VaasaETT World Energy Retail Market Rankings Report 2008

World Energy Retail Market Ranking Fourth Edition - October 2008

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WORLD ENERGY RETAIL MARKET RANKING The Utility Customer Switching Research Project monitors customer switch rates and trends in over 50 competitive energy retail markets worldwide. Highlights of the new research include: Australia retains its position as the most active region in the world, but now displays two tiers of activity, with Victoria topping the 2007 global rankings.

Great Britain and Wallonia in Belgium were Europe’s only hot markets in 2007, while Texas continues to lead the way in North America.

The Utility Customer Switching Research Project’s standardised definition of customer switching was recently adopted in the European Union by the European Regulators Group for Electricity and Gas (ERGEG) in their Best Practice Report on Customer Switching Processes

Germany is finally heating up, becoming an active market for the first time in 20072008.

Of the 13 European markets opening to full retail competition status in 2007, only one reached ‘Active’ switching levels. Average European switching rates were less than 4% compared with 13% for the rest of the world. Price caps remain a major hindrance to competition.

Overall, global switching activity is on the increase, with more active markets than ever before.

THE UTILITY CUSTOMER SWITCHING RESEARCH PROJECT The Utility Customer Switching Research Project was founded jointly in 2004 by Dr. Philip E. Lewis of VaasaETT and Paul Grey, co-founder of the Peace CIS. The Project monitors switch rates and trends in all fully liberalised energy retail markets worldwide and has provided the first global view of utility customer switching activity. The Project continues to be the most comprehensive and uniform source of comparable switching statistics in the electricity and gas markets worldwide, and provides ever-increasing analysis of observed trends and explanations for utility customer switching behaviour.

Customer switch rates are an important dimension of energy market competitiveness and have the advantage of being objective, measurable and comparable between markets. Many energy market commentators tend to focus on the wholesale aspects of the utility value chain as a measure of restructured market success, such as generation sources, transmission interconnections and wholesale market trading. The Utility Customer Switching Research Project contends that both retail and wholesale markets must be successful for consumers to receive the full benefits of competition. In this context, the Project focuses its research on energy retail competition and those market participants that are all too frequently ignored: the customers.

This World Energy Retail Market Rankings report is a summary of global switching activity, highlighting key trends, rankings and explanations. This report focuses on electricity markets with all statistics relating to a weighted aggregation of residential, industrial, commercial and other customer groups.

The Utility Customer Switching Research Project also offers a premium service which provides access to specific market graphs and more detailed analysis. Please visit www.utility-customerswitching.com for more information.

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Figure One: Markets Tracked By the Utility Customer Switching Research Project

Switch Rate Metric The Project's customer switching rate metric is calculated by dividing the number of customers who 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 one percent of customers switch suppliers in a given month, that month would have a 12 percent annualised customer switch rate. Similarly, where switching trend data is reported on a quarterly basis, the quarterly switch percentage has been multiplied by four to derive the `annualised quarterly' switching rate.

Definition of Switching In January 2006 Dr. Philip E. Lewis proposed a comprehensive definition of utility customer switching which has been supported by the CEER (Council of European Energy Regulators) and ERGEG (European Regulator's Group for Electricity and Gas): Switching supplier is defined as "the action through which a customer changes supplier."

More specifically: A switch is essentially seen as the free (by choice) movement of a customer (defined in terms of an overall relationship or the supply points and quantity of electricity or gas associated with the relationship) from one supplier to another. Switching activity is defined as the number of switches in a given period of time.

A switch additionally includes: a) A re-switch: when a customer switches for the second or subsequent time, even within the same measured period of time b) A switch-back: when a customer switches back to his/her former or previous supplier. When a customer moves, a switch should only be recorded if a customer switches to a supplier other than the supplier which is incumbent in the area where he/she is moving to. Theoretically, a switch should NOT be recorded if the customer remains with the same supplier as before the move, but for practicality this specification has been removed from the definition for this project and from those of CEER and ERGEG. A change of tariff with the same retailer is not equivalent to a switch (this exclusion extends to: changing to a new tariff; changing from a regulated to a non-regulated tariff with the same supplier or a subsidiary of the same supplier).

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Sources of Data The Utility Customer Switching Research Project draws on more than 60 of the best and most direct sources for data collection. These sources typically include national or regional regulators, system operators, energy associations, meter registration organizations and statistical authorities. Additionally utilities, retailers and other experts are used to assist with data interpretation.

“We use data from the Utility Customer Switching Research Project to evaluate the success of Australian markets and the level of competitive activity” – Cameron O’Reilly, Energy Retailers Association of Australia

Levels of Activity Taking account of the rapid growth in the number of competitive markets and increasing variance between market switching activity and maturity, the levels of activity have been extended from three to five categories. Levels of activity reflect the findings of nearly 12 years of research.

Hot Markets: Annual switching approximately 15% or higher. Typically, switching activity is so intensive that competitive positioning becomes one of the utility’s most strategic issues. Switching momentum is usually high, constant, needs little encouragement and easily flares up.

Warm Active Markets: Annual switching is between 9.5% and 15%. Typically, switching activity is sufficient that utilities risk losing significant numbers of customers if they do not actively compete, or if they make loyalty-related errors. Switching momentum is significant but mainly related to occasional stimulants in the market, such as price rises or profit announcements.

Active Markets: Annual switching is between 3.5% and 9.5%. Typically, switching activity leads to competitors becoming more customer-focused, but switching does not pose a major threat to utilities’ pricing or profitability. Entry into this level of activity often acts as a wake-up call for utilities. Customer awareness can also gain momentum.

Cool Active Markets: Annual switching is between 1% and 3.5%. Typically, switching is noticeable and measurable, but insufficient to affect any substantial change in the attitudes or behaviour of utilities. Competition is barely visible and customer awareness poor.

Dormant Markets: Annual switching less than 1%. Typically, switching and competition exist only in theory. The markets may be officially open to competition, and customers are able to choose their supplier, but in practice only larger consumers are motivated or able to do so.

