# Presentation: 554680

## Priority 1 = Price Competition

*Retail price to compare in PA provides for real competition.*
*Wholesale price to compare in CA means few switchers.*

**Notes:**
Although Green Mountain’s business is cleaner electricity, not cheaper electricity, our first priority in developing competitive markets is advocating for price competition.
The graph of 1998 customer switches in California and Pennsylvania illustrate why: over the 9 months the market has been open in California, about 80,000 residential customers switched to a new energy service provider, while in Pennsylvania, with about half the number of residential customers, about 400,000 customers had switched providers before the market officially opened January 1, 1999.
Price competition draws competitors into the market, who offer more choices to customers, which means more people go shopping, leading to more people switching.  (Think about a department store sale.)
Without price competition, as is the case today in California and Massachusetts, the market is narrow (value-added products only, no products based on lower prices) or non-existent.  
Pennsylvania’s market is the most vibrant retail electricity market in the country today because in at least two utility service territories, customers have the benefit of a market structure that supports price competition.

## Creating a Vibrant Retail Market

- 	The threshold issue is price competition
- drives suppliers into the market
- drives customers to go shopping
- 	Two fundamental questions:
- what price does non-choosing customer see
- can default supplier exert market power

## Pennsylvania Price to CompareMany suppliers offer residential choices

**Notes:**
We do not believe that there is one right way to restructure a state’s electric market.  We do recognize that there is a sharp distinction between states who have explicitly decided to support a competitive retail market and those which have not.  The difference between them is a market structure supporting price competition.
California and Massachusetts are passing through energy costs at or below wholesale prices to default service customers.  They do not have any significant price competition, although California supports a narrow market of value-added competitive suppliers like Green Mountain.
In contrast, Pennsylvania’s price to compare mechanism, recently supported in legislation in New Jersey, creates opportunity for competitive suppliers to offer a full set of choices to customers, who then shop for electricity and switch at a far greater rate.
 The proposals to bid out default service in Maine and Ohio are the next gradation on the spectrum of retail competition.  Requiring a default provider to incur costs similar to competitive suppliers* is a strong step in the direction of creating a level playing field for all suppliers.
 *The exception is marketing acquisition costs.  Also, default providers clearly achieve instantaneous economies of scale, lowering their unit costs relative to a supplier building up from zero customers.

## Price Competition & Public Policy

**Price to Beat**
**(Shopping Credit/**
**Back-out Rate)**

**Rate Cut / **
**Rate Freeze**

**PRICE**
**COMPETITION**

**Default Service**** **
***STRUCTURE & PRICE***
**(POLR)**

**Stranded Cost**
**Recovery**
**(CTC)**

***Each of these policy decisions affects the others and***
***the potential for retail price competition.***

**Notes:**
So, how do you get price competition in a retail electricity market?  That answer is dependent on the political and policy decisions about several of the major issues in every restructuring debate.
The stranded cost recovery, rate cut, default service and price to beat decisions are dynamically related to each other and ultimately define whether the market structure will be conducive to retail price competition.
Default service pricing, called different things in different states, is the bogey by which all competitive offers are judged.  In this discussion, the default service price is what a customer pays if they don’t choose.
As evidenced by Pennsylvania, policymakers can allow for full stranded cost recovery, impose a rate cut, provide for default service and create a market where the price to beat for utility default service allows price competition to flourish.
If default service is set at the wholesale price of power, with no recognition of the retail costs to serve customers receiving that service, price competition is not just unlikely, it is precluded.

## Wholesale v. Retail Supply Costs

- * Savings based on a 800 kWh/month usage with an 8cents/kWh default service rate, saving 4% on wholesale and 12% on retail costs.

**Notes:**
Even when default service customers have the wholesale spot price of power passed through to them, as in California, the utility serving those customers incurs costs to do so - retailing costs.  With the exception of marketing, the retail costs listed on the graph are similar for any supplier of energy services to small customers.
In this chart, a customer could see a rate reduction, recovery of stranded costs and receive default service from the monopoly utility.  However, in the uncompetitive case, the retail costs have been hidden (with no malice implied) within the distribution part of the bill which is not open for competition.  It is possible that retail costs might also be hidden in transmission or stranded costs as well.
With the only cost available for competition being the wholesale price of energy, a competitive supplier would struggle to produce attractive price savings on energy, let alone cover their retail costs to supply a customer.  (Note that a 2 mil savings, almost 10% of the wholesale energy price, saves a customer $1.60 per month.)
In this case, there is no price competition.
Price competitors enter the market only when the energy price a customer avoids by choosing an competitive supplier (the price to beat) is sufficient to cover the costs of retailing.
We applaud the efforts in PA, ME, NJ, TX and OH to ensure that default service is not structured to preclude price competition.

## Market Power Mitigation Matters

- 	A Default Supplier serves all non-choosing customers at a lower cost than competitors
- no marketing costs
- no switching costs
- instant economies of scale - retail and wholesale
- 	Retail market power can be exerted 2 ways
- control prices - either high or low
- prevent entry of competitive suppliers

## Default Service Provider Spectrum

- California: Regulated, utility default service

- Pennsylvania: Partial competitive bid after market opening

- Maine: Full competitive bidding before market opening

- Texas: Regulated, utility affiliate default service

- Atlanta Gas: Default service shared by all marketers

**More Competitive**

**Notes:**
We do not believe that there is one right way to restructure a state’s electric market.  We do recognize that there is a sharp distinction between states who have explicitly decided to support a competitive retail market and those which have not.  The difference between them is a market structure supporting price competition.
California and Massachusetts are passing through energy costs at or below wholesale prices to default service customers.  They do not have any significant price competition, although California supports a narrow market of value-added competitive suppliers like Green Mountain.
In contrast, Pennsylvania’s price to compare mechanism, recently supported in legislation in New Jersey, creates opportunity for competitive suppliers to offer a full set of choices to customers, who then shop for electricity and switch at a far greater rate.
 The proposals to bid out default service in Maine and Ohio are the next gradation on the spectrum of retail competition.  Requiring a default provider to incur costs similar to competitive suppliers* is a strong step in the direction of creating a level playing field for all suppliers.
 *The exception is marketing acquisition costs.  Also, default providers clearly achieve instantaneous economies of scale, lowering their unit costs relative to a supplier building up from zero customers.

## Default Service Pricing Spectrum

- Market indexed wholesale price - CA

- Administratively set retail price - MA

- No default service: retail market price - AGL

**More Competitive**

- Administratively set retail price, fuel adjusted - TX

- Market bid wholesale + administrative retail adder

**Notes:**
We do not believe that there is one right way to restructure a state’s electric market.  We do recognize that there is a sharp distinction between states who have explicitly decided to support a competitive retail market and those which have not.  The difference between them is a market structure supporting price competition.
California and Massachusetts are passing through energy costs at or below wholesale prices to default service customers.  They do not have any significant price competition, although California supports a narrow market of value-added competitive suppliers like Green Mountain.
In contrast, Pennsylvania’s price to compare mechanism, recently supported in legislation in New Jersey, creates opportunity for competitive suppliers to offer a full set of choices to customers, who then shop for electricity and switch at a far greater rate.
 The proposals to bid out default service in Maine and Ohio are the next gradation on the spectrum of retail competition.  Requiring a default provider to incur costs similar to competitive suppliers* is a strong step in the direction of creating a level playing field for all suppliers.
 *The exception is marketing acquisition costs.  Also, default providers clearly achieve instantaneous economies of scale, lowering their unit costs relative to a supplier building up from zero customers.