market support 
generation agreements with the incumbent utilities were not in place as 
expected. All of this heightens fears among customers that their chosen ESP 
will not be able to serve them or will vacate the market. Because they 
haven't been educated to the contrary, they fear they would be left without 
service or with some cost for switching to a new ESP or back to their 
utility. 

3. Online Liquidity Lacking. The much-touted retail auction exchanges are 
also struggling. One reason is that when customers compare bids in today's 
pricey market to last year's contract prices, they don't perceive any 
savings. Second, many commercial and industrial customers perceive no real 
price competition among retail suppliers for their contracts on an energy 
auction exchange. They believe they will get more competitive bids by 
preparing requests for proposal and soliciting bids directly from suppliers. 

4. Patchwork Regulation. Because regulation varies by state and transactions 
vary by utility, it is expensive and complex for ESPs to expand into 
different markets. For example, an ESP willing to offer a franchise deal to a 
national chain, say, McDonald's restaurants, may find it virtually impossible 
to navigate the regulations and transactional requirements for working with 
the many utilities in all the states where the chain operates. 

5. But Is That Rate Better? A customer who visits a popular retail energy 
website such as Essential.com or Energy.com may be presented with a standard 
offer price from one ESP. Is that a good price? How does it compare to what 
he pays now? Most massmarket energy customers don't know. Add the fact that 
65 percent of all Internet shoppers do not complete their purchase 
transactions, and the problem is clear. Price discovery must be enhanced, and 
the shopping and enrollment processes need to be simplified to attract novice 
energy buyers. 

A TO-DO LIST FOR BUILDING REAL CHOICE 

The challenges I describe are formidable; no one solution will address them 
all. Here are some important actions necessary to help break the logjam. 
Utilities and ESPs in particular can play a critical role in encouraging 
regulators at the state and federal levels to make needed changes. 

Cap Wholesale Prices. Energy companies are at the mercy of federal regulators 
to dampen wholesale market volatility. They, and state regulators, should 
continue pressuring the Federal Energy Regulatory Commission to consider 
short-term regional price caps on wholesale electricity. To mitigate gaming 
of the markets, the FERC also should require generators to publish their 
annual plans for scheduled downtime, and force them to explain unplanned 
downtime. 

Form A Mega-Exchange. To promote liquidity in retail energy exchanges, the 
operators of the various exchanges should consider pooling their resources to 
develop a universal exchange portal-or at least a virtual exchange-that most 
or all of the largest customers could use. That way customers and suppliers 
could go to one site and see all deals, even if the deals were posted 
regionally behind the scenes. Such an exchange would offer various 
procurement vehicles, including auction, bid/ask, and standard offer. 
Suppliers also would welcome a single site where they could see all qualified 
deals. 

Educate the Public. Consumer education in deregulating markets clearly needs 
to go further. Regulators in these states could follow a strategy that's been 
moderately successful in several states: collecting money from all 
participating utilities and ESPs to launch a campaign to increase the 
public's understanding of retail choice. Radio, TV, and print ads would 
explain the merits of deregulation, demystifying the enrollment process and 
calming the fears of apprehensive customers. Through this type of program, 
for example, Pennsylvania regulators saw mass-- market awareness of retail 
electric choice soar to 94 percent in just over a year. Utilities and ESPs 
can enhance these public awareness efforts by coordinating their own 
educational materials with the statewide campaign. 

Redouble Marketing. In line with the objectives to increase consumer 
awareness, energy service providers need to do a better job of branding their 
service, communicating their value proposition, facilitating price discovery, 
and targeting the actual buyer within commercial organizations. This is a job 
for the professionals. ESPs should hire and consult with Madison Avenue 
talent to develop branding and advertising campaigns. ESP websites should 
allow a prospective customer to enter basic information from their utility 
bill, and calculate both the commodity charge and the distribution charge, 
demonstrating the clear impact of switching on one month's bill. Accuracy is 
critical. Often, the ESPs have difficulty getting this calculation right 
themselves. 

Standardize Transactions. Utilities and ESPs, backed by a FERC directive, 
should take the lead in developing national standards for electronic 
transactions, including switching. That would ease apprehension among 
customers, make national contracting easier, and reduce the investment 
required by energy suppliers to enter new markets. 

Phase out "Standard Offers." State regulators should consider speeding the 
elimination of UDC "price to beat" and "standard offers." This price rigging 
creates a false economy with the customer, adds undue price pressure to 
commodity prices, and puts severe earnings pressure on utilities. The crisis 
situation in California has made such potential consequences crystal dear. 

Aggregate the Apathetic. Some municipalities have begun aggregating their 
residents to form residential aggregation pools that are attractive to ESPs 
and wholesale suppliers. If the municipality successfully addresses customer 
apprehension, and allows disinterested customers to opt out, these 
aggregations can be an effective way to force choice in a community... at 
least until the next general election. Energy companies and state regulators 
may be able to encourage aggregations by educating local officials on the 
benefits of such buying pools and providing materials for marketing to 
residents. 

Force Choice. State regulators can force all customers to choose an ESP, 
and/or bar the incumbent utility from acting as an ESP. In Texas, for 
example, utilities cannot prospect for new energy supply customers outside 
their territory until at least 40 percent of their franchise customers have 
chosen an alternative ESP For gas deregulation in Georgia, all customers were 
assigned an ESP in proportion to the market share each ESP garnered in a 
pilot period. Energy companies may influence legislators in deregulating 
states, as well as federal legislators, to pursue this approach. 

Consider Re-Regulation. The FERC should consider guidelines to encourage 
states with volatile supply networks to re-regulate, or defer deregulation, 
until the wholesale markets stabilize and the bugs have been ironed out of 
the deregulation process. 

Simplify Rates. State regulators should encourage utilities to simplify their 
rates for residential and small commercial customers. That would allow retail 
suppliers and customers to more easily understand the rates and potential 
savings of switching to an ESP. 

Deregulation will succeed only when all stakeholders put the success of the 
program before partisan interests. Without the undivided support of all 
parties, there can be little improvement on the pseudo-competitive mire we 
see today. It just doesn't work. 

Jeff Felton is a consultant based in Naples, Fla. He has 22 years of 
consuIting experience, the last 15 in the utilities/energy industry. Felton 
was a partner in the energy practice at BusinessEdge Solutions Inc. from 1999 
until May. Before that, he was senior vice president and Energy Practice 
director at DMR Consulting Group, and a partner in the National Utility 
Consulting Services (NUCS) Group at Price Waterhouse, now 
PriceWaterhouseCoopers. Contact Felton at JeffFelton@aol.com