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2007-YEAR WORLD RANKINGS: Top 10 Macro Determinants of Switching

Figure two: 2007 World Energy Retail Market Rankings

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Efficiency and sufficiency in wholesale markets 2. Extensive unbundling of retail, distribution and generation 3. Sufficient price float, volatility and margins 4. New market entrants (gen-retailers if necessary) 5. Powerful autonomous competition oriented regulators 6. Depleted incumbent advantages 7. Switching desensitization 8. Switching momentum 9. Political devolvement 10. Time Top 10 Marketing Determinants of Switching 1. Critical aware customers 2. Price and publicity shocks 3. Savings potential 4. Reduced incumbent price matching 5. Timing and intensiveness 6. Channel efficiency 7. Product customization 8. Competitor differentiation 9. Skill and perseverance 10. Dual fuel convergence

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HOT MARKETS Victoria in Australia took the top spot once again in 2007, with a switch rate equivalent to more than one quarter of total market. Peaking at over 30%, a peak only topped by South Australia, Victoria's customer switching rate was the most active year ever recorded for any market in the world.

South Australia took a close second highest ranking, pushing Great Britain into third place.

However, South Australia's ranking may not be long held as switching rates dropping off substantially since the middle of 2007and into 2008 may mean Queensland takes the secondplace position in 2008.

A new entry into the rankings in 2007, Wallonia in Belgium made it to the Hot category in its first year of full competition, only the second market ever to do so, but this market is only actually a Hot Market by virtue of its front-loaded switching which dropped off dramatically once advance switching registrations and early switching had taken place. Great Britain remains the most consistent hot market of all time, having achieved a Hot level of switching every year since 2000.

It should be noted that since this report focuses on weighted aggregated switching levels which combine residential and I&C switching, the high, even Hot levels of I&C switching experienced in some markets may not be represented in this summary report. Most European markets for instance now display significant switching for larger I&C customers higher than for residential customers, with cumulative market switch levels over 80% in some cases. However some Active markets such as Belgium, and less active markets such as France, display significantly less activity with I&C switching comparable to residential market rates. Detailed I&C customer switching analysis is available through the Utility Customer Switching Research Project premium services.

Figure Three: Australian Market Aggregated Electric Retail Customer Switching Trends

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Australia A major drought in Australia depleted "peaking" hydro-generation, led to cutbacks in water use by coal-fired generators on the east coast, and resulted in increased use of gas for electricity generation. These factors pushed up wholesale electricity and gas prices throughout 20072008 and this in turn led to increased retail electricity prices. These price spikes contributed to the ongoing high levels of customer switching, especially in Victoria where regulated retail prices rose to the greatest extent.

It is interesting to note that during the past four years, Victoria, South Australia and New South Wales have followed somewhat similar switching patterns, albeit at very different levels of switching. The similar switching patterns indicate the relative commonality of market players and underlying market conditions. The different levels of switching arguably indicate, for instance, the differing levels of price capping, state involvement and competitiveness within the respective markets.

Victoria Victoria remains Australia's most competitive retail market with up to a dozen suppliers actively competing for market share. From the beginning of 2008, the small business sector was removed from the regulated price process, and, in late 2008, the State Government announced it would move to full deregulation of the market by phasing out standard contract tariffs for households from 1 January 2009. The final regulated prices determined for 2008 saw headroom maintained and, with retail tariff increases of up to 17%, customers continued to move between suppliers looking for the best deal. Other factors contributing to the dramatic level of Victorian switching activity include lifestyle products and affinity programmes targeted at niche customer segments and publicly accessible websites which allow customers to compare suppliers' prices.

South Australia 2007 saw South Australia retain its position near the top of the rankings but has been falling in 2008 while remaining relatively active by most standards. The recent change in fortunes is largely because of price increases in the wholesale market, especially in the summer of 2008 when high temperatures and a tightening of supply and demand saw major price spikes. A transaction which saw the major electricity retailer strengthen its domination of generation has, in some retailers’ eyes, increased the risk of operating in South Australia. There continues to be a high number of retailers present in the market, and the threat of competition is sufficient to keep margins under control. The wholesale price spikes have led some second tier retailers to cut back marketing activities due to a tightening of headroom in the regulated tariffs.

Great Britain Great Britain maintained its long-term lead at the top of the European switching rankings for 2007 and early 2008. Continuing price volatility, price variance, and switching momentum in the retail market meant there were still many consumers shopping for a better utility deal.

When coupled with the major utilities use of door-to-door sales techniques, record switching numbers were seen in the UK throughout 2007.

Towards the end of 2007 and into 2008 more consumers switched to capped and fixed price deals using online aggregation services such as uSwitch.com – a trend accentuated by price increases in early 2008 and followed by growing speculation of higher wholesale prices into 2009. Utilities saw retail profits decline in early 2008 in the face of rising wholesale costs, whilst

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those utilities with strong vertical integrations ensured that those rising costs had positive impacts on their overall bottom line.

Great Britain is testament to the inter-dependency and importance of news media, prices and appropriate marketing. Years of intensive media reporting have proliferated customers' beliefs that profits and prices are twins, and that switching is the appropriate and sensible approach to minimize energy costs. The higher the prices and greater the price volatility, the more switching that takes place, facilitated by an ever increasing customer awareness and desensitization to switching, in the face of timely direct marketing. The UK is also a relatively cyclical market for switching with a significantly growing customer desire for environmentalism and sustainability.

Wallonia Walloon in Belgium, which has been fully liberalised only since January 2007, for a brief moment overtook Great Britain's electricity market on the back of pre-registrations at the beginning of full market opening, then fell back to a more average yet active level of switching.

Nevertheless, the Benelux region is now third only to Great Britain and the Nordic Markets in terms of its levels of switching activity.

