The diversity in customers’ appetites should be considered by more utilities when pricing products.
Michael T. O’Sheasy is a vice president at Christensen Associates Energy Consulting LLC.
Economics 101 teaches that he who takes on the risk should be afforded the opportunity for rewards for taking on this risk. In the utility world, that means that if the retail customer accepts this risk, the seller/utility can avoid it, thereby lowering its risk-related cost of supply. And, some commercial and industrial business customers of the utility implicitly are forced to pursue aggressive programs to minimize electricity cost to maintain their economic cost competitiveness.
An electric provider should offer a portfolio of pricing products based upon sound risk fundamentals and permit the customers in the target market to select those products individually that best match their needs. It should be noted that regulated and integrated utilities have introduced some product variations adjusted for risk, particularly since the advent of electric restructuring. But such efforts have been limited in scope and have failed to take advantage of the full spectrum of customer classes. Three major factors that separate businesses’ attitudes toward electricity pricing are: (1) the degree to which their energy bill variance threatens the value of their own product(s); (2) the business customer’s usage flexibility; and (3) the overall magnitude of electricity cost as a portion of the customer’s overall cost of product.