Retail Competition in Electricity Supply
interim Report - February, 1996
1. INTRODUCTION
1.1 Background to this Report
1.2 Structure of the Report
2. INSTITUTIONAL FRAMEWORK
2.1 Role of Retail Competition in Electricity Supply Industry Reform
2.2 Achieving Environmental Outcomes
2.3 Competitive Access to the Distribution Network
2.4 Legislation for the Retail Market
2.4.1 Overview of legislation
2.4.2 Provisions relevant to the retail market
2.4.3 Retail licences and market structure
2.4.4 Customer contracts
3. IMMEDIATE ISSUES FOR THE INTRODUCTION OF RETAIL COMPETITION
3.1 Overview
3.2 Approach for Removal/Elimination of Franchise
3.3 Market Power
3.3.1 Will inherited market power impede retail competition in NSW?
3.3.2 Vertical and horizontal integration
3.4 Aggregation
3.5 Metering Issues
3.5.1 Metering systems
3.6 Alternative to Metering: deemed load profiling
3.7 Comments
3.8 Other Issues
4. OPTIONS FOR INTRODUCING RETAIL COMPETITION
4.1 Description of the Options
4.2 Comparison of the Options
4.3 Evaluation of the Options
4.3.1 Growth of contestable trade
4.3.2 Market power and choice of option
4.3.3 Ranking of options
4.4 Observations and Requests for Input
5. NEXT STEPS
5.1 Managing the Implementation
5.1.1 Trading arrangements
5.1.2 Commercial framework
5.1.3 Retail licences and a code of conduct
5.2 Related Issues
5.3 Strategy
5.4 Future Directions
APPENDICES
A. NAMES OF GENERATORS AND DISTRIBUTORS
B. LIST OF SUBMISSIONS
EXECUTIVE SUMMARY
1. BACKGROUND
1.1 This Report
The Electricity Reform Taskforce is preparing a Report to the Minister for Energy on a recommended option for introducing competition into the retail sector of the NSW electricity industry. The Report is in response to the commitment made in the May 1995, Electricity Reform Statement to give retail customers in NSW a real choice between competing suppliers.The Taskforce is releasing this Interim Report to interested parties to provide an opportunity for further industry, special interest group and customer input before presenting a recommendation to the Minister. The final report will be competed by the end of March 1996.
In preparing its recommendations the Taskforce was conscious of the necessity of meeting the following criteria:
- maintaining consistency with National Competition Policy
- promoting effective competition
- improving environmental quality
- ensuring a managed reform process.
1.2 Issues Examined
The issues affecting the introduction of retail competition can be grouped under the following main headings:
- metering and data collection (for financial settlement purposes)
- metering alternatives
- aggregation for distributed customers (users of electricity who operate across a series of sites)
- market power and effective competition
- environmental outcomes.
The Taskforce is seeking a response to these comments and the draft options before finalising its Report to the Minister.
1.3 Process of Gathering and Assessing Evidence
The public process of determining the framework for introducing competition into the retail sector began with the publication of an issues paper, Retail Competition in Electricity Supply in November 1995. In the paper a number of issues coming under the above topics were raised and comment sought on these.In order to widen the audience and provide opportunities for further involvement in the process:
- a public seminar was held in December
- a workshop was organised in January, targetting electricity industry representatives and customers (a mix of large industrial, commercial and government organisations)
- informal meetings were held with consumer and environmental advocacy groups, industry personnel and customers
2. RETAIL COMPETITION
The restructuring of the generation and distribution sectors is designed to encourage competition in the wholesale market. To fulfil the commitment of “real choice for retail customers” competition in the retail sector must ensue. This means removing the franchise to give every customer, regardless of the level of electricity use, a choice of service provider.For the customer there will be not only the benefits of a lower price for electricity but also value added services. Marketing energy services in a competitive environment means learning how to creatively enhance the values of services for which customers will pay. Sustainable energy procurement is one of a number of service offerings that can be created for targeted niche markets. Environmentally friendly electricity sourcing options can help differentiate companies and their products from other energy retailers. The government requires retailers to develop strategies for energy efficiency, demand management and energy purchasing from sustainable resources.
Retail competition is more than just bringing choice to customers, although that is a vital element driving the introduction of competition into the retail market. Competition in retail trading is necessary to realise the full benefits of introducing competition into the generation sector. Intelligent energy sourcing by retailers has implications both upstream and downstream for the production of energy services. The retailers who are competent in sourcing energy will be those who come up with a winning mix of spot purchases, portfolios of bulk supply contracts, direct retailer involvement in generation and facilitation of customer involvement.