WARM ACTIVE MARKETS Figure Four: Mature European Market Aggregated Electric Retail Customer Switching Trends

By the middle of 2008, Queensland in Australia became (temporarily at least) the most active electricity market in the world, having been fully open to competition for just one year. In essence it is therefore a hot market, leading a group of other markets that are anything but passive. Included in that group are the most active markets in North America and the Nordic region as well as another champion of competition, New Zealand. It also includes what could be described as Australia's least active market, New South Wales.

The Nordic markets and Texas displayed their ever-present seasonality in 2007 and early 2008.

While all markets go through cyclical phases and yearly other periodical changes, it is

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interesting to note two fascinating underlying trends. Excluding New Zealand and Queensland, which has only recently been liberalised, the markets in this category (and several markets in other categories) have increased their activity over the past three years, yet eased off during the past 12-18 months. In differing ways, the explanation for this can be found partly by analyzing the relationship between wholesale prices and switching. Wholesale price volatility is an essential component in the efficient running of a competitive liberalised market, raising consumer awareness and switching and instilling price discipline on retailers. Reduction of this volatility, smoothing it out, or reducing the ability for retail prices to float freely may still result in significant switching when price shifts occur, but in the longer term, less switching will take place since price predictability is reduced.

New South Wales New South Wales, as with other Australian East Coast states, was impacted by higher wholesale prices arising from the impacts of the drought on the generation sector. A new three year price path to 2010 was announced allowing for overall price increases of up to 24% over three years.

This prompted market activity although largely between incumbent Government owned retailers and large "gentailers". Unlike in Victoria where the industry is privately owned, a number of the second tier retailers stay out of the New South Wales market due to the Government domination of generation and a lack of headroom in retail tariffs.

Texas While Texas remains the most active market for competition in the United States, ranking the 6th most active market in 2007, switching activity has declined 25% perhaps due to uncertainty over the future of retail competition in Texas.

Recent times have seen the exit of 6 retailers from the market: PreBuy with 8,400 customers; National Power with 15,000 customers; E-tricity with 12,000; Riverway Power with 6,200, Blu Power, with 2,000 and W Power and Light, who most recently sold their customer base to Green Mountain Energy. Most retail failures have either been attributed to mismanagement or incorrect hedging of energy costs, issues compounded by recent financial crisis and the tightening of capital availability.

Despite these market failures, this isn't necessarily a sign of competitiveness failure. According to Karen Blackmore, Program Director at Energy Insights, an IDC company, "Retail competition has definitely seen a shake up in the past year. This settling may just be a sign of the market maturing."

This settling may have extended to consumer behaviour as evidenced in a recent survey of retail electric customers by J.D. Power and Associates, which reported those customers on fixed -price contracts pay more on average, yet are more satisfied overall. This trend has been observed in other markets worldwide as certain customer groups seek options with more certainty.

To foster more efficient market operations, the Texas Competitiveness Council developed a State Energy Plan in 2008 which made a number of recommendations to foster innovation, ensure no additional barriers are put in place that might hinder market efficiency, provide tax incentives for the installation of solar generation, and adjust the registration process to reduce the risk of competitive retailers establishing operations without adequate resources.

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Queensland Queensland only opened to Full Retail Contestability (FRC) from 1 July, 2007, when a double digit increase in the regulated tariff was announced to deal with higher wholesale prices. Coalfired generators in Queensland had borne the brunt of water shortages and had to cut back supply leading to wholesale price pressures. As the Queensland market is characterised by significant population growth, a rush of competitive activity accompanied the opening of the market, especially in the South-East of the state where incumbent government-owned retailers had been sold to the private sector. The retailers who had largely developed in competitive markets inter-state were also experienced in driving customer churn and had established competition-compliant systems. While the market started with a bang, political intervention in the latest price setting process is likely to see a significant levelling off of market activity.

Norway Norway remains once one of the 10 most active markets in the world, and third in Europe. This activity is, in part, due to substantial retail price volatility, high levels of critical customer awareness, and relatively aggressive marketing.

Nevertheless, the number of electricity customers switching supplier has been low since second quarter 2007. The first quarter of 2007 was influenced by the summer and autumn drought in 2006. High prices and massive media interest triggered high switching numbers, and in the first quarter of 2007 more than 70,000 households and 8,000 businesses found a new supplier. However, in the following quarters there have been less than 50,000 household switches, this represents approximately 2.5 percent of the customers.

Norwegian households consume on average 20,000 kWh per year, and electricity expenditures motivate consumer search for more favourable prices and contracts. The summers of 2007 and 2008 have seen heavy precipitation in Southern Norway where a large proportion of the population lives. At the same time, there has been reduced capacity for electricity export to Sweden and Denmark due to grid failures and necessary maintenance. Together with low summer demand for electricity, these factors have led to very low electricity prices in Southern Norway. Thus, supplier switching has been less attractive than under more normal conditions.

Customer switching activity in Norway is also being constrained by market structural issues such as high concentration of market share amongst a few major utilities, vertical integration of incumbent retail and distribution, and the over-dependence of new entrant energy retailers on a volatile wholesale electricity market.

New Zealand As one of the first markets to reach full retail competition, New Zealand has long been looked upon as an innovator with respect to energy deregulation. In 1999 New Zealand undertook a revamp of the electricity wholesale market which kick-started customer switching, later peaking at 27 percent for the second quarter of 2001. Since those highs, the New Zealand market has stabilized at around 10 percent customer switching. In an effort to proactively maintain efficient competition in the market, the New Zealand Electricity Commission developed a Market Design Review plan in 2008 to improve the operation of wholesale and retail markets. The Market Design Review – Options Paper outlines that, while mediumresidential customers can save between $NZ 0-265 or more if they are on the incorrect tariff option, customer switching remains consistently around 10 percent. The report suggests that the majority of customers are aware of the ability to switch, but almost 50 percent of those involved in a recent survey could only name their existing supplier. The survey indicated that

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switching was perceived as a difficult process, both in terms of the action of switching, and determining the value of switching – both in the short and long term.

