The Future of Customer Choice for Electricity

The Future of Customer Choice for Electricity

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With 13 states plus Washington DC currently allowing customer choice for electricity it seems obvious that the best growth opportunity for energy service companies (ESCOs) is to push for expansion into monopoly markets. However, two big questions exist:  how do potential ESCO customers in monopoly states perceive competitive electricity and how interested are they in switching to a customer choice model?  These questions recently were asked among business owners and executives in Wisconsin and the results were eye-opening.

To address these questions, focus groups were conducted with electricity decision makers and influencers among small business owners in the Milwaukee area and executives at larger corporations throughout Wisconsin.  These discussions were focused on understanding the following:

  • Current perceptions of the electricity market, including cost trends
  • Business reaction to the idea of introducing customer choice for electricity
  • Potential concerns with the introduction of customer choice for electricity

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Current Perceptions of the Electricity Market

On the surface, most of the business owners and executives who participated in this research are happy with the reliability and customer service provided by the utilities in Wisconsin.

“I’m pretty happy with the reliability of the electricity we use and the rates that we pay for that electricity.”

“I think the utilities do more for their customers today than they did in the past…at least as far as making us more aware of our usage and proactively providing energy savings programs.”

However, without prompting, many respondents expressed frustration with the current monopoly status for electricity in Wisconsin… particularly regarding pricing.

“I find it difficult to accept the monopoly for electricity in Wisconsin.  The utilities have the market locked up and there is no competition, so we have no choice in the matter.  We’re essentially held hostage by the utilities.”

Further, many business owners and executives are very frustrated with ongoing rate increases and expressed concern that the Wisconsin Public Service Commission has not done more to control rate increases.

“Nobody challenges the WPSC, they just trust them to do the right thing.  But, I have never heard that the commission vetoed a rate increase that the utility asked for.”

Finally, business owners and executives firmly believe that an imbalance in electricity supply and demand has contributed to ongoing electricity rate increases in Wisconsin.  In fact, there is a concern that Wisconsin utilities have over-built electricity capacity as a means to artificially inflate rates.  Although this is counterintuitive based on the generally accepted laws of supply and demand, Wisconsin rates have continued to increase despite higher supply and lower consumption.

“Whenever they tell us to conserve energy, and they provide programs to help us reduce our usage, they turn around and say ‘we need to raise rates because consumption is down.’  It’s illogical.”

“Why should we continue to pay for overproduction?  If the utilities ran more efficiently it should reduce our costs.  They need to operate like any normal business that is beholden to the laws of supply and demand.”

“Either they need a rate increase to repair equipment or they need a rate increase because consumption is down… either way, they’re going to get their rate increase.  There is really nobody to keep them in check, not even the WPSC.  They pretty much do whatever they want with electricity rates.”

Reactions to a Customer Choice Electricity Model in Wisconsin

The vast majority of business owners and executives that participated in this research had little to no prior knowledge about competitive electricity markets in other states.  Any knowledge that did exist was at a very high level.

“All I know about competitive electricity is that it’s not allowed in Wisconsin.”

“I knew there was competition in some states…that was what caused the whole Enron thing.”

“I just assumed that Illinois had the same utility structure as Wisconsin…and the utilities certainly don’t really want you to know that other states have competition.”

However, the initial reaction to the customer choice business model was positive.  Most business owners and executives espoused the attitude, “It works in other states, so why wouldn’t it work in Wisconsin?”  Further, many respondents for this research were angry that customer choice for electricity is not available in Wisconsin.

“I can’t believe the people of Wisconsin don’t know this and aren’t doing something.”

Most of the business owners and executives believe that introducing a competitive choice model for electricity would have several positive impacts on consumers and businesses:

  • Better long-term electricity rates
  • Improved reliability
  • Increased conservation
  • Improved generator efficiency

“I think there would be increased reliability during peak periods.  I think there could also be additional services that these suppliers could offer like Internet and home security.”

“I would think there would be more conservation, because you wouldn’t be penalized for reducing your usage.”

“You would hope that they would become more efficient at generating the electricity that is needed.  Wouldn’t you think that could help to keep rates in check?”

Potential Concerns with the Introduction of Customer Choice for Electricity

Not surprisingly, based on the overall lack of knowledge surrounding customer choice for electricity, the focus group discussions yielded several concerns among business owners and executives.  These concerns ranged from the time required to “shop” for electricity suppliers/rates to outage response, safety, reliability and service.

  • Time Commitment

“It would mean more work for me… I would feel compelled to shop prices every contract.  I don’t mind doing that, but a lot of people won’t want to do that.”

  • Response to Outages

“The piece that I’m concerned with is the ‘last mile’, the piece of wire that comes into my house or business.  If electricity supply is changed, what is the utilities’ incentive to respond quickly if I have an outage?”

  • Safety

“The challenge I see from a legislative standpoint is public safety.  It’s not the same as cable TV or telephone, if those go out it’s generally not a life or death situation… but for electricity it can be.”

  • Quality & Service

“There could be concerns about the quality and service level of some providers.  I switched from AT&T and went to Time-Warner and I went back.  Now, if I have the ability to that with electricity, that would be a good thing.”

In addition, business owners and executives raised several questions that ESCOs should anticipate as they work to expand customer choice beyond the current base.  The primary questions revolved around the competitive structure and potential cost savings.  Essentially, these business people would like to better understand how competitive choice will save them money and how much money they could save in the long-term.

“What percentage of our electricity bills is generation versus distribution versus labor?  How much cost savings would we really be looking at?”

Respondents also raised several questions about transmission and line maintenance:

“Do you pay a fixed monthly fee for the transmission?  I’m talking about the wire to my house…somebody has to pay for that wire.”

“One of my concerns or questions would be about the infrastructure – who is responsible for that and who is going to maintain it?  We need to make sure that we have a delivery network that will be as reliable as what we currently have.”

What Does This All Mean for ESCOs?

Based on these focus groups, it appears that business owners in Wisconsin (and presumably other states as well)would welcome customer choice for electricity.  There is significant frustration with both the current cost of electricity and ongoing rate increases in monopoly states; in addition, reaction to a customer choice electricity structure was extremely positive.  Marketing and legislative efforts to expand customer choice for electricity appear to be overdue and would be welcome…at least in Wisconsin.

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