3. RECOMMENDED OPTIONS FOR RETAIL COMPETITION
The Taskforce has examined the process for reducing and ultimately eliminating the statutory franchise. Mindful of the impending national electricity market and the need to have a state market in NSW as soon as practicable, the decision has been made to recommend threshold limits as the mechanism for controlling the pace at which the market is developed.The Taskforce recommends that threshold limits applied to retail customers be used to manage the introduction of competition to the retail sector.
In the choice of the unit of measurement for the threshold level it is appropriate to use energy-based limits, particularly at lower thresholds where annual energy consumption is the common measure.
The Taskforce recommends using energy-based limits, but recognises that at the higher thresholds in certain circumstances, it may be appropriate to use the demand-based equivalent.
In developing the options the Taskforce recognised that the options have to be cost-effective, with inconvenience to customers seeking alternative suppliers minimised. Additionally, new entrants must not face artificial barriers to entry, and financial viability of existing retailers must be considered.
From the submissions and discussions with various interested groups, both private and public, a possible set of options emerged. Further analysis reduced membership of the set to four. The Taskforce feels that these four options are feasible, accommodate the needs of customers and the industry, are in line with national market requirements and represent the set of best prospects for retail competition. These options are presented in the table below with a brief summary description included after the table.
SHORT-LISTED OPTIONS
Option A: MWh paOption A - the market trials strategy
- Stage 1 Oct 1996 4,000 No aggregation for distributed customers
- Stage 2 Apr 1997 750 Still no aggregation
- Stage 3 Dec 2000 + All customers Aggregation disappears as an issue
Option B:
- Stage 1 Feb 1997 750 No aggregation
- Stage 2 Jul 1998 160 Still no aggregation
- Stage 3 Dec 2000 + All customers Aggregation disappears as an issue
Option C:
- Stage 1 Oct 1996 4,000 No aggregation
- Stage 2 Apr 1997 4,000 Aggregation permitted
- Stage 3 Jul 1999 All customers Aggregation disappears as an issue
Option D:
- Stage 1 Oct 1996 4,000 No aggregation
- Stage 2 Apr 1997 750 Still no aggregation
- Stage 3 Oct 1997 All customers Aggregation disappears as an issue
Gives an estimated 0.1% of sites a choice of supplier by early-1997 - these sites are energy-intensive, accounting for some 33% of energy used by all tariff customers. Somewhat wider customer involvement occurs via market trials in the lead-up to open customer participation which is tentatively scheduled for end-2000.
Option B - moving onto the path taken by Victoria
Gives an estimated 0.4% of sites a choice of supplier by mid-1998; - these sites account for some 40% of energy used by all tariff customers. Participation by other sites is closed off altogether, at least until end-2000.
Option C - allowing for aggregation
Gives a wider range of sites a choice of supplier by early-1997 (through aggregation), and all sites a choice of supplier by mid 1999.
Option D - fast track
Like Option A, gives an estimated 0.1% of sites a choice of supplier by early-1997. Then gives all sites a choice of supplier by end-1997.
Options B and D allow little time for the important design phase of the NSW metering and settlements system and hence run the risk of early system obsolescence. Option D has the added disadvantage that the end-1997 deadline may seriously compromise efforts to ensure a smooth transition to open customer participation. Time is needed for heightening both customer and retailer awareness.
In contrast, Options A and C allow time for "open interface" systems design and for NSW retailers to develop their energy trading operations and hone their marketing skills. Both these Options recognise, to differing degrees, distributed customers.
Under Option A smaller customers have rather a long wait for contestability. Market trials would widen the contestable customer base to a limited extent. However, conducting market trials would require much the same amount of work as required for Option C and have the same pressures "to get it right".
Option C has considerable merit, cutting the waiting time for all customers to have a choice of supplier by at least 18 months, and providing early competitive entry for some distributed customers. This fits in well with the COAG Agreement on competition policy which names June 1999 as a key implementation date. However, the Taskforce recognises that Option C also presents, at this stage, an unquantified risk to existing NSW retailers’ profitability.
The Taskforce seeks, in confidence, detailed information from NSW distributors on the potential erosion of their sales and profit under Option C relative to Option B.
The Taskforce seeks comments on the options presented and asks respondents to indicate their preferred option.
4. NEXT STEPS
Once the decision is made to select an option, the implementation process begins. Regardless of which option is chosen, decisions will need to be made on many issues in the next six months for the market to function within any of the indicated timeframes.In order to establish trading arrangements for retail competition the following tasks need to be undertaken:
- To develop a trading system communications strategy that will allow a cost effective utilisation of current and future technology.
- To assess the costs of metering and to make recommendations on transitional arrangements.
- To assess the cost of data collection and settlements and make recommendations on the choice of service providers.
- To investigate the feasibility of implementing an all-metering solution.
- To examine the feasibility of load profiling as an interim or more permanent solution.