The New Zealand Electricity Commission is currently considering a range of options to improve the competitiveness of the market including: providing increased information on customer bills, promoting and improving a dedicated consumer website that assists in switch comparisons, setting up a toll-free phone consumer advice service, undertaking direct marketing, publishing switching information and trends, or even prohibiting network companies from becoming retailers.

An interesting development in the New Zealand market this year is the entrance of a new retailer, Pulse Energy. In an intriguing model, Pulse Energy is proposing to pass on to consumers the wholesale price of electricity, sometimes 30% less than current retail prices. To achieve this, Pulse Energy will swap out the existing basic meters, and put in their own design of low cost IP-based interval meters, instead making their revenue on the high-margin metering charges. The particularly interesting thing about this development is that it demonstrates how competition in the metering sector can promote new services and pricing to the benefit of consumers, when most utility jurisdictions, even some Australian states now, have regressed to monopolistic control of metering.

Figure Five: Other European Market Aggregated Electric Retail Customer Switching Trends

Sweden Despite dropping two places in the world rankings, Sweden's 10th place in the 2007 rankings kept it up in the second tier of markets, and in the top tier of Nordic countries. Since Sweden's switching level is determined and constrained by many of the same factors experienced by Norway, it is perhaps not surprising that Sweden has experienced a fall off in switching since mid 2007 and into 2008. Even more interesting is the extent to which the two countries' levels and patterns have become paralleled in recent months.

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Sweden, nevertheless, appears to still have the largest number of energy customers in the Nordic region who are no longer served by their incumbent supplier. Switching activity has achieved some momentum in Sweden, supported by such factors as extensive media coverage of the benefits available to customers for switching, negative publicity for some incumbent suppliers, and price volatility. Sweden also has a national web-based price information and switching service, which further boosts switching activity by giving consumers better access to information about their supply options. Retail electricity prices in Sweden have varied considerably in recent years, however Sweden's lower retail price volatility compared to Norway is believed to have resulted in lower switching activity overall, given the many structural similarities between the two markets.

ACTIVE MARKETS The active markets experienced mixed fortunes in 2007 with some rising and some falling in terms of switching activity. Seasonality was also very prevalent as was cyclical variation. With the exception of Finland, however, all these markets are now in something of a growth phase in terms of switching activity. In particular Germany, the Netherlands and Alberta have recently been experiencing something of a boom in activity in 2008 and may soon become Warm Active markets if this trend continues, especially since the expected global recession is expected to boost switching in 2008-2009 as customers become more interested in ways to economize. Germany and Alberta also appear to be gaining a momentum that is likely to have a lasting impact on the switching levels in those markets.

Alberta New to this edition of the report, Alberta has a population of 3.3 million people with an electricity retail market consisting of 1.2 million metering points. The average annual residential consumption is about 7,200 kWh. The average annual commercial and industrial consumption is about 234,506 kWh. Currently, the installed generating capacity is about 12,120 MW. Peak demand in Alberta usually occurs in the winter. In 2007 (climactic year), peak demand reached 9,710 MW, up from 9,661 MW in 2006.

The Alberta retail market opened in January 2001. Small consumers who use less than 250,000 kWh annually can choose between a regulated rate option (RRO) or a competitive contract with a fixed price for electricity. The rate under the RRO consists of a blend of monthly forward and long-term hedges that RRO providers purchase on behalf of their customers. Consumers are being gradually transitioned to a rate where the RRO will be 100% based on monthly forward hedges by July 2010.

There are currently three residential retailers and 18 commercial and industrial retailers. Most competitive contracts available to residential customers are for one to five year terms.

The number of customers switching from the RRO to competitive contracts continued to increase for all customer classes in 2007. The most significant increase was among the small commercial/industrial class in the latter half of 2007, coinciding with an increase in RRO rates.

Netherlands After relative stagnation in 2006 (though still active), the market churn in the Netherlands 2007 and 2008 further increased to between 8 and 9%. Major drivers of switching for this timeframe were the continuously increasing price level, intensified from both former incumbents and new entrants. Moreover, switching for energy has received more attention, become easier to do, and is now more generally accepted than ever before. This often lengthy process of

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desensitization, driven by ever growing experience, word of mouth and media support, is a typical characteristic of a maturing, active market, occurring at the point at which a market obtains a critical level of activity required to induce a self-perpetuating momentum. The Netherlands switching experience is arguably beginning to look increasingly like that of Great Britain, albeit at a somewhat lower level, with consistently high but cyclical and somewhat volatile levels of switching.

The most and effective selling methods in the Dutch market are currently door-to-door, telemarketing and the Internet price comparison websites, used by more than 70% of switchers at some point in their switching decision-making process. Price and the perception of price is the most important sales argument, especially when combined with the offering of, often significant, financial cash backs. A sense of wanting to do the right thing and escape unfair price rises also fits into the psychological equation of the customer. The electricity industry, its prices, profits and executive salaries (to name but a few) are often a heated topic of pubic discussion in the Netherlands.

Flanders Since full market opening in July 2003, Flanders has seen a constant increase in the rate of switching in both the residential and industrial and commercial electricity markets. The increase is largely due to savings potentials amid the growth of energy expenses in the general budget of households and industry. As of July 2008 for instance, there was a price gap of more than 100 euro between the highest and lowest prices on offer for residential customers. In addition, customer awareness is accelerating through the growing interest of news media amid rising prices and the development of new entrant marketing. This is further boosted by the success of web-based tools for residential customers that simulate a price comparison between suppliers. Non-incumbent retailers such as Nuon, Essent and E.ON are also key to the Flanders switching experience, having won a sizable market share from Flanders' primary incumbent electricity and gas retailer Electrabel.

Switching would be higher but for a number of structural and procedural issues: One issue concerns the rules and processes for switching, which are well defined but still the subject of improvement efforts and, while not necessarily a turn off for customers, they present a potential barrier for new market entrance. Another issue concerns market concentration - a few large suppliers in Flanders have a strong position on the production side, with two of them controlling a common market share of over 85%. Under such conditions it is perhaps not surprising that consumers switch at least partially out of principle.

