Monthly Archives: November 2011

Texas Electricity, AEP Texas and the Rules of Deregulation – Part 3

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If you’ve read Part 1 and Part 2 of my examination of AEP’s application to sell deregulated electricity in Texas you are acquainted with both the basics of the situation, as well as just how much confusion exists by consumers in the Texas marketplace. In this section, I’m going to pick back up on market confusion and competition, examine why AEP is insisting on operating under the AEP brand and talk about how the rest of the Texas electricity market views AEP’s application.

Brand Awareness, Competitive Advantages, and Market Confusion

Anyone who has ever taken a marketing class or just watched a healthy amount of television understands the importance of marketing and brand awareness. When viewed under that lens, it is easy to see why AEP wants to sell electricity service under the AEP brand name. In the same survey we referenced in Part 2, which was commissioned by AEP to support their REP application, it was revealed that 52% of all customers in the AEP Texas TDU service area expressed some form of brand recognition for AEP Retail Energy. To recap, AEP Retail Energy is the brand name AEP hopes to sell retail electricity under and for all intents and purposes is a company that does not even exist to retail customers in Texas. Yet 52% of people expressed recognition. Additionally, it had the second highest recognition of any REP brand currently operating in any AEP territory behind only West Texas Utilities (37% to 36%), the former AEP retail electricity branch which was sold to Direct Energy in 2002.

That is the power of branding. When a company that doesn’t even exist yet in Texas has 56% total state market awareness and is effectively tied for first as the most known brand in a company’s native service territory, it is easy to see why AEP is so intent on doing business as AEP Retail Energy. The AEP name brand gives them a huge competitive advantage.

If you don’t believe brand awareness is that big a deal, lets further shine a light on the competitive advantages and their importance in the Texas deregulated electricity marketplace. Here are some more telling facts from the survey results turned up by AEP.

  • As we’ve established already, the AEP footprint in Texas is a mess. The highest percentage of recognition by any retail electricity provider was a meager 37%. The second highest response was for a fictional AEP company that doesn’t even exist. Reliant and TXU, the market incumbents for Houston and Dallas respectively, both had a 35% recognition with the people surveyed. No independent REP mentioned in the survey had higher than 13% recognition, and most were in the single digits.
  • In the Oncor service area, TXU had a 73% recognition amongst people surveyed. This is a perfect example of the power of brand awareness. Everyone in Dallas knows TXU. Reliant, the other big incumbent in Texas had a 30% recognition with people in the Oncor footprint. Almost no other REP mentioned in the survey had higher than 10%.
  • In Centerpoint, the results are basically the opposite if Dallas. Reliant had a 79% brand recognition while TXU had a 39% brand recognition, which is impressive considering it is outside of their historical footprint. And again, no other REP was even close to TXU and Reliant in the survey.

    • So what does all this data tell us? It tells us that brand recognition is extremely important when competing for customers. It’s no coincidence that TXU and Reliant are far and away the largest two REPs in the state of Texas. The two companies combine to serve almost 45% of all deregulated electricity customers in Texas. Is it any wonder that AEP wants to also capitalize on their own pre-existing brand awareness? They want to be one of three companies fighting for that 45%, as opposed to one of the other 50 or so REP’s slugging it out for the other 55% percent of customers.

    What Does Everyone Else Think?

    Not surprisingly, not everyone is on board with the AEP license application. CPL (Central Power & Light), sold by AEP to Direct Energy in 2002, has filed an intervention in their petition protesting the move. We can assume Direct Energy is frustrated by the idea that AEP could resume business in the REP space. Much of the value they got when they purchased CPL and and WTU (West Texas Utilities) from AEP was in the familiar brand names to the people in those service areas. The same way Reliant and TXU have the name recognition and history of brand awareness that comes with being an incumbent. If AEP suddenly comes into those areas and sells electricity as anything with AEP in their name, it drastically devalues Direct Energy’s purchase. And customers in that area will likely be even more confused, as has already been illustrated.

    Direct Energy is not alone in their protests. The Alliance for Retail Markets (ARM) and The Texas Energy Association of Marketers (TEAM) have also filed motions to intervene in protest of AEP’s application. ARM is a coalition of REPs that act together in some matters, including Gexa, Champion Energy, Green Mountain and more. TEAM is a similar group of deregulated market participants made up or other REPs with members that include Bounce Energy, Amigo and Tara Energy, StarTex Power, Cirro Energy and more. So basically, all of the other REPs in Texas are opposed to AEP’s application to sell deregulated electricity. They know that AEP will be have a distinct advantage because of established brand recognition. Additionally the PUC will also weigh in with their opinion in court, and my understanding is that they’re strongly against the idea of allowing AEP to do business as AEP Retail Energy. Whether that prevents them from doing business as some other name isn’t clear

    This concludes my examination of the importance of brand awareness and the market confusion that still exists in the world of Texas electricity. In the last post in this series, I’ll offer my own opinions on AEP’s actions as well as some other concerns that aren’t being addressed in the hearings.

