Consumers have the power to choose power, but few taking advantage Filed: 05/11/2001

By BRAD FOSS

AP Business Writer

MECHANICSBURG, Pa. (AP) -- For 30 years, the refrigerator packed with organic milk and tofu at Tracey Shambach's health food store has been powered by PPL Corp., the electric utility that long was the only source of local juice.

Shambach is now free to choose from among a handful of PPL competitors, thanks to Pennsylvania's deregulated electricity market. But she's hesitant to switch.

"I don't think they offer much of an incentive," said Shambach, who has been offered savings of less than 10 percent on her $350-a-month bill.

Plans are underway in 24 states and the District of Columbia to introduce competition into retail electric markets, but so far businesses and residential customers haven't gotten too charged up.

Fewer than 3 percent of eligible consumers nationwide have switched, according to Ken Malloy, president of the Center for the Advancement of Energy Markets.

As a result, upstart suppliers such as The New Power Co. and Green Mountain Energy Co., both of which have marketed heavily in Pennsylvania, Ohio, California and Texas, have yet to see any profits, while Internet-based power marketers are going out of business. And companies with regional market power, such as Exelon Energy and Allegheny Energy Supply, are learning that success can be elusive in areas where they lack brand identity.

State governments are also grappling with the issue.

North Carolina and Iowa, for example, have been reluctant to move forward with their deregulation plans, in part because of California's messy situation -- that state's largest utility is in bankruptcy court and retail rates are due to rise about 40 percent. In Nevada, where deregulation was approved in 1997, the state legislature recently passed a bill to halt competition indefinitely.

Consumers are unclear about how deregulation works, observers say, and thus are hesitant to shake up long-running relationships with their local utility.

The biggest hurdle for upstart power marketers is that "people don't want to take the time to save just a few dollars a month," said Irwin Popowsky, Pennsylvania's consumer advocate and a booster of deregulated markets.

Alternative providers have fared better in Pennsylvania than almost anywhere else -- roughly 10 percent of electricity customers have changed over. Within that sector are about 100,000 households and businesses that have opted to pay above-market prices for power from environmentally friendly sources.

But there's evidence that Pennsylvania is experiencing a competitive chill because of prolonged spikes in wholesale electricity costs.

Uncertainty has kept Jack Ritter, the mayor of Mechanicsburg and the owner of a hardware store, on the sidelines. Ritter, who spends about $900 a month on electricity, said he has trouble understanding the different services being offered.

"They all say they can save you money," said Ritter. "Who can tell who's got the better deal?"

The challenge of offering savings through competition has been made difficult by the piecemeal approach most states have taken to deregulation.

For example, a handful of states have required incumbent utilities to lower retail electricity prices between 5 percent and 10 percent to stimulate competition, presenting a problem for newcomers hoping to sell even cheaper electricity at a time when natural gas is expensive.

The basic premise underlying deregulation in retail markets is to introduce competition on the actual price of electricity, which generally accounts for only about a third of a customer's bill. The rest is basically the cost of transmission, a service that is not open to newcomers.

Getting consumers to shop around is expensive.

Eugene Lockhart, chief executive at New Power, said his company spends around $150 in marketing and advertising for each customer it acquires. And while profit margins are thin, Lockhart emphasizes the breadth of New Power's business strategy: Each time the company sends a monthly electric bill, it tries to sell consumers other products: natural gas, premium-priced "green" energy and Web-enabled home metering systems.

While "choice" is the buzzword associated with deregulation, many of the consumers who have switched providers in Pennsylvania and elsewhere have been passive participants.

New Power acquired 253,000 customers at once from PECO, the incumbent utility in Philadelphia, which was forced to hand over some 20 percent of its residential customers to to spur competition. And the vast majority of Exelon Energy's 100,000 customers were acquired from PECO as part of a merger.

Gerald Rhoads, Exelon president, said it will take time for consumers to embrace competition, which officially began in the United States in 1996 when California opened up its electricity market.

"It took the long-distance telephone companies well over 10 years before they got 50 percent of customers to switch," he said.

Lockhart said a critical mass of switching will not occur until it is easier for power-generating companies to build more plants to bring down wholesale costs. He and others predict that Texas, with its healthy surplus of generating capacity, will be the most price-competitive retail electricity market when deregulation gets underway there this summer.

But for some, the benefits of energy competition have nothing to do with price.

Shawn Baker-Sweet of Philadelphia gladly pays a 20 percent premium for "green" energy -- a 50-50 combination of natural gas and renewables like wind, solar and hydroelectric power -- that Austin, Texas-based Green Mountain sells to PECO, her local utility.

"It was worth it to me to use reusable energy," the 32-year-old waitress said.

Some 400,000 customers in 132 communities across Ohio have signed a six-year deal with Green Mountain for electricity produced using 98 percent natural gas and 2 percent methane emitted from landfills.

Deregulation of electricity is not likely to bring about the tremendous price reductions seen with long-distance telephone service. Instead, executives promise better customer service and innovations, such as real-time metering that allows homeowners to scale back on consumption when rates are particularly high.

But innovations are not important to Shambach, the health-food store owner. She said there's something else power marketers need to offer before she'll seriously consider switching -- rates at least 15 percent lower.

http://www.bakersfield.com/oil/Story/435194p-427321c.html

"If they could offer something like that, maybe," she said. "But for 10 to 20 bucks, no way."

-- Martin Thompson (mthom1927@aol.com), May 11, 2001

Answers

Good article Martin, you beat me to it as usual.

See other recent articles and my comments, http://hv.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=00591u

-- Andre Weltman (aweltman@state.pa.us), May 14, 2001.