Finland Finland's 2007 level of activity remained largely unchanged compared with a year earlier, failing to give Finland a position in the top tier of Nordic markets and dropping to 14th place in the world rankings. Like other Nordic markets, seasonality produces pronounced patterns in customer switching. Publicity shocks can be a major factor in energy retail customer switching activity, dramatically illustrated in Finland when a media frenzy surrounding energy price increases and large payouts to utility company directors lead to higher levels of customer switching. The negative publicity does appear to cause some price squeezing, but faced by high costs-to-serve, incumbents remain expensive, while new entrants are deterred by a variety of issues including the small size of the market, the lack of ownership unbundling, wholesale exposure risk, anti-competitive balancing rules, insufficient customer awareness and incumbent price-matching where incumbent utilities offer special prices to those customers who consider leaving, or who are deemed valuable and likely to leave.

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While an active market, Finland has failed to gain either switching momentum from customers, and lacks competitive drive due to the large number of incumbent retailers in the market.

However, as with the other Nordic countries, and many other markets, switching is expected to increase if the world economic recession takes hold.

Germany In Germany, approximately 2 million customers switched their supplier and/or tariff in 2007. 1.2 million of these customers chose a new supplier, while the remaining 800,000 customers stayed with their old supplier but opted for another tariff. According to projections of the Bundesnetzagentur (Federal Network Agency), 520,000 customers switched in the first half of 2007, while about 1.5 million customers did so in the second half, indicating an enormous increase over time. With regards to 2006, the level of switching more than doubled and another substantial increase is expected for 2008.

The most common reason (about 90%) for switching in 2007 was the option of a cheaper tariff.

The drastic increase of electricity prices led to a growing awareness by customers and a corresponding pressure to act, especially for industrial and commercial customers, over half of which have now switched supplier. The simultaneous increase in transparency of tariffs makes it easier for customers to switch. About 14% of those customers that already switched their supplier stated the option of green electricity as a reason, while about 13% were simply not satisfied with their old supplier. Bonuses for switching, and the utilisation of alternative and expanded distribution methods and channels (e.g. book-trade or bakeries) are key current marketing trends. The growing awareness of electricity prices and the resulting public discussion about suppliers or tariffs has been and still is being spurred by an increasing presence in the news media. The troubled image of the energy industry, in the face of prices, profits and some other publicity shocks, has provided additional switching motivation to customers.

Figure Six: North American Market Aggregated Electric Retail Customer Switching Trends

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COOL ACTIVE MARKETS While Cool Active markets are something of a mixed bunch in terms of the determinants of their activity, they are often typified by insufficient competitive opportunities for new entrants.

Either price margins are virtually non-existent due to price regulation of one form or another, there is a severe lack of ’critical awareness' (awareness sufficient to facilitate switching), or incumbent dominance is simply overpowering. But unlike the Dormant markets, these markets do display some clear switching activity and potential, although they simply have not gained any momentum. In the case of Spain, for instance, low incumbent price caps (soon to be removed) have, until now, presented a barrier to effective market entry. In Ireland, market dominance and a powerful historically based affinity to the incumbent has arguably been key.

Denmark The Danish electricity market has been by far the least active of the big four Nordic Markets (Norway, Sweden, Finland and Denmark) since it was fully liberalised in January 2003, despite large initial information campaigns by the industry.

This relatively low level of activity has mirrored a number of shortcomings in the market, both structural and situational. Perhaps most severely, the competitive retail element of the electricity price accounts for only 20-30 percent of the total price per kWh (the percentage varies every three months). Taxes and distribution charges make up a larger share than in other Nordic markets. Thus, potential savings from switching supplier are less significant. Price and Supply Volatility has also historically been relatively low in Denmark, resulting in reduced customer involvement and switching stimuli.

Another factor reducing customer desire to switch is the Nordic ‘Two Bill’ issue, where those customers staying with a regional incumbent supplier will only receive one bill, while those switching supplier will receive in two bills: one from the company selling the electricity and one from the regional company delivering it through their regional distribution network. This hesitation to switch is heightened by the desire to support the regional electricity company, often cooperative societies where as co-owners, consumers associate more closely with the regional company than to the alternatives. Combined with the more typical customerswitching inhibitors found in other less active markets, it is unsurprising that Denmark has remained largely inactive to date.

2008 however, has seen a rise of new electricity suppliers entering the market with new ways of presenting and selling their products. This trend is expected to increase switching activity in 2008 and 2009, possibly pushing Denmark into the Active category.

New York The only US market other than Texas to display customer switching is New York. Employing a hybrid regulated-competitive structure, new-entrant retailers not only compete with each other but also with regulated incumbent utilities that generally retain control of customer service, billing and payment - placing barriers between retailers and their customers. Despite being categorized as active-slow, New York recorded the highest and second highest customer switching rates in its history in quarter two 2007 and quarter one 2008, respectively. New York saw electricity prices rise 25% and financially troubled consumers being cut-off at rates 20% higher than previous years.

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Italy Full retail competition in the Italian energy market was achieved on July 1st 2007 with the opening up of the residential energy market. Since then the switching rate has exceeded 100,000 customers per month. In a market with 36.1m clients this might seem modest compared with the more active markets of Northern Europe, Texas and the Southern Hemisphere, but it makes Italy the second most active of the many markets to have fully liberalised in 2007.

The overall switching rate in the Italian energy market has furthermore increased throughout 2007 and 2008. In fact, following the introduction of a Single Buyer in the power market back in 2004, several integrated utilities, as well as retailers, have started to commercially acquire customers in the free market. The share of the free power market counts today for some two thirds of the entire final consumption in Italy. In terms of customers, some 11% (3.9 million as of 30 September 2008) have now already switched, and the growth in electricity market switching over the past year has now also triggered long-awaited switching in the gas market.

