The number of retail energy markets open to competition grows year-on-year
and research carried out by Peace Software and VaasaEmg has provided for the
first time an “apples for apples” comparison of customer switching across competitive
retail energy markets around the world. Great Britain and the state of Victoria
in Australia are revealed to be by far the most active retail energy markets,
at times exceeding the rate of 20 percent customer switching per year.

Customer switch rates in more than 30 competitive retail energy markets have
been monitored on an ongoing basis by the Peace Software and VaasaEmg Utility
Customer Switching Research Project team. Peace Software is a developer of utility
customer information software for regulated utilities and competitive energy
retailers and VaasaEmg is a university-based research center that specializes
in electricity, gas and related utilities marketing to end customers.

Customer switch rates are an important metric of retail energy market competitiveness
and have the advantage of being objective, measurable and comparable between
markets. Eric Cody, retail energy markets consultant and former vice president
at National Grid, said: “Regulators will find this comparative customer switch
rate information essential for benchmarking the success of their own retail
competition initiatives, and energy retailers can apply the insights to their
customer acquisition and retention strategies.”

The research project’s customer switch rate metric is calculated by dividing
the number of customers that switched suppliers in a given period by the total
number of customers in the market, and the result is then converted to an annual
rate. For example, if 1 percent of customers switch suppliers in a given month,
that month has a 12 percent annualized customer switch rate. This approach has
substantial advantages over commonly reported switch rates that measure the
cumulative market share of regulated utility providers versus competitive providers.

The
comparative switch rate research has enabled the classification of markets into
four categories: Hot, Active, Slow and Dormant. Hot markets demonstrate annualized
switch rates of 15 percent or higher; Active is at least 5 percent; Slow is
below 5 percent; and Dormant markets exhibit less than 1 percent switching per
year. Figure 1 compares customer switching trends in a selection of markets
across these categories.

Hot Markets
Great Britain has consistently been at the forefront of
utility customer switching activity since full market opening in 1999. Rising
energy retail prices in recent years motivated British utility customers to
switch supplier and led the incumbent utilityaffiliated suppliers to ramp up
customer win-back campaigns. Price hikes have especially impacted British Gas,
which reputedly lost approximately 800,000 gas accounts between August 2004
and August 2005. The principal market share beneficiaries at this time are thought
to have been Scottish Power and Scottish and Southern Energy. It is believed
that Scottish Power achieved a net gain of around 1 million energy customers
between January 2004 and August 2005.

Meanwhile, down under in Australia, the state of Victoria has fast become a
hot spot of energy retail competition. Victoria introduced full retail competition
for electricity and gas in 2002 and it has exhibited increased customer switching
year-on-year, peaking at over 20 percent in 2005. Strong competition from out-of-state
incumbents and new start-up energy retailers have contributed to this dramatic
level of switch activity, along with the introduction of lifestyle products
cleverly targeted at niche customer segments.

Active Markets
Active markets include Flanders, the Netherlands, New
South Wales, New Zealand, South Australia, Sweden, Norway and Texas.

In Belgium, only the Flanders region is open to full electricity and gas retail
competition. The other Belgian regions of Wallonia and Brussels are introducing
full retail competition starting July 2007. The rate of customer switching in
Flanders slowed to around 5 percent in 2005 after hitting peaks of over 10 percent
in 2004.

The Netherlands introduced full retail competition for both electricity and
gas in July 2004 and today it is one of the most active European retail energy
markets. In the initial months after full market opening, most customer switching
activity related to electricity rather than gas.

New South Wales in Australia has exhibited a steady increase in customer switching
levels since full market opening in 2002. Customer switch rates in 2005 hovered
just above 5 percent, much lower than its neighboring states, but clearly active.

New
Zealand has the longest history of full energy retail competition of any country,
dating back to 1994. As is often characteristic of a mature energy retail market,
New Zealand experienced extremely high peaks of customer switching early on
– around 30 percent per year in mid-2001 – before easing and stabilizing in
later years. In 2005, New Zealand exhibited customer switching around the 8
percent level.

South Australia opened its doors to full retail electricity competition in
2003 and customer switch rates quickly soared. Principal reasons behind this
rapid acceleration include the divestment of the retail customer base by the
state government that removed the incumbent brand advantage, the granting of
switching credits to a portion of the customer base and rising retail prices
that motivated customers to shop around. Customer switching in South Australia
eased in 2005 to an estimated 11 percent rate.

Customer switch rates in Sweden have increased year-on-year since full market
opening in 1999, reaching 10 percent in 2004 before falling back to 6 to 7 percent
in 2005. A winter 2005 survey published by market research agency TEMO highlighted
that a cumulative 32 percent of Swedish energy consumers have switched supplier
at least once.

Norway was one of the most active energy retail markets in the world in 2003
with customer switching around the 20 percent level, following a temporary but
massive hike in wholesale prices and extensive utility marketing activity. Customer
switching levels have since stabilized at the 7 to 10 percent level.

The Texas electricity market opened to full retail competition in January 2002
and is widely considered the most competitive North American retail energy market.
It stands alone in U.S. markets for having separated its utility retail operations
from distribution, a market structure that has more in common with competitive
retail markets in Australia and Europe than with other U.S. states, most of
which employ a hybrid coexistence of regulated and competitive utility operations.
In 2005, Texas exhibited customer switching around the 7 percent level. The
Texas market is notable for the sheer number of participants, with over 40 energy
retailers actively competing for customers.

Slow Markets
In the Slow category for 2005 are the markets of Finland,
Denmark and Spain, with switching levels of less than 5 percent. Switching in
Finland has historically been inhibited by low customer awareness, and a sheer
lack of aggressive acquisition marketing. Denmark suffers from small savings
potential, and in Spain the incumbent utilities remain the dominant force with
little incentive for customers to switch.

Dormant Markets
Dormant markets are those in which all customers are
able to choose their retail energy supplier, but which do not exhibit significant
levels of customer switching. More than half of all markets monitored by the
research project remain Dormant, with switching levels below 1 percent per year.
This includes a number of European markets, such as Germany, which lack a consistent
method for switching and a centralized market registry infrastructure.

Almost all North American markets are classified as Dormant, including New
York, Pennsylvania, Massachusetts and Ohio. Their market structures inhibit
healthy competition through the continued role of the regulated utility as “last
resort” supplier and issuer of the customer bill within their respective distribution
territories.

The research project provides a consistent and objective basis for benchmarking
the competitiveness of retail energy markets around the world. Leading markets
have sustained active levels of competition for many years and this should be
viewed as proof that retail energy competition can thrive in new markets provided
they are appropriately structured.