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Breathing Life into the Massachusetts Retail Electric Market

Charlie Hewitt's picture
Principal Sarsen Energy Group

Charlie Hewitt currently serves as the principal for Sarsen Energy Group and is the founder of ElectricityMatch. He has more than 20 years of in-depth experience in the energy industry having...

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  • Jun 26, 2015
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The goals of retail electric competition are a source of disagreement among legislators, utilities, competitive suppliers, and consumers.  Some parties believe that the only goal is to reduce costs to consumers while others believe that customer choice produces important ancillary benefits such as innovation and consumer engagement.  This leads to the obvious question of how to measure the success of retail competition.

The number of customers switching to competitive suppliers often serves as a proxy for the health of the competitive market.  Massachusetts medium and large commercial and industrial (C&I) customers have switched away from utility service in droves.  At the end of 2014, competitive suppliers served 45% of medium and large C&I customers.  These customers represented 78% of the class load.  In stark contrast, residential switching represented only 18% of the available market while the small C&I switch rate was slightly better at 25% (46% of class load).

Are switching rates an appropriate metric on which to judge the success of electric deregulation?  The answer, as often is the case, depends on a number of issues.  Perhaps there is not a compelling financial incentive for consumers to leave utility basic service.  However, assuming low switching rates are solely the result of rate parity neglects potential biases in market design favoring utilities.  To address this concern, the Massachusetts Department of Public Utilities (DPU) launched a market investigation in December 2014.

Checking in with the Neighbors

Massachusetts residential and small C&I customers have been reluctant to switch to competitive supply compared to other customer classes.  For comparison purposes, it is interesting to examine residential switching rates in other states.

As of December 2014, New York had a residential switching rate just under 23%.  This is comparable to the 18% rate in Massachusetts.  New Jersey reported only 12.53% of residential customers selecting non-utility electricity providers.

Pennsylvania posted a far more robust residential switching rate of 34.7%.  Connecticut reported a similar residential shopping rate of 34.6% for United Illuminating and Eversource (CL&P).

The data do necessarily indicate a problem with the Massachusetts residential market.  However, the DPU project is laudable and worth a closer look.

Minor Market Issues

The DPU investigation focuses on five areas of market improvement.  One area of concern is establishing requirements for door-to-door marketing.  Door-to-door marketing is the bane of the retail electric market.  Regulations, training and carefully crafted scripts sometimes take a backseat when a salesperson is standing on the stoop trying to secure an enrollment.  This is a hard way to make a living and the temptation to embellish to get a sale is substantial.  While the DPU’s efforts in this area are necessary and appropriate, the impact on residential and small C&I switching is not expected to be significant.

Another area of focus is transitioning customers from one competitive supplier to another.  This is becoming more common as suppliers exit the market through mergers, acquisitions, or cessation of operations.  This eventuality is more of a market transaction item.  Customer transitions need to be streamlined; however, this is not a huge impediment to residential market participation.

More Significant Issues

Additionally, the DPU is looking to revise the practically useless disclosure labels electricity suppliers are required to provide customers.  The market needs standardized product disclosures to enable customers to compare electricity offers.  The Electricity Facts Label required in Texas is an excellent example of an effective document designed to help customers compare electricity plans.  The current Massachusetts disclosure labels are not nearly as effective.

The Massachusetts disclosure label format is only vaguely standardized.  The electricity provider must include a rate overview, customer service number, regional fuel mix characteristics, representative emission rates, and regional average labor characteristics.  A quick review of supplier disclosure labels reveals a broad range of interpretations as to what information is required.  Even if one agrees that disclosing the use of replacement workers during labor disputes at power plants is relevant, responses range from using 15-year old generic data to simply stating “unknown.” The result is a document that does not lend itself to side-by-side offer comparison.

Massachusetts is also developing a customer electric choice shopping platform.  Similar to other states like Connecticut and Texas, the DPU believes that a state-affiliated offer comparison website will give consumers the confidence to go shopping.  The DPU website may benefit consumers in several ways. 

First, the standardization of offer presentation will simplify the shopping experience.  Second, having offers presented on a provider-neutral platform is inherently good at instilling consumer confidence.  The concept has worked so well in other states that private electricity shopping websites have also flourished.  Finally, the website could increase awareness of the retail electric choice program and serve as conduit to educate consumers. 

The Biggest Issue

Massachusetts consumers on utility basic service choose between a 6-month fixed rate plan and a monthly variable rate plan.  If a consumer on the fixed rate plan switches away during a given 6-month term, they are rebilled as if they had been on the variable rate plan.  Bill recalculation could result in a credit or an additional charge.  While additional charges were often under $100, media reports of the rule did not cast electricity shopping in a positive light.

The reasoning behind this requirement was to prevent customers from gaming differences between utility and competitive supplier rates.  For example, a customer could be on the utility 6-month plan just to get past the highest price months and then switch to competitive supply.
Utilities were convinced that competitive suppliers would actively sell this strategy to consumers.  In others words, there would be a proliferation of retail electric offers tacitly encouraging consumers to arbitrage 6-month basic service  prices and prevailing market prices.  This would result in utility customers bearing the cost of their neighbor’s gaming strategy.

As part of its investigation, the DPU found that there was little evidence to support widespread gaming had occurred.  Furthermore, the cost of forgoing the bill recalculation for residential and small C&I customers would not place a significant burden on those customers remaining on utility basic service.  For this reason, the DPU formally suspended bill calculation for residential and small C&I customers on April 13, 2015.  As part of the rulemaking, the DPU agreed to monitor the market and address increased gaming activity if necessary.

Next Steps

The suspension of bill recalculation was a significant step in the right direction.  Competitive suppliers should resist the temptation to focus their marketing efforts on 10-month plans that seek to take advantage of this rulemaking.  The comparison website should be effective in standardizing offer presentation, educating consumers, and removing unwarranted concerns about shopping for electricity.

The primary challenge will be overcoming consumer apathy.  Opening the market in 1998 but suppressing competition with a discounted standard service offer until 2005 did little to stimulate the market.  However, recent DPU data shows residential and small C&I switching rates increasing in first four months of 2015.  At the end of April, competitive suppliers were serving 26% of residential customers.  Small C&I also posted higher switching rates with 32% of customers and 54% of load under competitive supply.

The true impact of the DPU project will become apparent over the next year.  If the market revisions are effective, consumers stand to benefit from increased competition and innovative pricing plans.  As the industry moves toward greater participation by consumers in managing their energy usage, engagement may become a more meaningful measure of the success of customer choice programs.

Charlie Hewitt's picture
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Peter Kelly-Detwiler's picture
Peter Kelly-Detwiler on Jun 30, 2015
There's another reason MA resi retail hasn't taken off - a lot of the offers are just plain misleading. As a veteran of retail energy since 1997, I was involved in building the C&i industry with one of the pioneers, ran the Ops group billing $1 bn annually, and then headed up the DR group, and we had fairly straightforward offerings.

Now we have this fixed introductory rate nonsense, leading to variable rates. I signed up for a 6.95 rate that went to 10 cents after 6 months - for the following 6 months, despite the Basic Service rate being at 8 cents during that entire period.

Recently, I saw one of the largest retailers in the business offering "45% savings" relative to a winter rate that actually expired on the same day and the new lower spring rate took hold - despite the fact that I had called and alerted them to the misleading nature of the offer. I have a high degree of frustration with an industry that too frequently relies on deceit, auto-renewals at arbitrary rates, and other poor practices. As currently practiced, it probably deserves to fail. It certainly does not add much value to the customer experience.

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