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Beyond the Standard Offer Mass Market Development Policies Culled From Other Markets’ Experiences A Report to the Massac

Beyond the Standard Offer Mass Market Development Policies Culled From Other Markets’ Experiences A Report to the Massachusetts Division of Energy Resources. Plexus Research, Inc. Eric P. Cody, Principal Researcher. Policy Goals Underlying DOER’s Project. Near Term:

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Beyond the Standard Offer Mass Market Development Policies Culled From Other Markets’ Experiences A Report to the Massac

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  1. Beyond the Standard OfferMass Market Development Policies Culled From Other Markets’ ExperiencesA Report to theMassachusetts Division of Energy Resources Plexus Research, Inc. Eric P. Cody, Principal Researcher

  2. Policy Goals Underlying DOER’s Project • Near Term: • Enable customers’ choice of retail supplier • Mitigate customers’ exposure to unwarranted price volatility • Long Term: • Sustain competitive options in the mass market • Enable the mass market to obtain the full benefits of retail competition 1

  3. UNITED KINGDOM COMPARISON MARKETS Comparative Market Assessment ALBERTA MAINE OREGON MASSACHUSETTS NEW YORK PENNSYLVANIA NEW JERSEY OHIO GEORGIA (GAS) TEXAS AUSTRALIA 2

  4. ‘Reality Checks’ withRetailers • Constellation New Energy • Direct Energy (Centrica) • Dominion Retail • Green Mountain Energy • Reliant Energy Retail Services • TXU Energy Services • WPS Energy Services 3

  5. Energy Retailer’s View Structure of Default Service Maintain Cash Flow Minimize Overheads Market Rules Size of Available Market Market Entry Decision Sustainable Operations Protect Margins Opportun-ities to Achieve Scale Manage Price Risk Wholesale Energy Cost Acquire Customers Retain Customers Regulated Retail Price 4

  6. Window into the Future:UK Residential Customer Experience • Satisfaction is high – 90% favorable • Price is the primary factor influencing switching • Price discounts are tied to method of payment • Dual fuel offers predominate – 80% of those who have switched buy electricity & gas from same source • Customer awareness of alternatives has increased • Non-price offers include loyalty points, bundled offers, green products and service differentiators 5

  7. Challenges Specific to “Mass Market” Entry • Cost to acquire customer high vs. margins • Expensive IT back office requirements • Minimum retailer scale ≈ 500K-1M customers • Projected customer savings modest • Pricing of regulated supply option can impede • Incumbent utility seen as competitor or barrier 6

  8. Current Retail Market Model Clusters 7

  9. % Residential Customers Served Competitively (2003) 100% Direct Customer Assignment Full Retail Separation Competitive Generation Supply Regulated Portfolio Options 8

  10. Competitive Benchmark Performance 9

  11. Findings • UK market alone has become ‘reasonably competitive’ • The most competitive electricity markets adopted Full Retail Transfer or a close derivative • Several of most competitive markets have unified regulatory authority over wholesale / retail • Early level of competitiveness may be proportional to market size • Sensible & consistent market practices have a positive effect on retailer entry 10

  12. Massachusetts Must Overcome Several Inherent Disadvantages • Market size • Customer usage patterns • Bifurcated regulatory authority • Prescriptive regulation of retailers 11

  13. Foundation Principles • Default service pricing must reflect market cost • Artificially increasing regulated supply price to create “headroom” does not create sustainable competition • Large-scale wholesale bidding works against retail competition • Preserving the largest possible market size is critical • Overly burdensome administrative requirements deter retailers from entering • Opportunities for retailers to build brand awareness are essential 12

  14. Key Policy Directions • RAPID SCALE ACHIEVEMENT: Adopt customer auction, direct assignment, or retail separation to move Standard Offer customers to non-regulated supply • RETAIL PRICE COMPARABILITY: Include components that accurately reflect the cost of retail services — such as billing and customer care — in default service pricing • MAINTAIN MARKET SIZE: Maintain a single, statewide model of retail choice that preserves effective market size • EXPAND MARKET SIZE: Simplify, standardize and regionalize business practices for customer enrollment & switching and other key processes to create a seamless New England retail market 13

  15. PlexusResearchInc. 629 Massachusetts Ave.Boxborough, MA 01719978-263-6080 ECody@PlexusResearch.com

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