The Market Maturation Cycle

Market restructuring is not an overnight process. It takes a long time to implement, there are lots of bumps in the road and benefits may not appear for as long as a decade. Consider what has happened in the airline and telcom industries over the last thirty years. While the process has taken decades to evolve (and is still evolving) for these industries, does anyone doubt the benefits to consumers? For anyone old enough to remember the days of the vertical AT&T phone monopoly, simply consider the multitude of services available today compared to the plain black dial phones of the past.

To put the process of market evolution in perspective, let's consider the market maturation cycle. The four stages of the market maturation cycle-regulation, deregulation, commoditization, and value-added services-provide an excellent framework from which to review the evolution of the electric industry in a specific region (remembering that different sectors will be at different stages in different states and regions in the U.S.). While the generation, wholesale trading and retail sales sectors will likely mature through these stages, they may not do so simultaneously, but rather will do so a different times in different regions. The other sectors-transmission, system operations and distribution will remain in the regulation stage, though regulation will have to be restructured to recognize the changes in the competitive sectors.

REGULATION
This phase is characterized by the dominance of regulation and lack of competition across the delivery chain. Transactions are generally highly structured and usually long-term in nature. Prices are fixed, buyers and sellers are relatively few, barriers to market entry are significant, vertically-integrated utilities dominate the marketplace, and customer choices are minimal. Prices are cost-of-service-based with little or no flexibility, and decisions to invest in infrastructure or innovation are highly influenced by support (or lack thereof) of regulators.
Prior to 1992, all of the U.S. electricity industry was in the regulation phase. Utilities or closely aligned generation agencies owned all generation, transmission, and distribution and operated their systems as a unified whole. Customers had little choice but to buy electric supply from their local utility.

DEREGULATION
In the deregulation phase, rules are loosened in some sectors and barriers to entry are broken down to allow competition to come into the market. As the number of competitors increases, transactions become more flexible and customers attempt to benefit from increasing choice and competition. Regulation still controls much of the way business is transacted, but is designed to encourage a level playing field among competitors and to foster competition in sectors that have been opened. Services in the competitive sectors (which may include generation, wholesale trading and retail sales) become more diverse and may be tailored to individual customers. While system operations remains highly regulated, prices for services such as reserves and transmission rights become market-based. Transmission and distribution prices remain cost-of-service-based, but incentive ratemaking is often adopted to encourage efficiency.

COMMODITIZATION
In the commoditization phase of the market maturation cycle, competition has taken hold. Numerous market participants compete with each other and trading volumes are high. Prices are market-sensitive and volatile. Regulations act mainly to prevent market manipulation and to assure fair access to monopoly infrastructure. Transactions become simplified and transferable among buyers and sellers. Financial markets arise where risk can be managed. Transactions that used to be secured with a phone call between old friends are now handled electronically with buyer and sellers often blind to each others identity. The return on investment in infrastructure such as generation is purely based on market demand. Now shareholders of competitive companies carry the risk of bad management decisions. If a power plant is built and market conditions don't support its cost (as has happened to numerous such investments in recent years) no one pays except the shareholders (and maybe the bond holders) of the merchant generation company. Under commoditization, there is price transparency-meaning market prices are known to all participants-there are no barriers to transfer of commodity between willing buyers and sellers, no one entity has market power, and there are no regulatory protections.

VALUE-ADDED SERVICES
In this final phase of the market maturation cycle, participants attempts to add value (and increase profits) by adding services their customers will value to the sale of commodity. In many instances, market maturation has led to razor thin commodity margins, so marketers are forced to develop customer-focused services that will improve profits to the seller. Because on kWh of electricity delivered through the distribution system is the same as another, value-added services are the best way for participants to increase market share. In the retail electricity marketplace, most marketers must rely on value-added services to attain reasonable market share and profits. Low price alone is not enough to sustain a market position.

VALUE-ADDED SERVICES
Facilities management
Energy management
Demand side management
Pricing and risk management
Power quality
Reliability
Combined commodity
Billing options
Value-Based