Electricity Retailing

RET AIL ELECTRICITY MARKETS
Paul L. Joskow
MIT
"It's a sin to buy retail"

Attributed to Woody Allen
May 23, 2000
---
----
WHAT DO RETAILERS DO IN OTHER INDUSTRIES?
Convenient locations, times of operation, other services to make

shopping more convenient (e.g. Amazon.com)
Wide range of products and brands with deep inventories at a single

convenient location
Point-of-sale service to Customers
Post-sale service and return privileges
Pass along benefits of wholesale buying power (e.g. Walmart, Costco)
Reputation for providing accurate product information and selling high

quality products (Nordstrom)
Credit, billing arrangements and other ancillary services
Innovative retailing technologies and strategies which reduce retailing

costs and these cost reductions are reflected in lower retail prices
Reduce layers of wholesale retail chain and bring customers

closer to the wholesale market (e.g. Costco)
---
---
-----
WHAT VALUE ADDED SERVICES CAN

ELECTRICITY RETAILERS PROVIDE?
Some traditional retail value added services do not have natural

analogies in electricity, especially for residential and small commercial
customers
Convenient locations and opening times

Multiple brands and complementary products
Inventory and reliability
Point-of-sale service, return privileges, etc.
Retailing commodity electricityper se is a primarily a set of
financial relationships rather than physical production and
delivery locations_
It is easy (and cheap) to buy directly in the wholesale spot market using
the UDC as a settlement and billing agent given current metering
technology
Current metering technology is poorly matched to take advantage of

wholesale spot market opportunities
Need to distinguish between "mass market" (residential) and "custom

market" (large commercial and industrial)
Customer care and billing requirements are different

Relative costs of real-time metering, communications and control
are different
Concerns about consumer exploitation and consumer protections

are different. How do small customers get benefits of
competition?
Opportunities to provide economical value added services are
different
WHAT VALUE ADDED SERVICES CAN

ELECTRICITY RETAILERS PROVIDE?
Reduce the costs of retailing electricity through innovative sales and

billing arrangements (e.g. essential.com, utility.com) and joint sales of
electricity, gas, telecom, internet, etc.
.
.
.
UDC retailing costs are presently low, especially for large

customer segment
Little advertising or promotion costs in current UDC cost
structures
Superior wholesale power procurement to offer lower prices
Large public competitive markets with transparent prices limit
opportunitiesto use buyerpower
Installation of sophisticated metering, communications and control

equipment
Hedging market-price risk, including weather related impacts, for

customers
.
.
Load profiling makes this harder for mass market
Inside the fence services
.
.
.
Distributed/backup generation
Energy efficiency applications
Power quality services
Total energy management/utility services
Green Power
SOCIAL VALUE OF SUCCESSFUL RETAIL MARKET

AT LEAST FOR LARGE CUSTOMERS
Having some price-responsive retail load that can actively participate

in the wholesale spot market is important for improving performance of
wholesalemarkets
Inelastic spot market demand creates market power problems

during very high load hours
Wholesale prices are potentially unbounded during very high load

hours
Necessitates price caps and other regulatory interventions that can

create other inefficiencies
10% to 20% of retail load should be in the wholesale market with

ability to respond to day-ahead and real-time price spikes
Increasing number and diversity of buyers in the wholesale market

increases competition, market liquidity, and provides more options for
generators to layoff market risk
Lower wholesale prices in the long run
CHALLENGES FACED BY MASS MARKET

RETAILERS
Customers are sticky and price discounts modest
Median U.S. residential customer has about $25 in wholesale

generation costs in bill ex stranded cost charges
Limited set of economical value-added services
Advertising and marketing are costly
Good back-office billing and settlements operations are challenging

and costly to create
Good customer care and credit services are costly and challenging to
create
"Price to beat" includes little if any RCS costs
Filtering "good" from "bad" residential customers raises public policy

concerns (internet sign-on + internet billing + credit card)
Scale is very important
---
WHAT CAN BE DONE?
Unbundling T&D, Stranded Cost, DSM and unavoidable customer care

costs from generation services and avoidable retailing costs
.
UDC (as UDC) offers Basic Energy Service at least to residential and
.
small commercial customers
Buy directly in wholesale spot market and pass through of

wholesale spot market price
No hedging or other specialized products
Charge for avoidable customer service costs
Rebalance allocation of RCS costs to reflect cost causality
Distribution Service Charge:
Pdu = T&D + Sg + DSM+ Rm
Basic Electricity Service Charge: Pbgu = Ow + Rc
Allow utility affiliates to compete as ESPs with appropriate conduct

rules and intra-corporate separations
TABLE 1
AVERAGE EMBEDDED RETAILING COSTS
Per Kwh:
0.27 - 0.38 cents/Kwh
Per customer:
$5.80 - $8.25 per month
Average Electricity Prices (IOU):

Residential
8.9 cents/Kwh
Industrial
4.7 cents/Kwh
Average Electricity Bill:

