Michael Giberson
Posts Tagged ‘retail competition’
PG&E spending big to protect its monopoly against municipal aggregation
February 10, 2010Michael Giberson
For a number of years, state law in California has permitted cities or counties to arrange to become the electric power service provider for their areas – an arrangement where they would be responsible for acquiring the electric energy needed for consumers in their areas while the local utility would continue to operate the transmission and distribution. (Consumer in the affected areas are allowed to opt-out, and stay with the private utility.) Only in the past few years have a few local government taken the “community choice aggregator” idea seriously, and so only recently have the state’s privately-owned utilities worried much about the prospect of losing customer base.
San Francisco-based PG&E has initiated an effort to change the law so that local governments would need a two-thirds majority favorable vote from citizens in their communities in order to become a community choice aggregator. Advocates of the local government-centered efforts worry that a two-thirds requirement will be insurmountable. Details of the story are available at the Mercury News. The state’s Legislative Analyst’s Office supplies a description.
Hat Tip for the link goes to Tom Fowler, NewsWatch: Energy, but he misleadingly styles the story as “California utilities spending big to block electric competition.” For one, just a single utility – PG&E – seems to be involved. The state’s other investor-owned utilities appear not to be participating in the effort. And the effort isn’t so much an attempt to “block electric competition” as it is an attempt by one monopolist to block other potential monopolists from horning in on its action.
Of course there has long been competition between private utilities and municipalities in the electric industry. According to Forrest McDonald’s biography of Samuel Insull, one reason Insull became an advocate of state-regulated private monopoly utilities in the late 1890s was as an effort to avoid municipalization of his companies. Historically, municipalities were motivated by a hope of lower rates (at least that was usually the story for public consumption). In the case of at least of few of the local governments exploring becoming an aggregator now, however, the announced motivation is to purchase a larger amount of renewable power, even though it can be more expensive.
As an aside: In parts of Texas with significant amounts of real retail electric competition, consumers can already choose the amount of their power that comes from renewable sources, with multiple companies offering contracts ranging all the way from 0 to 100 percent renewable energy content.
Georgia electric consumers want competition to help protect against higher prices, just like they have for natural gas
February 8, 2010Michael Giberson
Latrese Brown, a Cusseta [Georgia] resident, gathered a group of people who believe Sumter EMC is ripping them off. “Not only mine but my entire community light bills are outrageous high, they’re more than our mortgages, more than our rent, more than our car note,” complains Brown.
… The citizens of Cusseta went to their county commissioners Tuesday night and asked them to consider bringing in another company.
“You should be able to choose who you’re with, we choose our gas company, we should be able to choose who provides our lights to us because we want to choose our customer service.”
Notice what she said? “We choose our gas company, we should be able to choose who provides our lights …” Georgia is, I think, unique in allowing competitive retail natural gas suppliers to operate. Consumer Latrese Brown has experienced a competitive retail gas market and a regulated monopoly electric utility service, and she concluded she’d like to give competitive retail electricity a try, too.
Greg Crowder, vice president of marketing and administration at Sumter EMC says it’s not Sumter Electric calling the shots. He argues they have not increased rates and that the electric service act decided territories for electric companies.
“It was done to keep from duplicating efforts, two utilities running down the same road to serve the same customer then that’s inefficient,” says Crowder.
Of course Georgia is not overrun with multiple natural gas pipes running down the same road. A single natural gas pipeline company manages the distribution pipeline and provides delivery service. Separately, about 15 or so competing retail natural gas suppliers offer consumers a variety of fixed-price or variable-price contract offerings and other terms.
It is not too complicated to have a single wire running down the street and yet multiple retailers delivering power over that single wire.
… And, the cause for the high bills is nothing more than the heaters reaction to the extreme temperatures, “the heating load is what caused the high bills, we’ve seen it before.”
The proximate cause of the unexpectedly high bills was the much cooler than normal weather experienced this winter. Nothing unusual about occasionally experiences unusually cold weather. What seemed noteworthy about the news story was that consumers facing unexpectedly high bills were not demanding regulators take direct action to reduce electric rates. Rather, they sought protection through competition, just like they already enjoy for retail natural gas prices.
The REVISED history of electric competition in Lubbock
February 1, 2010Michael Giberson
At the time of the initial announcement that Lubbock Power & Light would acquire the distribution assets of competing electric utility Xcel within the city, leaving LP&L as a monopolist, I took note of several inconvenient statements about the benefits of competition included in official LP&L history. (See “The (soon to be revised) history of electric competition in Lubbock,” November 5, 2009.)
