Texas has been leading the nationwide move toward electricity market deregulation for many years. It launched with the promise of more choice, better plans and products, and lower prices. For the most part, these promises have been met. Few markets, if any, have more competition or products than Texas. But has it resulted in lower prices?
In 2014, Texans living in deregulated areas (such as Houston, Dallas, El Paso) paid approximately 15% more for electricity than their counterparts living in markets with integrated utilities (such as Austin and San Antonio), according to a report by the Texas Coalition for Affordable Power. In that same year, Texans in deregulated markets paid 12.59 cents per kilowatt hour, more than the national average of 12.52 and well above the rate paid by Texans living in areas with regulated utilities (just under 11 cents per kilowatt hour).
The report suggests several possible explanations for the higher prices, including inefficiencies in the deregulated market, customer confusion about comparing rates and higher prices from legacy companies that remain from their regulated counterparts. While these are all valid explanations, I suggest there is another element in play: customers are paying a premium because of the intrinsic value they place on the retail electricity provider’s (REP) products and brand.
The Power of Brand
The fact is electricity customers are buying a commodity from their REP—the electricity that powers the lights in my house works exactly the same as the electricity that powers the lights in your house. One might expect that a “rational consumer” would simply purchase the cheapest supply. But that isn’t what happens. Instead, consumers are faced with a multitude of choices from companies, plans and products to generation sources and bundles—all of which are competing to offer the best “value.” Often consumers end up choosing a more expensive option because they believe it is the best deal for them. In other words, consumers feel that there is something other than a low price that is a source of value—that is the power of brand.
Texas REPs have invested millions of dollars to differentiate themselves and their supply of electricity (e.g., coal plants vs. wind or solar generation) and to create new, compelling products and plans, all to attract the attention of consumers and to build their brand identity. These brand-building activities are designed to give consumers a reason to pay a premium over the lowest rate in exchange for some other tangible or intangible asset, such as flexible payment schedules, time-of-use rates, rewards points, rebates for smart thermostats, gift cards or simply to go with a company that the customer trusts.
Using Brand Trust as a Key Metric
Given the importance of a strong brand in such a competitive marketplace, Texas REPs keep close tabs on their brand health and their competitors’ brands. Market Strategies International recommends tracking a metric called “Brand Trust” as a way to monitor the relative strength of the brand.
“Our research shows that brand trust is the driving factor of customer loyalty and attraction, so being a most trusted brand directly translates into greater financial rewards,” said Chris Oberle, senior vice president at Market Strategies. “Electric providers that we have identified as most trusted brands are considered companies that customers have confidence in to do the right thing on their behalf, which translates to higher levels of loyalty.”
To illustrate this point, following is a list of the Most Trusted Texas REP brands. Each has shown strong consumer loyalty and commitment. Among all retailers, StarTex Power stands out as the highest-ranked, Most Trusted REP.
Brand Trust Leads to Premium Pricing
The consumer switching rate is high for the Texas REP market, with almost half (44%) of customers stating they have used more than one REP at their current residence, and one in five stating they have used three or more REPs at their current residence.
REPs with high brand trust have twice the customer loyalty than those with low brand trust. For instance, when offered a modest $1 savings per month, 18% of customers with low brand trust with their electric provider said they “would switch providers” while only 6% of those with high brand trust would switch. Another potential for lost revenue is the 29% preference for natural gas service among Texas REP customers.
Since Texas consumers are comfortable switching providers, it is clear that the most successful REPs are going to be those that foster trust and loyalty among their customers. Read more about the Texas Retail Electric Provider Brand Trust Study or email me to learn how the power of brand benefits utilities during times of rate increases and higher bills.