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Texas Electric Deregulation
Entering With A Bang Or A Whimper?
By
Michael Richarme
Electricity deregulation has begun in Texas, not with a bang but a whimper.
Despite aggressive promotional campaigns, the average Texas consumer still
isn’t convinced there is much value in switching providers. Interest does
appear to be higher among commercial and industrial companies, but they
aren’t stampeding to change providers either.
On January 1, 2002, retail electricity deregulation became official in Texas,
allowing millions of consumers and businesses to switch to a provider of their
choice—with a few exceptions. Municipally run electric companies, electric
cooperatives, and El Paso Electric are exempt from competition for a few years.
Prior to the launch of deregulation, a six-month pilot test was enacted that
allowed a limited number of consumers and businesses to switch providers so
transfer processes and behind-the-scenes databases could be tested. During the
pilot test, Texas Public Utility Commission (PUC) and most of the electricity
providers mounted large publicity campaigns to inform customers of their
upcoming options.
The campaigns—consisting of billboards, television and radio ads, and
direct-mail pieces—generated significant billings for quite a few
advertising agencies, but didn’t do a great deal to heighten interest
among consumers.
In Dallas-Fort Worth, an exploratory survey of household electricity
decision-makers was conducted the day after deregulation took effect. Among the
findings were:
- Educational campaigns mounted by PUC and electric companies were at best only
somewhat successful, with respondents rating their knowledge of deregulation as
"fairly high."
- Of those respondents eligible to switch providers, a large majority indicated
they had no plans to switch in the next six months.
- Of those respondents who planned to switch in the next six months, most said
they were considering only one other company.
- New Power and Shell Energy were mentioned most frequently as companies to which
respondents were considering switching. Both of these companies are new
entrants into the retail electricity market rather than existing electric
companies moving into new markets.
Because respondents were drawn entirely from Dallas-Fort Worth, this
exploratory survey cannot be viewed as scientific. Though respondents were
diverse demographically, they may not be representative of the state’s
population.
However, some trends are clear. It appears that retail electricity deregulation
in Texas will begin this year with mixed results at best, and the number of
consumers switching from one electricity provider to another will be quite
moderate. Moreover, until the electric companies overcome consumer inertia with
a sound value proposition, most consumers won’t switch.
Beginning to understand this, many Texas electric companies are scrambling to
conduct their own research in hopes of finding the winning equation. Those that
are not doing research most likely will learn their lessons the hard
way—one lost customer at a time.
So where does this leave electricity deregulation in Texas? The real
battleground for incumbent electric utilities appears to be large industrial
and commercial accounts. Though highly visible, as in the case of a recent
switch by Texas Instruments from TXU to Reliant Energy, with a two-year, $50
million per year contract changing hands, these accounts tend to be extremely
price sensitive and generally not the most loyal customers.
Movement by these customers can cause large fluctuations in both revenue and
operating expenses, and the visibility of these accounts may serve as decision
influencers for the larger undecided consumer base. Again, astute electric
companies are conducting in-depth research within this customer base, trying to
discover the combination of attributes that will prevent defection to another
retail electric provider.
The research itself isn’t enough, however. Providers also are going to have
to develop a plan of action based on a clear understanding of how buyers think
and on a reasonable projection of the results of their strategies. The nature
of deregulation, converting a highly structured and regulation-dependent market
into one in which free choice reigns, requires some consideration of the
extremes of strategic options.
Across the United States, the markets for electric utilities are generally
monopolistic, with a single utility granted the right to provide electric
service to all customers in a given area. Over the past 100 years, this has
created a significant amount of brand equity for the incumbent utility. In the
interest of stimulating competition, state regulatory agencies are deregulating
the electric utility markets in their jurisdictions, allowing additional
entrants to compete for customers in the incumbent’s formerly protected
territory.
For incumbents, the time has come to defend their territory against these new
entrants, though with some significant regulatory restrictions. Incumbent
utilities typically are given a fixed price reduction from the regulatory
agency, which must be offered to all customers for a fixed period of time. In
addition, the incumbents are forced to unbundle generation and transmission
services from their retail business, as well as offer wholesale electricity to
all entrants at the same wholesale price they offer to their retail divisions.