    Texas Electricity, AEP Texas and the Rules of Deregulation – Part 2

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    So if you’ve read part one of my look into AEP’s application to sell retail electricity, you have an understanding of the rules that separate TDUs and REPs, as well as AEP’s place in the Texas electricity market. Now it is time to highlight why what AEP is doing is problematic for consumers. Lets jump right in below.

    Market Confusion for deregulated Texas Electricity

    While there are many concerns about AEP getting into business as an REP, the main focus of this battle will be on whether or not letting AEP into the market will be confusing to customers. In other words, people might further misunderstand the roles of REPs and TDUs or customers might mistakenly think they don’t have electric choice. Some customers might even think that could receive worse service from AEP the TDU if they don’t order their service from AEP the REP. Does this seem far fetched? Well, it shouldn’t

    Many of those fears were confirmed by a research survey AEP conducted to SUPPORT their application. In fact, the release of the survey results has created quite a stir in the electricity world, with many people writing different articles and commenting on the eye-opening results.

    Here are some startling facts from the survey*:

  • Less than 1/3 of all people surveyed understood that the company that maintains power lines isn’t the company that bills them each month.
  • In all deregulated areas, nearly 75% or more of all people surveyed couldn’t correctly name their TDU
  • 52% of all people in AEP service areas already believe AEP sells retail electricity.

    • So, in summation, less than 1/3 of people surveyed actually have an understanding about how the competitive electricity market works, less than 25% of the people in deregulated areas can correctly identify their TDU, and 52% of all customers in AEP service territories already believe that AEP sells retail electricity. I would say this is pretty definitive proof that Texans still don’t understand deregulated electricity. Additionally, I think it is strong evidence that allowing AEP to sell retail electricity would further add to market confusion.

    AEP’s suggested Compromise

    What is AEP’s response to any potential market confusion that might occur from them operating a TDU as well as an REP? It is to include this disclosure in the fine print of their advertisements, disclosures, and most importantly business cards:

    AEP Retail Energy is not the same company as AEP Texas Central Company or AEP Texas North Company, which are sometimes referred to together as AEP Texas, and AEP Retail Energy is not regulated by the Public Utility Commission of Texas, and you do not have to buy AEP Retail Energy’s products to continue to receive quality regulated services from AEP Texas Central Company, AEP Texas North Company, or AEP Texas.

    Additionally, AEP will cite the full company name in their Electricity Facts Labels (EFLs) as: AEP Texas Commercial & Industrial Retail Limited Partnership.

    Remember earlier when it was mentioned that the two TDU divisions of AEP are commonly referred to as AEP Texas? Look at the first two words of what would appear on an EFL…that’s right, they are AEP and Texas, respectively. AEP Texas. AEP’s suggestion to eliminate confusion and create separation from AEP Texas and AEP Retail Energy is to list the extremely long company name on EFL fine print…the first two words of which are AEP and Texas.

    As someone who works in this industry and is familiar with customer habits, believe me when I tell you that most people don’t even read their EFLs or fine print when they sign up for electricity plans. The notion that listing the full company name will make things perfectly clear to all customers is extremely unlikely. Add in the fact that the first two words of the long company name listed are AEP Texas and the idea that customers will completely disassociate AEP Energy Retail from AEP Texas becomes almost an impossibility. I would argue it strengthens the connection. I would also suggest that is exactly what AEP has in mind.

    Ok, now that we’ve established that the concerns over market confusion are very real and taken a look at the research and AEP’s proposed compromise, we can move forward. In the next section I will take a much closer look at the potential confusion and the implications it could have for competition in the deregulated electricity market. We will also talk about who is opposing AEP in this hearing.

    *For anyone interested in looking at the actual results of AEP’s survey, they can download a PDF of the file from this link.

    Texas Electricity, AEP Texas and the Rules of Deregulation – Part 1

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    In a series of articles, I want to take a look at American Electric Power’s (AEP) court hearing regarding their application to become a Retail Electricity Provider (REP), similar to Reliant, TXU, Gexa, or Bounce. The interesting thing about their application is that AEP is currently a Transmission and Distribution Utility (TDU) for 2 regions of Texas. This is interesting because all TDU’s like Centerpoint, Oncor and AEP were forced to split from their REP businesses as a part of deregulation in 2002. Consequently, this hearing is big news and could have a huge impact on the entire Texas electricity landscape.