At the time I wrote, “I’m guessing the official story is about to change.” Guess what? Now available on the LP&L website, a somewhat revised version of the document, “The History of Lubbock Power & Light.”
Here is a comparison of selected old and new paragraphs from “The History of Lubbock Power & Light.” Old first paragraph (emphasis added in this quote and in quotes below):
In the electric utility industry, retail competition for electric customers is a relatively new concept. Not so in Lubbock, Texas. The good people of Lubbock have benefited from retail competition for electricity since 1916.
In the new history the first two sentences are:
Lubbock was a relatively new town at the time having been created in 1891 when two smaller settlements both moved their towns from several miles away to our present location. The first county court house was built at this time with the county itself having been created in 1876 by the Texas State Legislature.
Obviously a shift in emphasis (and a somewhat awkward first sentence) produced by the revision.
The old version of the history noted that the emergence of competition in the city immediately produced lower rates. This paragraph remains the same in both versions:
The effort by those early Lubbock leaders was realized a success on September 28, 1917 as the municipal power plant began producing electricity priced at only ten cents a kilowatt-hour. The other utility cut its rates accordingly soon after. Imagine that!
In the older version of the history, that early success was followed by a report of steadily falling prices in subsequent decades and then the following claims about the continued value of competition: low rates and high quality customer service:
Today, the vast majority of Lubbock remains dual-certified and customers still have a choice of electric utility providers. Customers whose account balances are current are allowed to switch from one company to the other at their discretion. The competition for the electric dollar in Lubbock has resulted in some of the lowest electricity costs in the state of Texas and in the nation. Another major benefit of competition is that customers enjoy increased levels of customer service than would be found in cities this size with only one electric provider.
Lubbock Power & Light’s mission is to provide low cost, reliable electric service. We feel we’ve been successful in that mission. All electric customers in Lubbock have benefited from the decision of those early pioneers to begin retail competition.
In the new view of Lubbock’s electric power history, the report of steadily falling prices jumps directly to a claim about LP&L’s mission:
Lubbock Power & Light’s mission is to provide low cost, reliable electric service. LP&L has competed with many private companies, but in the end the majority of the customers have chosen LP&L, leaving the private companies looking for other options.
Compare the final sentence above, in bold, with the final sentence in the old paragraph. The old paragraph emphasizes the benefits to consumers, while the new official story shifts the viewpoint to that of the utilities. The shift seems to me a possible harbinger of the future of utility service for LP&L customers: a shift in viewpoint from customer benefits to a utility perspective.
UPDATE: Link to a copy of the history of LP&L showing the post-November 2009 changes.
Smart meter benefits for low-income consumers
January 18, 2010Michael Giberson
Much of the smart grid promise (and hype) implicitly suggests that the benefits will be scooped up by high-income consumers. Who else is going to be buying “grid aware” washer-dryer sets with built in wi-fi connectivity integrated into internet-linked home energy managements system?
Still, the benefits won’t be limited to big spenders hoping to manage their energy use a little better. One example: a new prepaid electric power service product being developed by First Choice Power for offer in areas of Texas with smart meters installed. Prepaid electric service is frequently easier to manage for low-income consumers because it does not require the consumer to make a deposit or pass a credit check.
Prepaid service is already available in the Texas retail power market, but the existing services face several difficulties with standard meters. Without constant metering and information flows to retailer and consumer, consumers are charged in advance based upon estimated usage — both parties to the service are left with a bit of risk. The result is a product that is costlier for retailers to offer and more difficult for the consumer to manage. As one consequence, prepaid service is the subject of significantly more complaints than standard consumer service in the competitive Texas retail power market. (See this earlier post for a related discussion.)
Excerpts from the company press release:
First Choice Power today announced that it has launched a prepaid electricity service called Control First™. The service allows customers to sign up for electricity service with no credit check, no contract and no costly deposit, eliminating barriers to switching as well as providing customers with complete control of their electricity usage and payments.First Choice Power is the first affiliated retail electric provider in Texas to offer residential prepaid service based on actual daily usage from an advanced or “smart” meter, unlike other providers in the market that bill estimated usage.
“Control First is the first prepaid product that really lets customers take control of their electricity costs and manage their usage,” said Brian Hayduk, president of First Choice Power. “This is the next generation of prepaid products giving customers more visibility, more flexibility and more information so that there are no surprises at the end of the month.”
…
“First Choice Power’s Control First is a true prepaid product,” Hayduk said. “With Control First, you decide how much you will pay and when to make your payments. With no minimum payment requirements, you have the flexibility to best manage your budget according to the amount of electricity you use.”