The I&C segment accounts for approximately half of the switching to date (2.3 million) with residential switching (1.6 million) closing in rapidly.

The largest contribution to switching comes from ENEL ENERGIA and SORGENIA in the I&C segment and from ENEL ENERGIA and ENI in the residential segment. However, other competitors are entering the battle for retail market share with substantial campaigns, and switching is therefore set to steadily increase also in the future. The prevailing competitive price scheme both for power and gas is a fixed price offer, which in the case of electricity is often combined with a green energy option. These offers are contrasting regulated tariffs for power and gas decided by the Regulatory Authority, which are updated every 3 months and have shown strong increases over the past two years. Once again the level of regulated tariffs makes, or breaks, the potential for switching in a liberalised ‘competitive' market.

Slovenia The switch rate in Slovenia mainly reflects industrial and commercial (I&C) customers for whom switching rates are have been and remain `Active’. Residential customer switching has been effectively dormant since the residential market opened in July 2007. The reason for the constricted switching rate in Slovenia lies mainly in the strategies of newcomers resulting from the unattractive margins in the market, and poor awareness and trust among customers.

Besides the five incumbent, effectively integrated utilities, there are only two active newcomers in retail market, and these are focused primarily on business customers. Among I&C customers switching has been enhanced through a mixture of competitive pricing/purchasing, cost-toserve advantages, and even affinity deals (for smaller I&C customers). Market concentration and wholesale shortages continue however, to limit options for new entrants regardless of customer group.

Austria While switching rates remain very modest in Austria as a whole, recent price increases have triggered heightened public interest in comparing prices and switching. Switching rates have now doubled compared to 2005. The main reason behind the increase in switching seems to be the entry of Verbund APS, the first company to truly compete in the Austrian electricity market, albeit on a modest scale. Remarkable regional differences exist, however, with cumulative switching rates ranging between 2.1% and 10.4% for small customers (households and small commercial) depending on region, the biggest regions being on the upper end of the scale. One of the first signs that competition is being taken more seriously has been that

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some executive directors have been losing their jobs because of rising switching rates.

Austria has relatively high switching rates among commercial customers, arguably because when the market liberalised in 2001, this group started with the highest prices in comparison to the other customer groups, so saving potentials were, and still, are the highest. For industrial customers cumulative switching rates since 2001 have ranged between 40% and 75%. In this market, price differences between suppliers have been quite low and additional services such as portfolio management have, therefore, become more important when choosing the supplier.

Continuing barriers to competition and switching arguably include the market structure brought about by past mergers and insufficient unbundling. In the view of the Austrian regulator and independent onlookers, further improvement of the market rules and more aggressive enforcement of unbundling are needed in order to reach a level of mobility within the group of small customers, which would guarantee an effective barrier to market power of incumbents. Austria is also typical of many other less active markets where the regulator has been granted insufficient power to make necessary structural or other changes to the market.

While a variety of marketing channels have proved significant within the market, the Austrian electricity market is also still relatively immature in terms of its switching-related marketing and, as a result, market opening has faced a heavy imbalance in favour of defensive marketing by the incumbents.

Ireland Ranking 22nd in the 2007 rankings, and 14th in Europe, the Irish electricity retail market has been slow to develop its level of competition in the residential sector since it opened in February 2005. ESB, the incumbent Electricity supplier, is still dominating although independent suppliers such as Bord Gáis Energy Supply, Airtricity and Energia have captured a significant proportion of the market share among industrial and commercial customers. The gas market, open since 2004 for industrial and commercial achieved full competition status (opening to residential retail customers) on 1st July 2007. Customer switching in this category has been strong among all business customers.

Independent suppliers in Ireland have generally been focusing on offering discounts to the incumbent’s regulated tariffs for a certain period of time, as a means of attracting customers to switch. This approach however, requires that regulated tariffs be transparent and cost reflective. In order to facilitate customer switching, Bord Gáis Energy Supply (the incumbent Gas supplier) in October 2007 implemented new tariff structures designed to ensure greater levels of cost reflexivity, provide improved levels of choice for natural gas customers, and also to provide more transparent tariffs against which other suppliers may compete. In the electricity market, however, there is reluctance for customers to switch from the incumbent as the number of tariffs offered by the ESB make it hard for independent suppliers to offer a similar range and at the discount offered by ESB. Added to this is the reality that ESB has long been positively embedded into Irish society, as EDF has in France, making it a relatively trusted player in the market. Arguably, there is still much to be done in Ireland to reduce ESB’s incumbent advantages and to enhance involvement in switching among residential customers.

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Figure Seven: Relative Energy Retail Customer Switching by Market

DORMANT MARKETS It would be easy to say that many of the markets in this category are Dormant only because they have only been fully liberalised since mid 2007. To some extent this is a valid argument as it can sometimes take years before markets ignite into a state of activity. However, there are sufficient cases of markets becoming active within a year to counter the argument, and the levels of switching within the dormant markets are often not just low, but in fact almost nonexistent. Some cases see as low as 0.001% annualized switching. The Dormant sector should therefore be seen as containing both seedling markets and non-active markets.

Some of the many key issues in the Dormant category include the detrimental impact of price caps, low levels of customer awareness, insufficient regulatory mandates, excessive market concentration, the lack of ownership unbundling, the lack of efficient wholesale markets and/ or cross border availability, barriers to new market entrance, state involvement in the utility business, and weak interest in competition among incumbent retailers.

France The French electricity market became fully open as of 1 July 2007. According to a recent report from the French Regulator CRE (September 2008), six alternative suppliers are active on the French residential electricity market (fourteen in the I&C segment), whereas three are active on the residential gas market (nine in the I&C segment). Behind these positive metrics, the reality is somehow different. Above all, the persistence of attractive and risk free regulated tariffs (mainly calculated on the cost of the incumbent nuclear KWh for electricity), is preventing competition from taking off in the market. Furthermore, as in several other geographies, the dominant alternative supplier of one energy company is the incumbent supplier of the other energy company. In other words, EDF and GDF Suez are the main "competition makers" in France.