    Understanding the Basics

    To start, lets take a quick look at the intent of the rules put in place by the PUC when deregulation was first enacted. In section 25.342 of PURA (Public Utility Regulatory Act), the general purpose of the separation of TDU’s (Transmission and Distribution Utilities) and REP’s is laid out as follows:

    The commission seeks to prohibit practices between regulated and
    competitive activities that may unreasonably restrict, impair, or reduce the level of competition during the transitional separation of personnel, information flow, functions, and operations, and after a competitive market is established

    In short, the intention of the rules are to prevent a competitive advantage in the deregulated areas of the Texas electricity market. Companies like Centerpoint and AEP who operate transmission utilities and have access to valuable customer information as well as an established brand shouldn’t be allowed to sell electricity. This separation is the reason that a deregulated electricity market can function and succeed. It is why in 2002 Reliant spun off Centerpoint and TXU spun off Oncor. AEP sold Central Power & Light and West Texas Utilities, which were their retail electricity business units, to Direct Energy. If the PUC hadn’t forced companies to separate their retail and transmission businesses then creating a fair deregulated market would have been impossible.

    AEP Texas & Retail Electricity in Texas

    When PURA went into effect in 2002, AEP opted to sell their retail electricity interests outright and concentrate on their power generation and transmission businesses. Now, nine years later, AEP Texas has filed an application with the PUC to become a certified retail electricity provider. And surprisingly, AEP has been granted a hearing that will determine whether or not they will be certified to sell electricity to all mass market customers in Texas. As I write this, parties are giving testimony in the hearing and a decision will be made sometime in early 2012. If their motion fails, AEP will still have the right to appeal in another court.

    How is this even possible? As previously mentioned, deregulation forced the separation of retail and transmission energy companies in 2002 and AEP was forced to sell their retail interests. How can they now be allowed to start a new retail company using the AEP name?

    The short answer, unsurprisingly, is legalese. The company seeking a PUC license is a subsidiary of parent company AEP, registered as AEP Texas Commercial & Industrial Retail Limited Partnership. The two separate companies that operate the transmission and distribution services, commonly referred to as AEP or AEP Texas in this article, are officially known as AEP Texas North and AEP Texas Central, respectively. In the eyes of the law, these are all three separate and independent companies.

    Of course, there is some precedent in this situation. Oncor, the TDU for the Dallas and Ft. Worth area, and retail electricity provider TXU operate as two individual entities under parent company Energy Future Holdings. But this isn’t quite the same situation at all. The split of Oncor and TXU was carefully handled with massive PUC oversight in 2002 to ensure the two companies were truly separate. Oncor operates completely independently without any management from Energy Future Holdings. Additionally, great pains were made to separate TXU and Oncor with very different names and separate branding. And over time, Oncor has taken on separate minority ownership and board members from their parent company to even further the separation. AEP is simply coming along almost a decade later, starting a new subsidiary, and saying they’d also like to sell retail electricity to everyone in the deregulated areas of Texas-despite the fact they also operate two TDUs. The kicker is that they’d like to do it under the AEP name or some variation of the highly recognized AEP brand. But more on branding and marketing later.

    These are just the basic facts surrounding the AEP case in regards to their intentions, the complications, and how it relates to the rules and boundaries set up by the initial laws put in place during deregulation in 2002. In the next section I will examine the details of AEP’s application and the issues surrounding their efforts to sell deregulated electricity in Texas .

    Texas Electricity unlikely to follow Austin’s Green Example

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    In a recent article by the NPR, writer Terrence Henry takes an admiring look at Austin and their commitment to green energy sources. He asks whether or not the rest of Texas will be likely to follow their example.

    My knee-jerk, educated guess? Unlikely.

    Austin is pretty unique from an energy perspective. Their energy needs are modest compared to larger metropolitan areas, and 1900 of their megawatts come from natural gas plants. They also get 10% of their energy needs from nuclear power, having a 16% ownership in the South Texas Nuclear Station. They have a 50% ownership of just one coal plant, and it provides just 300 megawatts.

    This is all great for Austin. I just happen to think it unlikely that other areas will be able to follow suit. For starters, there are no more nuclear power plants being constructed or planned after financing fell through on NRG’s designs to build two more reactors to add to the Texas electricity grid. And as I’ve written previously, Texas is having real issues getting investors to invest in more natural gas powered plants.

    Austin plans on replacing their modest coal energy needs from wind energy, which is fantastic, but is also problematic because wind power is unpredictable and oftentimes the wind isn’t blowing when Texans need the energy the most (in the summer). As a result, I doubt many other cities will be willing to invest too heavily in an inconsistent source of green energy such as wind.

    So with no potential for nuclear plans, a scarcity of activity on the construction front for natural gas plants, and the inconsistency of wind energy, my guess is that other cities won’t be able to follow Austin’s example.