The offer will be made more broadly available later this year as more customers are able to take advantage of the smart meter-based service. There are about 800,000 installed smart meters in Texas, with stated plans by transmission and distribution companies to install an additional 1.6 million in 2010 with more added in subsequent years to total 5.7 million in 2013. Customers must have an advanced meter to be eligible for Control First.
And prepaid is not necessarily just for low-income consumers. As Lynne discusses in a post on prepaid service, prepaid service can promote consumer awareness and control over energy use and help consumers to reduce energy use.
Electric power rate reforms needed for smart grid to create value
December 15, 2009Michael Giberson
In a white paper released yesterday, the Association of Home Appliance Manufacturers (AHAM) identified three requirements necessary for the smart grid to create value for residential customers:
- Pricing must provide incentives to manage energy use more efficiently and enable
consumers to save money. - Communication Standards must be open, flexible, secure, and limited in number.
- Consumer Choice & Privacy must be respected; the consumer is the decision
maker.
The smart grid comes in both industrial-sized and consumer-sized packages. Electric utilities can use sophisticated electronics for communication and computation to improve control and reduce their costs of operation. This utility-side smart grid can and will proceed without consumer rate reform, but these incremental changes in ways of doing business will bring relatively modest benefits.
The consumer-oriented smart grid is where the revolutionary action will be, as consumers gain better control over their electric power use. That better control will allow consumers to more completely reveal where and when electric power has more value, and the electric power industry will become more efficient at delivering power where and when it is most wanted.
Obviously, it will take consumer buy-in to get the revolutionary ball rolling. As the AHAD white paper notes, only a small number of customers will adopt smart appliances because of the environmental benefits that come from better control over power use. Most consumers will require economic incentives to participate.
However, it isn’t the case that each retail customer need to face real-time rates all of the time. Rather, each customer just needs a contract with a retail supplier that divides up the price and quantity risks in a mutually agreeable fashion. Those contracts could be real time rates, or fixed-term time-of-use rates, or critical peak pricing rates, or whatever. Real-time rates have nice theoretical properties, it is true, but most of the potential benefits can be achieved with relatively few consumers on real-time rates.
AHAD writes:
With the proper tariffs in place to incentivize actions, the consumer can reduce costs and manage energy without significant behavior changes. Truly dynamic pricing combined with Smart Appliances will not require large changes in consumer behavior to realize a reduction in peak load. Unfortunately, tariffs that would encourage widespread adoption of these practices are currently not in place.
AHAD recommends the development of model tariffs and rate structures, presumably with the goal of adoption for use in state regulatory proceedings. I predict this effort will happen, and over time model smart grid tariffs will gain adoption by many state regulatory commission.
Also, I predict the consumers in the competitive retail portions of the Texas power market will have “smart grid compatible” contract offers available from at least three separate companies within three months after (a) the customer has a smart meter and (b) ERCOT has rolled out its new wholesale settlement system for the customer’s distribution utility footprint. The Texas retail power market will get better and better as the state becomes the leader in end-to-end smart grid integration.
Texas power rates are already dropping due to low natural gas prices, wind power pressure on prices, and temporarily moderated demand due to economic conditions. While I’m in a predicting mood, I may as well predict that when the economy rebounds and natural gas prices are next over $8/mmbtu for a sustained period, we’ll see a much different Texas power market: more resilient, more efficient, and offering reasonably-priced power relative to neighboring states.
Energy information devices start to go mass market
November 24, 2009Lynne Kiesling
Tim Haab helpfully points out an article from Time about EnergyHub, a device for consumers to see more, and more timely, information about their energy consumption. I’ve written about EnergyHub here before, and honestly, they have not been among the most forward-looking or impressive of the products I’ve seen for providing consumers with both the information about their energy consumption and the ability to take action and automate changes in energy consumption behavior. Perhaps EnergyHub’s product has advanced since I last looked at them, but I do think Time christening EnergyHub’s smart thermostat one of the best inventions of 2009 is a bit of hyperbole, as well as being incorrect, since companies like Tendril have been working on more informative and communicative “smart thermostat” technology since 2007.
Still, having a publication like Time draw attention to the ability of homeowners to see better energy information and to respond to dynamic price signals autonomously is a positive step toward a more competitive and efficient retail electricity industry.
However, I have one nit to pick with Tim’s post. He states
Typical consumers get a bill at the end of the month reporting total consumption and the total bill. But efficient energy pricing requires the consumer to know the marginal cost of the next unit consumed–how much will it cost me to toast this frozen waffle?