However, the recent decision of the French government to allow customers having chosen a market-price contract to opt back to regulated tariffs has enabled switching – mostly from residential customers – to gain some momentum on the French market, with 176,000 sites gained by alternative electricity suppliers during the second quarter of 2008 (equivalent to 0.6% market share) and 75,000 sites gained by alternative gas suppliers (equivalent to 0.7% market share).

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More information on the data collection and analysis method can be found at www.utility-customerswitching.com

These encouraging figures might show a slight change in the behaviours of French consumers, even though one may wonder whether this trend will extend beyond the ‘early adopters’ consumer segment. At least early market surveys investigating French willingness to shop around have indicated that, psychologically, French consumers are fairly similar to their British counterparts during the early stages of full competition. What the French market lacks, however, is the second and third forces, namely heavy support for switching from news media and new entrants.

ABOUT THE AUTHORS Dr. Philip E. Lewis, CEO, VaasaETT Global Energy Think Tank Dr. Lewis is a leading international specialist within the field of utility customer behaviour and psychology. He has conducted energy markets research and consultancy during the past 12 years in over 50 countries for over 250 organizations. He has also worked extensively at an industry and market-wide level, having written major customer-related reports for the European Regulator's Group for Electricity and Gas (ERGEG) and cooperated with various governmental and industry representative organizations around the world. Dr. Lewis is also on the editorial board of the journal ”Energy Efficiency” published by Springer; was founding chief editor of the ”Energyforum Global Report;” and has chaired and co-organized dozens of high level conferences around the world. He has also been a member of the WWF (European Policy Office) Green Power Partnership Advisory Committee, and has been on the committees of various large international events and awards such as Distribution Europe, the European Utility Awards; International Utility CIO of the Year Awards (Metering International/Energy EBiz). He has also been a keynote speaker at the world's largest metering event: Metering/Billing/CRM Europe, speaking on customer issues.

The definition of customer switching currently applied in Europe by ERGEG and CEER (Council of European Energy Regulators) is essentially a definition developed by Dr. Lewis, and he has been chosen to assist CEER in its auditing of European customer switching and churn statistics.

Dr. Lewis was formerly head of Marketing Research and Analysis for the UK based retailing subsidiary of what are now BP Amoco and Edf, during the onset of competition in the British retail energy market. Dr. Lewis holds a PhD in Marketing from the University of Edinburgh and developed his graduate marketing expertise in the banking sector with American Express Bank in Frankfurt and National Westminster Bank in London.

James Braatvedt, Peace - Hansen Technologies Mr. Braatvedt has had articles and whitepapers published on a variety of utility customer lifecycle topics. After completing a Bachelors Degree in Management, majoring in Public Relations, International Management and Marketing, Mr. Braatvedt worked as Marketing Manager in the Government Sector before joining Peace in early 2006. He currently resides in Los Angeles, California.

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ABOUT VAASAETT and the Global Energy Think Tank The VaasaETT Global Energy Think TankÂŽ is a coordinator of expertise for the energy and utilities industry, comprising expert exploration, events and knowledge sharing, supervised by a senior independent advisory committee. The Think Tank affords outstanding opportunities to search out answers to key questions using the best knowledge from around the world.

Through the thousands of high and medium level executives, officials, researchers, consultants and other experts that we know and trust personally, the Global Energy Think Tank creates partnerships and consortiums for research, strategic advice, solutions and even independent lobbying support. Whatever you need to know, we probably know someone, somewhere who has the answer. Covering over 50 countries in four continents, our network covers a wide range of interest areas, from Demand Response and Smart Metering to Customer Switching, from Renewable Energy to Smart Grids, from Regulatory Efficiency to Competitive Pricing.

VaasaETT is a highly innovative research and advisory agency, providing world leading customer psychometrics and related strategies through research and collaboration with the Global Energy Think Tank. Unrivalled expertise of utility customer psychology and behaviour is applied to three core focus areas: Customer Value, Market Efficiency and Demand Response within liberalised and smart metering environments. We are arguably the world's leading collector and analyst of global customer switching, churn and loyalty trends in competitive (liberalised/deregulated) retail electricity and gas markets.

For more information, please visit www.vaasaett.com

ABOUT OUR SUPPORTERS About Capgemini and the Collaborative Business Experience Capgemini, one of the world's foremost providers of consulting, technology and outsourcing services, has a unique way of working with its clients, called the Collaborative Business Experience.

Backed by over four decades of industry and service experience, the Collaborative Business Experience is designed to help our clients achieve better, faster, more sustainable results through seamless access to our network of world-leading technology partners and collaboration-focused methods and tools. Through commitment to mutual success and the achievement of tangible value, we help businesses implement growth strategies, leverage technology, and thrive through the power of collaboration. Capgemini employs approximately 83,500 people worldwide and reported 2007 global revenues of 8.7 billion Euros.

With 1.15 billion Euros revenue in 2007 and 10,000+ dedicated consultants engaged in Energy, Utilities and Chemicals projects across Europe, North America and Asia Pacific, Capgemini's Energy, Utilities & Chemicals Global Sector serves the business consulting and information technology needs of many of the world’s largest players of this industry.

More information about our services, offices and research is available at www.capgemini.com/ energy

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Peace CIS, by Hansen Technologies Hansen Technologies is the largest independent CIS vendor worldwide. The Peace CIS is installed at major utilities in 37 regulated and competitive energy markets for billing and customer relationship management of millions of electricity, gas and water customers. The leading-edge PeaceX CIS continues our tradition of introducing innovation to the CIS market. A substantial evolution of our proven CIS, PeaceX will redefine the value a CIS brings to an enterprise. Best-of-breed and strategically innovative, PeaceX brings some significant benefits: Next-generation 'Smart Screens' for dramatically increased agent productivity Componentization of business functions that provides real choice for your business components as you need them Service-Oriented Architecture (SOA), an open industry standards approach, not using expensive and proprietary technologies For more information, visit www.peace.com.