    When To Buy Electricity in Texas – 2011/2012 Edition

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    One of the most common questions most people ask is when to shop for Texas electricity. In fact, I’ve written about this topic before. Normally, my previous advice would apply any year, and for the most part it still does: Shop during the winter months when the rates are lowest and lock into long term plans with stable rates so you won’t be surprised by any huge bills. That is still the case, but I wanted to revisit the topic of the best time to shop because of a couple of new factors that will unquestionably effect our electricity rates…both in the short term, as well as potentially in the long term.

    As I’m sure anyone who has been living in Texas is aware, we had a record setting drought and heat wave this past summer. Almost a month of consecutive days over 100 degrees, multiple threats of rolling blackouts and soaring electricity prices. Now, the soaring electricity prices and the high bills were the effect, and the cause was not having enough energy generation resources to meet demand because of the high temperatures.

    Energy generation resources (coal plants, natural gas plants) are likely to continue to be a problem. With the looming EPA changes taking some of the existing resources offline, next summer could be even more grim than this past summer. Additionally, I’ve also spoken about and linked several articles recently discussing how the current economic market is making it unlikely that any companies will be building any new energy generation plants in Texas in the near future despite the fact that the state desperately needs more of them.

    So what does this have to do with shopping for electricity plans? Well, recently multiple companies have come forward in their projections saying that they expect Texas electricity rates to rise in the near future. They highlight a scarcity of energy generation assets as well as companies that might attempt to recoup their losses from our sweltering summer (which I have also discussed previously) as reasons for the likely rate increaes. The parent companies for Reliant, TXU, Dynowatt, StarTex Power and more have all posted serious losses that they have attributed directly to the previous Texas summer weather.

    The short of it is, that while there is no question that winter is the best time to shop for electricity plans, customers might really want to start keeping an eye on the marketplace RIGHT NOW. There’s reason to believe that the Texas electric rates are going to go up in the very near future, and probably for a long time to come. To that end, it might really behoove Texans to consider locking into long term plans that will last through the summer now, as opposed to waiting for January or February to start shopping. I can’t say when the rates will start going up for certain, but I can definitely advise people to keep an eye on the market prices and lock in a long term plan as soon as they start moving. Also, I’ve always been a proponent of 12 month fixed plans. Considering the state of the market, I’d actually consider more people start taking a look at 24 month fixed plans as well.

    Anyway, I hope this post motivates people to keep an eye on the market prices moving forward.

    Texas Electricity, ERCOT, and Future Power Generation

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    Paul Ring over at Energy Choice Matters has been on fire lately with a number of interesting and thoughtful articles. In the latest one, Paul analyzes some comments Calpine COO Thad Hill in regards to the issues that Texas is having in attracting new investments in energy generation. Calpine is a fortune 500 company with more than half a dozen major power plants all over the country.

    As always, the original article by Paul Ring is fantastic, and I encourage everyone to take the time to read it. That being said, below I’m going to spell out the issues facing Texas electricity.

    The basic issue discussed by Hill and analyzed by Ring is how Texas is currently having trouble attracting interest from investors who are willing to build new power plants in Texas. As last July and August demonstrated, Texas is right on the edge of having enough electricity generation capacity to meet the state’s needs during the hottest months of the year. And that doesn’t even take into account what pending EPA changes in 2012 will do do to older coal-fired plants that have been deemed as too “dirty” in regards to pollution. In short, it looks like Texas is going to have problems meeting their power needs, particularly if we have any more summers like the one we just experienced.

    So what is the problem? Just build more plants, right? Well, that’s where things get tricky. Under deregulation, the model is that investors shoulder the burden of new plant construction, when before the state could simply tax or charge Texas electricity customers directly through their bills to subsidize new plant construction. But this is out of the question in the deregulated market (as it should be). Meanwhile, investors like Calpine, are saying that building plants in Texas is too risky and might not be profitable enough to warrant them taking the risk. In a regulated market, investors could be guaranteed a certain amount of energy to be purchased over a long time period by the state or regulated entity, but in the Texas electricity market the only driver is demand, there aren’t any built in guarantees or incentives. Basically, most Texas customers don’t like to sign up for electricity more than a year at a time with one company, so most REP’s are only buying energy in year metrics. Investors need to take their chances just like customers when they’d prefer to have 7 year guarantees. Since they can’t predict their profits and losses, and they’re unwilling to invest. Meanwhile, Texas desperately needs more energy generation plants. So we are at an impasse.

    Whatever the solution, and I have no idea what it will be, guarantees are out of the question as are subsidies from Texas citizens to build new plants. Both of those solutions would be large steps towards removing deregulated electricity completely because they would be flying in the face of electric choice in Texas. One thing is certain, this issue will only continue to get more visibility as time moves on, because it is a huge problem that will have to be solved somehow.