Yes … and no. Think about the other products you consume — do you necessarily pay precisely the marginal cost for every single unit of every single product you consume? No. Electricity is no different from, say, your cell phone — do you know the marginal cost to Verizon of the next minute of mobile communication you consume? No, you don’t, and you don’t pay a price that directly reflects that cost. Why not? Because pricing also reflects preferences, not just costs, and there are differentiated products/service contracts.
However, what all other products you consume have that electricity does not is choice and product differentiation. In a competitive retail market, retailers would offer time-differentiated and quality-differentiated products, or bundled services, but these products and services do not necessarily all have to include real-time retail pricing to lead to efficient retail markets. Here’s an example: suppose I am risk-averse, so I do not want real-time prices, but I am willing to pay a peak-off peak time of use price. Suppose I contract with a retailer for a TOU contract. That retailer is essentially engaging in risk management, so the retailer will either buy from the wholesale market on long-term contracts or from the wholesale spot market (probably some combination of the two). In this case I do not observe the marginal cost of the last unit I consume, but I am choosing between peak and off peak. My retailer sees its marginal cost of the last unit I consume, though, in its engagement with the wholesale market. But the contract that I chose voluntarily reflects my willingness to bear price risk.
Put more simply: an efficient retail electricity market does not require that the retail price for all consumers precisely reflects the marginal cost to the supplier of the last unit consumed, but it does require that consumers have choices that enable them to express their diverse preferences over price risk, generation source, etc. It is also enabled by technology that allows consumers to see how much it’s going to cost them to toast that frozen waffle, and to make more sense of what a price per kilowatt-hour means in terms of actual consumption.
Tim is correct that electricity regulation has led to a world in which consumers pay a fixed, averaged price and only know how much they have consumed when they receive their bills at the end of the month. Given how much communication technology is prevalent in our lives, and how inexpensive it has become, that lack of information is appalling.
New meters enabling new rate designs by competitive power suppliers in Texas
November 13, 2009Michael Giberson
Many companies offer retail electric power contracts in the competitive retail portions of Texas, but for a long time the contracts have been kind of, you know, boring: either fixed rate or variable, if fixed then for 1 or 2 years. Renewable content offerings provided a little color, ranging up to 100 percent. Toss in some prepay options and differences on early termination fees, and that about covers the range of options.
Now smart meters, being installed in both the Houston and Dallas-Fort Worth areas, are enabling more diverse rate designs. Elizabeth Souder at Texas Energy and Environment mentioned TXU Energy and Reliant had begun offering time-of-use rates. Souder reports that for the Oncor distribution area (D-FW area):
TXU charges 8.9 cents per kilowatt hour for electricity used off peak. Power used on peak, 1 p.m. to 6 p.m. from May to October, costrs 24.3 cents.
TXU time-of-use customers also get a free thermostat that shows how much power they are using. Customers may decline the thermostat and get a $75 Visa gift card instead.
Tom Fowler of NewsWatch: Energy reports that for the CenterPoint Energy distribution area:
In Houston, Reliant has three levels April thru October: 11.6 cents off-peak, 13.4 cents standard and 15.6 cents on-peak. November thru March it’s 11.6 cents off-peak and 13.4 cents.
These rates are just some of the first offerings to take advantage of the new metering capabilities, more and probably better offerings to come.
Since May, Green Mountain Energy has been offering a “Renewable Rewards” program, a privately offered net metering rate for residential customers with distributed generation capability. Participation requires a meter capable of two-way metering (are the standard “smart meters” being installed capable?) and of course there are limits. But the first 500 kwh per month of excess energy is bought back at the customer’s full retail price, and any additional energy is bought at 50 percent of retail.
And unlike net metering elsewhere, imposed on regulated utilities and funded via cross subsidies from other ratepayers, participation in Renewable Rewards is voluntary; the Green Mountain Energy program is a privately-provided competitive offering.
Austin Energy’s future rate hikes
November 6, 2009Michael Giberson
A few years ago Lubbock’s municipal electric utility was in a tight financial spot that threatened to put it and the city into bankruptcy. When the utility pushed through a rate increase, customers started switching to competing electric utility Xcel. The dwindling customer base forced the municipal utility to find another way out of their difficulties. The utility reorganized management, negotiated some complex deals to reduce wholesale power costs, and made their rates competitive again. It worked, Lubbock Power & Light is financially secure today and still offering competitive rates.
Austin Energy, the municipal utility for the Texas capital, foresees tough times ahead and the need to either “significantly raise electric rates” or “start losing millions by 2011.” Fortunately for the utility, Austin Energy is a monopoly and its customers cannot escape rate increases so easily. (See Marty Toohy’s article, “Electric utility proposes major rate increase,” in the Austin American-Statesman.)
