Taff Tschamler, KEMA
Since 2002 U.S. competitive electric retail markets have progressed rapidly, particularly among the commercial and industrial sector. Although the progress varies widely among states, the total amount of peak load nationwide that switched to competitive suppliers has increased by nearly 250 percent since 2002.
The overall outlook for retail power competition in the U.S. is mixed, but remains positive among top markets. Five states now boast considerable customer migration, and several other markets are in the process of adopting pro-market reforms. Nationwide, more than 3.2 million customers have chosen new suppliers, totaling 55,000 MW.
From a market share perspective, most of the top firms are focused on commercial and industrial markets, where a larger opportunity exists. They generally have large customer positions in Texas and, with the exception of TXU Energy, are operating in at least three other states. Some operate in a dozen states (see figure).
Market activity, as measured by peak load switched, is concentrated in a handful of states. Of the 55,000 MW total that has switched to a new provider, more than 70 percent is being served in five states
Not surprisingly, nearly 48,000 MW, or 86 percent, of migrated load is accounted for by non-residential sectors. Residential migration accounts for about 7,500 MW. Only Texas and Ohio have reported any significant degree of residential switching.
In addition to growing migration levels, supplier profitability and the net number of new entrants further support the fact that market conditions have improved over the past two years. The number of retail suppliers that were profitable jumped in 2002 and has continued to increase.
deep in the heart of Texas
By any measure, Texas is the most competitive retail power market in North America. The state accounts for 90 percent of new supplier entrants in the past two years, and not coincidentally, two of the most profitable suppliers are active in the Texas market.
This is due, in large part, to the rate structure that was put in place for customers who do not choose competitive service, referred to as default service. The Texas model works like this: Each utility affiliated retailer inherited the old utility customer base and split its electric service into two customer segments
For the non-PTB group, comprised of users consuming more than 1 MW at their peak load, the Texas Public Utilities Commission (PUC) eliminated regulated electric prices (the only state to do so) effective January 1, 2002, leaving rates subject to market forces. This opened the floodgates for new retailer entrants negotiating a variety of deals in late 2001. More than 95 percent of the large Texas customers have since negotiated with a new retailer or the affiliate. In the absence of price regulations, the market became extremely competitive, leading to a variety of different product structures and customized contracts.
For those PTB customers under 1 MW, affiliated retailers charge a regulated rate if the customer does not choose a competitive offer. As of January, affiliates can charge a price lower than the PTB for business customers and will be able to lower prices for residential customers in 2005. Through a fuel factor mechanism that permits price increases when natural gas prices increase, Texas adopted a critical rate component in the PTB that has resulted in consistent
Headroom refers to the difference between the default price (e.g. PTB) and the cost to providers of electricity supply. The law stipulates that affiliated retail companies may request fuel factor changes up to twice per year under certain conditions. Consequently, prices for customers on the PTB rate have increased substantially over prices charged at the opening of the market in January 2002, given the steady rise of natural gas prices.
As a result of this unique structure, Texas has over 60 active providers, with more than 15 new entrants in 2003 alone and 12 new entrants in the first five months of 2004. This level of competition has prompted large numbers of customers under 1 MW to actively participate. As of May 2004, roughly 50 percent of small business customer load and 18 percent of residential customer load was being served by an alternative supplier.
A handful of other markets have made substantial strides towards developing competitive markets over the past year or two. Central to the progress achieved are the ongoing changes to default service and transition rate policies. As initial transition periods expire, new rate structures are being put in place for default customers.
In many markets, the initial rate structures inhibited or prohibited competition. A few states, most notably New Jersey in 2003 and Maryland in 2004, changed these structures while several extended existing structures. Several additional states are expected to adopt new post-transition default service policies over the coming few years, including Ohio, Washington, D.C., Duquesne Light (Penn.) and Illinois.
The reforms to date generally reflect a trend of exposing large power buyers to short term market pricing (hourly to quarterly) and protecting small customers from market volatility through the use of longer term contract pricing (one to three years). The result is a generally positive outlook for competition in large customer markets and a negative outlook for small customer markets.
The current trend of subjecting larger default customers to more market price volatility and small customers to less volatility can be expected to continue for perhaps the next five to eight years. Consequently, among already open markets, competition in large customer markets in the U.S. is likely to progress and customer participation increase, while small customer markets, with the exception of Texas, are likely to remain mostly price regulated and inactive.
The 30 states that are not currently open are unlikely to restructure over the coming five years, with perhaps the exception of a few markets, like Arkansas, that may open their large customer market. Although resistance should be strong in many states for the coming three to five years, the forces of competition and customer choice will undoubtedly prevail over time.
Tschamler is a principal with KEMA with 10 years of experience in the energy industry. His primary areas of expertise include retail business planning, competitive intelligence, market design and financial analysis of energy markets. He can be reached at email@example.com.