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TXU Electric Delivery is rolling out advanced metering (AMI) provided by DCSI, a power line communications company. With its investment in meter data management provided by eMeter and the AMI, TXU has the option of collecting hourly data. This hourly data, in turn, gives the retail arm of TXU, TXU Energy, the option to offer time-based rates to its customers, which if designed and marketed well, could provide real savings to customers, and also benefit TXU.

Finally, finally it is happening. The promise of retail competition as a real benefit to customers and retailers may be coming to fruition.

Why is TXU Considering This Now?

A second item mentioned in Mr. Wilder's December 8, 2005 presentation provides the clues to an answer. Natural gas prices are again on the rise (prices have been recorded over $14 per MMBtu at the Henry Hub), and much of the native generation in ERCOT uses natural gas as the primary fuel source. As the cost of natural gas increases, the marginal price of wholesale power in the ERCOT region similarly rises. If TXU builds the two new coal plants that Mr. Wilder also mentioned in his address, TXU could increase its margin by producing a larger percentage of power using less expensive generation. At the same time, in theory, more customers would be on time-based rates reduce peak demand, thus also increasing TXU's retail margin. By sharing the savings of power generation with customers, both TXU Energy and its customers come out ahead. While the coal plants Mr. Wilder envisions will take several years to construct, time-based rates provide the company an option that is available now to lower its costs, increase margin, and again offer real savings to customers. What could be better than that?

The risk that TXU Energy takes, of course, is that other retailers will no doubt also offer time-based rates to customers in the TXU Energy Delivery footprint. This, we believe is good for energy consumers because it offers a level of competition that has not been seen in the United States since retail deregulation was started in the 1990s. We believe that TXU Energy is betting that if it rolls out the time-based pricing first and markets these rates well, it will gain a lasting competitive advantage in the ERCOT market.

UtiliPoint^® strongly believes that the question regulators and utilities elsewhere should be asking is: "Why isn't this happening in our state?" Consider Pennsylvania, for example. AMI is installed by almost every utility in Pennsylvania, and yet, most are not collecting hourly data. Without hourly data collection, retailers can't offer time-based rates, and competition is a dying on the vine. Regulators could breathe life into competition in Pennsylvania and in other states by requiring utilities to collect hourly data.

UtiliPoint^® acknowledges that there are some tactical and operational obstacles for some utilities. At PPL, for example, we deduce that the principal impediment to collecting hourly data is the lack of a fully capable meter data management system. PPL has the same AMI system installed that TXU Energy Delivery is rolling out now. At the moment, the utility collects hourly data but doesn't retain the information, nor make it a priority in collections. PPL is rumored to be addressing meter data management, and when this task is complete, state regulators should make it a priority to make billing quality hourly data available to retail providers for PPL residential customers.

Of important note, UtiliPoint^® reminds the industry that active retail competition is not a requirement for utilities to offer these types of savings to residential and other small retail customers. California is going forward with its initiative to have the regulated utilities install AMI, and then offer dynamic time-based rates. The goal there, is to first and foremost, avoid any more power emergencies and the associated rolling blackouts, and then to reduce peak demand and to lower costs. The Province of Ontario in Canada is following a similar plan, and we have observed that there is a race of sorts to see whether California or Ontario "gets to goal" first. As a lesson from experience, UtiliPoint^® would strongly suggest to both Ontario and California that they are sure utilities install effective meter data management. Beyond this eventuality, Who knows, TXU may beat them both!

In addition to internal and market drivers, key externalities—mainly the Energy Policy Act of 2005—are compelling utilities and retailers to examine the benefits of time based pricing, AMI technologies, and the other back office technologies such as Meter Data Management Systems that support them.

Will Customers Like Time-based Rates?

Customers that participate view the programs as very beneficial and the response of those on the offerings is high, yet actual market penetration has been low. The savings and benefits to customers and the provider can be substantial even if the participation rate remains in the expected range of 25 percent to 35 percent. Gulf Power offers residential customers with central air conditioning the option of signing up to take part in its GoodCents critical peak pricing program. To our knowledge, customers have been very satisfied with this program, and have achieved annual bill savings of 14.9 percent. Also under this program, we have seen a significant reduction in summer peak with reductions of 37 to 42 percent. Winter peak demands under the program have also thinned with demands shrinking from 49 to 60 percent for the participating households. It should be noted that this program utilizes smart thermostats, and that customers pay a monthly fee that covers approximately 60 percent of the AMI and smart thermostat costs. UtiliPoint® views this program as a consummate success.

More evidence for consumer acceptance of time based rates can be found in Chicago, where the Community Energy Cooperative has worked with Commonwealth Edison to offer hourly rates to residential customers. Here consumers have been surprisingly receptive to hourly pricing. In the program The Cooperative actively notifies customers if any of the hourly prices for the following day will be above 10 cents per kilowatt hour (kWh), and otherwise posts the hourly prices for the following day on its website. Participating consumers have realized significant savings, and where smart thermostats are deployed the benefits of this program have by all accounts multiplied.

Looking again at the west coast, in 2003-2004 California undertook a state wide pilot project to test critical peak pricing, and in follow-up interviews with, a very high percentage of residential customers recommended critical peak pricing rates for all residential customers. As seen in the figure below, residential customers offer a variety of reasons why the dynamic pricing should be offered to others, including saving energy and money, raising awareness of energy conservation, and managing their energy use.

UtiliPoint mentions above that many customers were happy with well-designed time-based prices.

What is a Well-designed Time-based Rate?

Considering the utility and/or retailer perspective a well designed rate should be straightforward, providing the opportunity capture savings from demand response, and rates schemes should be well arbitraged with the wholesale purchase of electricity, potentially providing for even greater economies and perhaps even an increase in margin.

Considering the customer perspective, there has to be the opportunity for significant savings in exchange for reasonable adjustments to energy usage patterns. Many of the time-of-use rates on the books today do not allow customers to save money without "Herculean efforts" to change their usage patterns. UtiliPoint^® recommends, therefore, that peak periods should be relatively short, and the price differentials between the peak- and off-peak periods should be large enough to make an impact on the bill if a customer reduces peak usage.

For example, in the chart below, UtiliPoint^® used the day-ahead LMP prices for the PJM PPL node to analyze the potential for dynamic pricing in the PPL service territory. Using these wholesale prices for July and August in 2005, the average price differential between critical peak days and normal weekdays from 1 pm to 7 pm is $73 per megawatt hour (MWh). Critical peak days were chosen in this case by selecting the top ten days in terms of the maximum LMP price recorded for those two months. Under these parameters, we believe that there clearly demonstration that if a six hour critical peak period is considered, based on July and August of 2005, there is ample room for establishing significant price differences between the critical peak days and the remaining days and thus room for the establishment of a highly leveragable pricing program.

What's Next for Time-based Pricing?

UtiliPoint^® is excited to see, finally, retailers getting back into the business of responsive rates. While it is always difficult to predict the future, it is our anticipation that we are witnessing the beginning of a new and important trend in retail electricity pricing. UtiliPoint^® further anticipates discussion around wholesale to retail arbitrage to again come to the fore as retailers and vertically integrated utilities alike come to better understand the entire value chain of opportunity associated with time based rates. Moreover, we expect increasing discussion and activity around the development of sophisticated meter data management solutions and believe that metering, software, and services vendors will draw new opportunity as retailers and utilities experience challenges with all of the data they will now have to handle in the creation, implementation, and administration of time based rates programs.