What the FPL 2009 3Q earnings call transcript says about the Texas retail market
November 5, 2009Michael Giberson
Seeking Alpha has begun publishing transcripts of quarterly corporate earnings calls. Typically these calls are discussions presented by the CEO and other corporate officers followed by Q&A with financial analysts. The calls offer a more “inside look” at company operations than you get from reading newspaper or magazine stories or even trade press. What’s more, the calls provide insight into the markets that the company participates in. The FPL Group Inc. 3Q 2009 call provides several insights into the electric business in Texas, where FPL participates in both the wholesale and retail markets.
FPL, through its NextEra Energy Resources subsidiary, owns both fossil-fueled and wind power plants in Texas and several other places. Currently the company is the second-largest operator of wind power plants in the world behind Iberdrola. FPL owns Gexa Energy, a energy retailer in Texas serving about 172,000 customers (according to Wikipedia).
The earnings call spanned the range of FPL Group activities and interests. There is much here of interest in Texas: FPL has recently completed a 200-mile self-funded transmission line linking four of its wind power plants in ERCOT’s west region directly to the higher-priced ERCOT south region, they’ve added both wind power and natural gas generation in Texas, and they are constantly trying to balance their risk exposures for their wholesale and retail obligations in the state.
I thought the call was particularly interesting for what it implied about retail market profit margins during the current low-wholesale power prices in Texas (and most other places). Earnings from their merchant generator fleet are down:
Although we were pleased with the $0.11 year-over-year improvement in NextEra Energy Resources’ quarterly earnings per share contributions, the financial performance did not meet our internal expectations. Two factors primarily drive this: the Texas merchant gas fleet and the wind resource. Let me explain a bit further.
On the former, contributions from the Texas gas fleet were approximately $24 million or $0.06 per share below our quarterly expectations. Both spark spreads and ancillary revenues were much lower than we expected.
As for the latter, as I mentioned a moment ago, the wind resource in the third quarter was well below normal or roughly $0.06 per share below our expectations. … For the year, the poor wind resource has reduced per share results by nearly $0.13.
Elsewhere in the call:
Meanwhile, our retail business in Texas … added about $0.04 per share incrementally given favorable margins. The remaining contributions from the existing merchant fleet amounted to negative $0.02 per share, but there is nothing notable in any one category worth calling out.
Later in the call:
Just one last comment: As I’ve said before, we’re certainly not happy that ancillary revenue is down at our gas plants in Texas, but one of the reasons that [inaudible] retail business is up $0.04 quarter-over-quarter is because they didn’t have to pay the ancillary cost to our gas assets and other gas assets.
A couple of comments:
First, the ownership of both wholesale and retail assets in the Texas competitive market provides a sort of natural hedge against fuel price movements. When wholesale power revenue or ancillary service revenues are low, as currently, the wholesale business suffers but the retail side benefits. (See related discussion on wholesale-retail combination in Texas, and earlier here.)
Second, while retail prices have fallen in Texas, they haven’t fallen as far and as fast as wholesale prices, so retail margins are higher for FPL. The call doesn’t fully clarify the reasons here. The most straightforward explanation is that FPL likely has many customers on one- or two-year fixed price contracts, with prices that relatively high now (but presumably competitive one or two years ago.) Also, as noted in the call, costs for ancillary services were unexpectedly low, which reduced expenses for the retail side.
But margins may be higher, too, if retail prices are slow to adjust to dropping wholesale prices. I wonder whether there is an asymmetric price adjustment phenomenon in competitive retail electricity? Do consumers shop around more and switch companies more when prices are going up as compared to when prices are falling? Probably, and that should be enough of a force to produce a “rockets and feathers” effect on prices.
Finally, and I don’t think the call made this connection, but I wonder whether there is a link between the lower-than-expected wind resource and the low revenues/costs associated with ancillary services. To some degree, variable wind power output increases the demand for energy balancing and other ancillary services required by the transmission system for reliable operations. Possibly with less wind power coming on the system, fewer ancillary services were required. Of course low natural gas prices and on-average slightly lower electric power demand would also reduce the cost of ancillary services, so the explanation may not be wind-output related.
NOTE: FPL’s 200-mile self-funded transmission line, dubbed the “Texas Clean Energy Express,” raises a host of interesting issues worthy of examination. One of these days…
ALSO: Of course FPL Group Inc. isn’t the only company with an interest in the Texas electric power market. Search “Texas AND electric” at Seeking Alpha’s Transcript Center for much much more. If you find anything interesting, let me know.