Residential
Industrial
$7,200.00/Month
75.00/Month
Retailing Costs Included: Meter reading, meter maintenance, meter carrying charges, billing
costs, bad debts, customer services, advertising and promotion, A&G allocation. Calculated
from data reported in Financial Statistics of Major U.S. Investor-Owned Utilities (1996), U,S.
Department of Energy, Energy Information Administration.
- --
TABLE 2
ALTERNA~TIVE RETAILING COST ALLOCATION METHODS
p~ Kwh Allocation
Avera2e Embedded RCS Cost/Month
Residential:
$ 2.25
Commercial
$ 15.30
- $ 21.75/month
Industrial
$407.50
- $578.70/month
70% Customer/
30% per kWh
$ 3.20/month
Avera2e Embedded RCS Cost/Month
Residential
$ 4.75 - $
Commercial
Industrial
$126.33
8.66
6.73/month
$ 12.30/month
- $179.38
Retailing Costs Included: Meter reading, meter maintenance, meter canying charges, billing
costs, bad debts, customer services, advertising and promotion, A&G allocation.
TABLE 3
CUSTOMERS SWITCHING TO ESPs IN PENNSYLVANIA
PERCENTAGE OF LOAD SERVED BY ESPs
As Of 4/1/2000
(Choice started 1/1/99)
1999
!ill
RESIDENTIAL
RESIDENTIAL SHOPPING CREDIT
63.5%
5.65 /kWh
2.8
37.8
63.6
4.26 /kWh
6.6
58.7
69.2
4.53 /kWh
24.7
41.0
13.2
4.75 /kWh
1.2
23.6
30.0
N/A
17.4%
PP&L
GPU ENERGY
ALLEGHENY
INDUSTRIAL
44.7%
PECO
DUQUESNE
COMMERCIAL
N/A: Comparable numbers are not available since transmission charges are treated differently for Allegheny. However, the comparable
shopping credit for Allegheny is likely to be lower than those reported for the other utilities.
Source: Pennsylvania Office of Consumer Advocate
TABLE 4
RETAIL CUSTOMER SWITCHING TO ESPs IN
CALIFORNIA
As of April 15,2000
(Retail choice started 4/1/98)
% of Demand
RESIDENTIAL
% of Customers
2.3%
1.9%
4.9%
3.9%
14.9%
7.2%
32.6%
20.1%
COMMERCIAL
< 20kW
20 < kW < 500
INDUSTRIAL
> 500kW
Source: California Public Utilities Commission, Direct Access Reports, March 15, 2000.
TABLE 5
RETAIL CUSTOMER SWITCHING TO ESPs IN

MASSACHUSETTS
As of March 2000
(Retail choice started
4/1198)
% of Retail Sales
Residential:
0.17%
Small Commercial:
0.83%
Medium Commercial:
3.82%
Large Commercial/Industrial:
[1,989 customers; 1 low-income customer)
18.37%
Source: Division of Energy Resources, Commonwealth of Massachusetts, May, 2000

Electricity Retailing

Uploaded by

Copyright:

Available Formats

Electricity Retailing

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Electricity Retailing

Uploaded by

Copyright:

Available Formats

RET AIL ELECTRICITY MARKETS

"It's a sin to buy retail"

May 23, 2000

WHAT DO RETAILERS DO IN OTHER INDUSTRIES?

Convenient locations, times of operation, other services to make

Wide range of products and brands with deep inventories at a single

Point-of-sale service to Customers

Post-sale service and return privileges

Pass along benefits of wholesale buying power (e.g. Walmart, Costco)

Reputation for providing accurate product information and selling high

Credit, billing arrangements and other ancillary services

Innovative retailing technologies and strategies which reduce retailing

Reduce layers of wholesale retail chain and bring customers

WHAT VALUE ADDED SERVICES CAN

Some traditional retail value added services do not have natural

Convenient locations and opening times

Current metering technology is poorly matched to take advantage of

Need to distinguish between "mass market" (residential) and "custom

Customer care and billing requirements are different

Concerns about consumer exploitation and consumer protections

WHAT VALUE ADDED SERVICES CAN

Reduce the costs of retailing electricity through innovative sales and

UDC retailing costs are presently low, especially for large

Superior wholesale power procurement to offer lower prices

Large public competitive markets with transparent prices limit

opportunitiesto use buyerpower

Installation of sophisticated metering, communications and control

Hedging market-price risk, including weather related impacts, for

Load profiling makes this harder for mass market

Inside the fence services

Total energy management/utility services

SOCIAL VALUE OF SUCCESSFUL RETAIL MARKET

Having some price-responsive retail load that can actively participate

Inelastic spot market demand creates market power problems

Wholesale prices are potentially unbounded during very high load

Necessitates price caps and other regulatory interventions that can

10% to 20% of retail load should be in the wholesale market with

Increasing number and diversity of buyers in the wholesale market

Lower wholesale prices in the long run

CHALLENGES FACED BY MASS MARKET

Customers are sticky and price discounts modest

Median U.S. residential customer has about $25 in wholesale

Limited set of economical value-added services

Advertising and marketing are costly

Good back-office billing and settlements operations are challenging

"Price to beat" includes little if any RCS costs

Filtering "good" from "bad" residential customers raises public policy

Scale is very important

WHAT CAN BE DONE?

Unbundling T&D, Stranded Cost, DSM and unavoidable customer care

small commercial customers

Buy directly in wholesale spot market and pass through of

No hedging or other specialized products

Charge for avoidable customer service costs

Rebalance allocation of RCS costs to reflect cost causality

Distribution Service Charge:

Pdu = T&D + Sg + DSM+ Rm

Basic Electricity Service Charge: Pbgu = Ow + Rc

Allow utility affiliates to compete as ESPs with appropriate conduct