Thus, competition exists at the retail level, not at the generation or
transmission level.
The incumbent electric utilities know they will be unable to maintain their
former 100% market share. Consequently they have been engaging in active
marketing campaigns to emphasize their long histories in their markets,
stability, reliability, and other key attributes. The incumbents are testing
various positioning advertisements and campaigns aimed at keeping the most
profitable customers in their fold.
The incumbents are generally burdened by existing cost structures developed
under regulated market conditions, such as expensive downtown facilities,
attractive compensation and benefits packages, elaborate customer service and
billing systems, and expensive marketing campaigns. For many incumbents, it
will be a major challenge to transform into retail marketing structures that
can serve both household consumers and commercial/industrial customers.
In the deregulation race, entrants can be divided into two types. The first type
is a prospecting incumbent from some other market, looking to replace lost
market share in its home market with incrementally gained market share in other
markets. These prospecting incumbents bring credibility from their existing
electricity business, but may not have any brand awareness within the new
market.
One possible strategy for these prospecting incumbents is to provide national
account services for all of their large commercial and industrial accounts,
accenting one unified bill and one point of customer service for all locations.
A major challenge for the prospecting incumbents will be to identify
appropriate markets in which to enter, and to develop an efficient and
effective "out of market" retail marketing and service operation.
The second type is a new entrant, formed specifically to participate in
deregulated energy markets. These new entrants do not have home markets to
protect and operate strictly as a marketing arbitrage entity in each market
they enter. This entrant focuses on increasing brand awareness by emphasizing
additional customer service, simplified billing, and lower prices.
The new entrant will have a limited physical presence in the market, as customer
service, billing, and most marketing functions can be handled from a central
location. This strategy will be applicable most often to small businesses and
consumers. The major challenge for the new entrant is to establish awareness
and credibility, entering the consumer consideration set when the opportunity
for switching is presented.
The ultimate scenario from the perspective of existing electric utilities is a
duopoly market. In this scenario, incumbent A enters the market of incumbent B,
and incumbent B enters the market of incumbent A. The two utilities are able to
fend off new entrants and establish a stable duopoly with limited competition.
Overtly moving to this type of strategy is precluded by antitrust legislation,
but it seems to be a natural extension of legislation adopted in many states.
However, this does not work in situations in which incumbent A moves into many
markets to acquire national accounts, and reciprocal entry by incumbent B into
incumbent A’s market is not countered. In this case, the first mover will
have a decided advantage.
From the perspective of new entrants, the most intriguing scenario is one
involving a highly fragmented market in which new entrants compete against a
sluggish, unprepared incumbent utility. Without another "reputable"
utility brand to absorb consumers wanting to switch due to grievances, the
incumbent will lose customers who cannot be safely offset by entry into the
prospecting utility’s market. Doing so would elicit a competitive response
by the prospecting utility and exacerbate the problem in the incumbent
utility’s market.
Based on the data presented above, it appears the monopolistic or duopolistic
market scenario will be maintained for consumer accounts over the near term,
and a more fragmented market will emerge for commercial and industrial
accounts. The similarities to the deregulation of the telephone market two
decades ago are striking, and it is highly likely that a similar pattern of
initial competition, followed by reduced prices, higher levels of innovation,
and a subsequent market consolidation, will occur in the retail electricity
market as well. But not very quickly.
Michael Richarme is Vice President, Business Development at Arlington, Texas-based
Decision Analyst, one of the nation’s leading marketing research firms.
Decision Analyst provides marketing research services to Fortune 500 companies
and other organizations, including utility providers.
Copyright © 2002 by Decision Analyst, Inc.
This article may not be copied, published, or used in any way without written
permission of Decision Analyst.
About the Author
Michael Richarme (mrichar@decisionanalyst.com)
is a Senior Vice President at Dallas-Fort Worth based Decision Analyst. He may
be reached at 1-800-262-5974 or 1-817-640-6166.
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