ACKNOWLEDGEMENTS VaasaETT would like to thank all those one hundred or more people and source organizations around the world who have supported the Utility Customer Switching Research Project with data, advice, reviews and feedback, and welcome all further contributions. While many contributors prefer to remain anonymous, we would like to acknowledge the following for their input to the 2008 World Energy Retail Rankings Report and Utility Customer Switching Research Project: Paul Grey (New Zealand), Capgemini, Trend:Research (Germany), Tor Arnt Johnsen (NVE/ Norwegian School of Management), CRE (France), ENECO, CER (Ireland), Ofgem, (Great Britain), E-Control (Austria), EDSN (Netherlands) VREG (Flanders, Belgium), CNE, (Spain), NVE (Norway), Statistics Sweden, DanskEnergi (Denmark), CWAPE (Wallonia, Belgium), BRUGEL (Brussels, Belgium), RAE (Greece), Public Utilities Commission (Latvia), Energy Regulatory Office (Poland), Energy Agency of the Republic of Slovenia, Bord GĂĄis Energy Supply (Ireland), Electrica (Romania), ANRE (Romania), AutoritĂ per l'energia elettrica e il gas (Italy), BDEW (Germany), Bundesnetzagentur (Germany), Orkustofnun (Iceland), Croatian Market Operator, Luxembourg Institute of Regulation, ERU (Czech Republic), OTE (Czech Republic), ERAA (Australia), NEMMCO (Australia), REMCO (Australia), Vencorp (Australia), Gas Market Company (Australia), Essential Services Commission of South Australia, Electricity Commission (New Zealand), Department of Energy (Alberta, Canada), ERCOT (Texas), Public Service Commission (New York), ENECO (Netherlands), ENEL (Italy), GEN-I (Slovenia), EFT (Slovenia/International), SEAS-NVE (Denmark), Fortum (Nordic), Finnish Energy Market Authority .

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PREMIUM SERVICES In addition to the complimentary World Utility Rankings Report, the Utility Customer Switching Research Project (UCSRP) collects an unparalleled amount of global switching data. By subscribing you can gain access to all the data you need to make strategic business decisions through an innovative online interactive tool, the UCSRP Interactive Chart. The chart will enable subscribers to view, compare and copy graphs utilizing any combination of switching trend available within the UCSRP Subscribers Data Series. Subscribers can, for example, view a single market trend, or can compare it against any number of the other markets.

The 2008-2009 UCSRP Subscribers Data Series: Switching trends from at least 30 markets (all non-dormant markets in the World Utility Rankings Report, plus the following dormant markets: Czech Republic, Iceland, France, Luxembourg, Greece, Romania, Latvia and Poland).

Quarterly market data typically dating back to the time of full market opening where available.

Data divided into 4 categories: Aggregated Electricity (residential and I&C); Residential Electricity; I&C Electricity; Aggregated Gas, Residential Gas, I&C Gas. Please note that in some cases small commercial customers are combined with residential. Upon special request it is additionally possible to obtain separate data for small, large and even midsized I&C customers.

While switching definitions can vary by country, most data complies with the USCRP definition described within the World Utility Rankings Report. While the USCRP goes to great lengths to ensure the quality and consistency of the data, data is collected from independent third parties, and subscribers should use the data for indicative purposes only.

The data series is updated at least twice yearly, with some markets being updated monthly or quarterly, although some data is only available for update on a yearly basis. As of October 2008, the most recent data available within the series ranges from Quarter 4 2007 up until Quarter 3 2008, depending on the market.

For more information on the data series or the subscription service, email UCSRP@vaasaett.com.

Subscription Options Standard 1 year: Unlimited access to the UCSRP Interactive Chart for the period of one year. Data series access limited to the Aggregated Electricity category (residential and I&C rates combined weighted).

Price: â‚Ź285

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Standard 2 Years: Unlimited access to the UCSRP Interactive Chart for the period of two years. Data series access limited to the Aggregated Electricity category (residential and I&C rates combined weighted).

Price: €480

Silver 2 Years: Unlimited access to the UCSRP Interactive Chart for the period of two years.

Data series access limited to the following categories: Aggregated Electricity, Residential Electricity, I&C Electricity. Service available in December 2008.

Price: € 650

Gold 2 Years: Unlimited access to the UCSRP Interactive Chart for the period of two years.

Data series access limited to the following categories: Aggregated Electricity, Residential Electricity, I&C Electricity, Aggregated Gas, Residential Gas, I&C Gas. Service available in January 2009.

Price € 780 If you subscribe now to the Silver or Gold service, you will receive the Standard service until the Silver or Gold Service is available from which time you will be provided one full year of access to the Silver or Gold service. It is possible to subscribe first to the Standard 1 or 2 year option and then upgrade later to the Silver or Gold service at a pro-rata rate.

Subscribe Now! Subscription is simple. Just visit: www.utility-customer-switching.com, click on the subscribe tab and follow instructions. You will be requested to complete simple order form. We will then send you an invoice for electronic payment. Once your payment is received, you will be emailed a user name and password enabling you to immediately use the online service.

Alternatively, contact us at UCSRP@vaasaett.com and we will send you an order form.

Exclusive UCSRP Custom-switch Research; The detailed examination of switching trends can prove invaluable when considering customer acquisition and retention strategies. In addition to the UCSRP Subscribers Data Series, the UCSRP, in partnership with VaasaETT, can develop a customized market switching report that provides detail and insight to meet your specific requirements. These premium research reports are strictly limited to one company per market. Contact us today to discuss your options.

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www.utility-customer-switching.com UCSRP@vaasaett.com

Š 2006-2008 VaasaETT and Peace Note: Use of content and graphics from this report must reference the source as VaasaETT Utility Customer Switching Research Project