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Texas electric utility markets open to competition in less than one year on January 1, 2002.
MAISY Texas Utility Service Area Databases and software products have been updated to reflect competitive market rules unique to Texas, providing guidance to energy service providers in evaluating Texas utility markets, developing competitive marketing strategies and targeting the most profitable customer segments within those markets. MAISY helps energy service providers identify profitable utility customers and customer segments before they are acquired. MAISY's ability to provide this analysis for service areas which have not yet been deregulated is especially valuable in assessing new market potential and marketing strategies. BackgroundCurrent Texas utility rate structures provide total revenues that roughly meet total cost of service for broad customer classes within individual utilities; however, variations in individual customer seasonal energy use and hourly load profiles create substantial discrepancies between revenue and cost-of-service for individual customers within customer classes. Competition will permit energy service providers to seek out customers whose revenues are significantly greater than their cost of service and make price offers that benefit both the ESP (energy service provider) and the customer; customers who cost more to serve than they return in revenue will eventually face rates that more closely reflect the seasonal and hourly resource costs of providing power. Texas service area markets provide both significant opportunities and significant risks for all competitive energy service providers participating in Texas markets. Discrepancies between individual customer cost of service and revenues guarantees that some customers will be profitable while other customers will cost more to serve than they return in revenue. Settlement rules in Texas competitive markets, which define settlement classes based on winter ratios and load factors, add an additional dimension to customer profitability assessment. If each competitive ESP acquires and maintains customers who reflect a cross-section of the population, individual customer profitability will not be an issue since profitable and unprofitable customers will provide offsetting impacts on the bottom line. These equal distributions of profitable and unprofitable customers will not occur, however, because competitive markets provide ESPs with the opportunity and incentive to selectively pursue the most profitable individual customers and customer segments. A recent analysis of the Texas markets estimated residential customer commodity profits of $75 per customer/year and small-mid market commercial customer profits of $1,500/year for the most profitable quintile of customers in each class (customer losses are of about equal magnitude for the least profitable customer quintiles in each class). Since profit scoring models can distinguish as much as 70 percent of the variation in profit among customers, prior to acquisition, Texas electricity markets will soon reflect the same kind of focused marketing activity that accompanied the early years of telecommunications market deregulation. Texas Utility Database UpdatesMAISY Utility Service Area Energy Marketing Databases include extensive building structure, building and end-use energy use, equipment, conservation, electricity, natural gas and oil consumption data including hourly loads and other energy-related variables, and monthly electricity billing data along with traditional economic and demographic information for a representative sample of commercial and residential customers within each service area. The following new variables have been added to Texas Utility Service Area Databases to facilitate analysis of competitive market issues:
Energy use and billing data have been reorganized to provide easy evaluations of customer revenue and cost of service. The new Energy Billing Group Variables are available for each customer record or for customer segments and include:
MAISY provides hourly load profiles for individual customer records and customer segments including month and day-type profiles as well as 8760 hourly loads. This information can be used to develop estimates of the following load profiles used in the settlement process: Residential Segment Load Profiles
Commercial Segment Load Profiles
The MAISY system can also incorporate utility segment load profile data as they become available. Texas Competitive Market Applications - Residential CustomersMAISY Utility Service Area Energy Marketing Databases are used to develop competitive market strategies and to support competitive marketing programs. While the following applications relate specifically to Texas markets, most are applicable in other state markets. ESPs who acquire residential customers beginning January 1, 2002 will be responsible for providing power according to each customer's monthly energy use and the load profiles associated with the customer's load class. Residential customers are assigned to one of two load classes: a "high winter ratio" load class when maximum December-February monthly energy use is greater than 1.5 times the average of the minimum Fall and Spring monthly use or a "low winter ratio" if the ratio is less than or equal to 1.5. These load profiles along with customer monthly energy use, generation resources and other ESP supply options determine the cost of providing service for each customer. When Texas markets become competitive in 2002, residential customers will be paying rates set by their current utilities (these "price-to-beat" rates will reflect a 6 percent reduction from current rates). Texas utilities typically have relatively simple residential rate structures with different summer and winter charges per kWh. The kWh charge is usually applied in two or three blocks with lower charges applying for greater use. While seasonal rate variations and monthly block pricing is an attempt to charge customers based on customer cost of service, rates paid by individual customers are only nominally correlated with their true cost of service. For instance the TXU monthly charge for each kWh (beyond the first 600 kWh in the month) is $.0626/kWh from June through October. However the actual cost of supplying those kWh varies considerably through this five month period. ESPs who identify new customers whose cost of service is significantly less than their electric bill will offer reduced rates while earning greater than average profits. Similarly, customers who cost more to serve than they return in revenue will be avoided in targeted marketing campaigns. Price-to-beat rates are frozen for home utilities within their own service areas for three years or until 40 percent of residential and small commercial customers are served by alternative suppliers; consequently, competitors from outside each service area have a substantial competitive advantage over the home utility in competing for customers since the home utility is prevented from reducing rates to retain their most profitable customers. More specifically, MAISY Texas Utility Service Area Residential Databases are used to develop market strategies to target profitable customers as follows:
MAISY clients also utilize Utility Service Area Database information to:
MAISY Texas Utility Service Area Databases are provided in a database and software package which can be applied by inhouse ESP staff to address the issues identified above. Jackson Associates also provides a variety of consulting services to support client application of MAISY data. Texas Competitive Market Applications - Small Commercial CustomersSmall commercial customers, those with peak demands less than or equal to 1,000 kW, consume 75 percent of total commercial sector electricity use. ESPs who acquire commercial customers beginning January 1, 2002 will be responsible for providing power according to each customer's monthly energy use and the load profiles associated with the customer's load class (except for customer who have hourly meters as described below). Commercial customers are assigned to one of three "business" load classes: a low load factor, medium load factor and high load factor, depending on the customer's average load factor throughout the year. These load profiles along with customer monthly energy use, generation resources and other ESP supply options determine the cost of providing service for each customer. When Texas markets become competitive in 2002, commercial customers will be paying rates set by their current utilities (these "price-to-beat" rates will reflect a 6 percent reduction from current rates). Texas commercial rate structures are much more complicated than residential rate structures. Seasonal differentials are sometimes applied and demand charges based on maximum monthly peak demand are usually applied with kWh rate blocks which themselves are based on monthly peak demands. Like residential rates, however, rates paid by individual customers are only nominally correlated with their true cost of service. For instance, the TXU demand charge is $8.4476/kw per maximum monthly peak demand throughout the year; however, the cost of meeting peak demands varies considerably depending on the season of the year. As with residential customers, ESPs who identify new commercial customers with cost of service significantly less than their electric bill will offer reduced rates while earning greater than average profits. Similarly, customers who cost more to serve than they return in revenue will be avoided in targeted marketing campaigns. Price-to-beat rates are frozen for home utilities within their own service areas for three years or until 40 percent of residential and small commercial customers are served by alternative suppliers; consequently, competitors from outside each service area have a substantial competitive advantage over the home utility in competing for customers since the home utility is prevented from reducing rates to retain their most profitable customers. An extremely important additional opportunity exists to enhance small commercial customer profitability. Customers without interval data records (IDRs or hourly meters) require power supply and settlement based on customer class load profiles; however, customers who settle on the basis of IDR data have supply commitments matched to actual hourly energy use on an hour-by-hour basis. Hourly meters, which cost $200 - $300 in large quantity purchases are not currently cost-effective for most residential customers; however, commercial customer revenues and potential profits are many times that of residential. For instance a new one hundred room Hampton Inn is likely to have an annual bill of about $50,000. ESPs who can identify customers for whom IDR cost of service commitments would save more than the $200-300 meter cost can acquire those customers and install IDRs, reduce the cost of service relative to that required when using the class load profiles and provide savings to the customer. Since installing an IDR does not commit the ESP to an hourly settlement process, ESPs can identify likely beneficiaries of IDR metering but only convert customers from the class load profiles to an hourly settlement if there are clear cost of service advantages. The market for IDR conversions is substantial. ERCOT rules require customers with demands of more than 1000 kW to be metered with IDRs. Customers under this threshold , who can be optionally metered with IDRs include offices of less than about 200,000 square feet (about 10 stories), traditional supermarkets (e.g.,Winn Dixie, Krogers, etc.), most fast food restaurants, nearly all department stores, motels, retail stores, etc. More specifically, MAISY Texas Utility Service Area Commercial Databases are used to develop market strategies to target profitable customers as follows:
MAISY clients also utilize Utility Service Area Database information to:
MAISY Texas Utility Service Area Databases are provided in a database and software package which can be applied by inhouse ESP staff to address the issues identified above. Jackson Associates also provides a variety of consulting services to support client application of MAISY data. Texas Competitive Market Applications - Large Commercial CustomersLarge commercial customers, those with peak demands greater than 1,000 kW, consume 25 percent of total commercial electricity use. Large office buildings represent almost half of all large commercial customers. Most other large commercial customers include hospitals, and the largest retail, hotel and assembly buildings. Since these customers must be hourly metered, it is not possible to take advantages of load segment profiles and the diversity of individual customer energy use characteristics to identify and target individual customers and customer segments within the load classes. Depending on the cost of service characteristics of individual ESPs, however, it is possible to identify large customers and large customer segments whose cost of service is enough less than their current rates to reflect profitable marketing opportunities. MAISY utility customer databases provide hourly load profiles of these large commercial customers which can be used to complete this assessment. Both month and day-type profiles and 8760 hourly loads are available for each customer record. Related MAISY Applications/ResourcesThe following MAISY resources relate to the topics discussed in this section: Electric Utility Service Area Databases are described in detail along with utility service area database development and applications. MAISY Customer and Market Profiler is an optional add-on software system designed to assist MAISY users with customer and market hourly load and profitability analysis. The profiler software: (1) adds a "wizard approach" where a set of sequential screens help users define desired market segment or customer specifications, (2) automatically extracts and processes relevant customer data from the databases and (3) presents the results in a special Excel Workbook which integrates hourly loads, cost of service and rate structures. Use the Profiler for applications ranging from strategic market analysis to individual customer pricing and profitability evaluations. MAISY Profitability Analysis With Dynamic Load Profiles describes some of the issues related to Texas competitive markets in more detail. Assess "Headroom" in Different Utility Service Area Markets describes the application of MAISY Utility Customer Databases in assessing the market potential for individual utility service areas.
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