- To resolve the issue of who is to bear operational responsibility for the various activities of the trading arrangement.
- To monitor costs of the trading arrangements and examine the allocation of costs.
- To develop a code of conduct for the retail market referenced to that developed for the national market, and consistent with retail licence conditions.
- To develop strategies for raising customer awareness of the market, collecting relevant customer information and gauging customer opinions in order to assist with market development.
Retail competition will give customers freedom to choose from among competing retailers. Setting the framework and ensuring its implementation will make available to customers that freedom and choice. Achieving a workable competitive retail market will require planning and commitment. It may be stating, indeed quite probably restating, the obvious, but this is the start of an exciting and challenging period.
1. INTRODUCTION
1.1 Background to this Report
The NSW Government is undertaking major reform of the electricity supply industry. This initiative is a consequence of the NSW Government's COAG (Council of Australian Governments meeting on 1 March, 1995) commitment to participate in a national electricity market and reflects a general program of microeconomic reform within the state.
Reform of the state electricity supply industry is well underway. The restructuring is in line with commitments made by the NSW Minister for Energy in the May 1995 Electricity Reform Statement. Key elements of the reform are being or have been implemented. These involve separating the monopoly transmission and generation sectors, making the latter competitive, and reorganising the distribution sector.
The high voltage transmission network is now operated by a regulated authority, the Electricity Transmission Authority trading as TransGrid. The restructuring and corporatisation of the generation and distribution sectors are nearing completion and arrangements are expected to be finalised by 1 March, 1996. The original 25 distributors have been amalgamated and reduced to six of which, two are metropolitan-based. The distinctive nature of the two business operations of distributors, wires and energy trading , has been recognised. The Competition Principles Agreement (part of the COAG reform package) sets out principles for regulating access to essential facilities such as transmission and distribution networks. An effective access regime and accounting separation will together ensure that the regulated monopoly network business does not shield the retail supply business from competition. The generation side of Pacific Power is to be disaggregated into two state-owned corporations, with Eraring power station a subsidiary of one. Details of the changes in generation and distribution are given in Appendix A.
The restructuring of the generation and distribution sectors is intended to encourage competition in the wholesale market, by offering customers, both wholesale and retail, real choice between competing suppliers. The focus has now moved to restructuring the retail sector. This means opening up the market to competition and giving every customer, regardless of level of electricity use, a choice of service provider. The customer will benefit from lower electricity prices as well as value added services. The marketing of energy services in a competitive environment means learning how to creatively enhance the values of the services for which customers pay. Sustainable energy sourcing is one of a number of service offerings that can be created for targeted niche markets. Environmentally friendly electricity sourcing options can help differentiate energy retailers and their products. The Government requires retailers to develop plans for energy efficiency, demand management strategies, and strategies for purchasing energy from sustainable resources (Further detail is provided in Chapter 2).
If the benefits of competition are to be fully exploited the reforms must fulfil certain requirements, entry barriers must be lowered for both retailers and customers. However, there will be constraints on the process. Successful implementation will require a substantial effort by government policy makers, customers and the industry over a number of years. Criteria that must be met include:
- maintaining consistency with National Competition Policy
- promoting effective competition
- improving environmental quality
- ensuring a managed reform process.
The public process of determining the framework for introducing competition into the retail sector began with the publication of an Issues Paper, Retail Competition in Electricity Supply in November 1995. In the paper a number of issues were raised and comments sought. Fundamental issues such as the approach to be adopted and the speed at which reform should be introduced were covered. Information was requested from the industry regarding the penetration of half-hourly metering. Other issues raised for comment covered such matters as future industry structure and prospects for joint utility ownership.
In order to widen the audience and provide opportunities for further involvement in the process, a public seminar was held in December. This was followed by a workshop in January. The aim of the workshop was to provide electricity industry representatives and customers (a mix of large industrial, commercial and government organisations) with a forum for joint exploration of the issues and an opportunity to discuss suggested options for the introduction of retail competition. Taskforce members had an opportunity to listen to industry and customers debating the issues.
Members of the Taskforce have been meeting informally with consumer and environmental advocacy groups, industry personnel and customers to gather information and views on various aspects of the implementation. Data collection and analysis, and modelling of the effects on the industry of various approaches to the introduction of retail competition has been ongoing. This interim report is the culmination of that effort. Options for the introduction of retail competition are presented here for comment.
1.2 Structure of the Report
The remainder of this report is set out in the following manner.
Chapter 2 details legal and institutional framework within which the reforms are applied. This section discusses the requirements for effective retail competition and contains an overview of the relevant legislation, licensing and contractual arrangements.
Chapter 3 analyses issues raised in the previous report in the light of submissions received and discussions held with interested parties.
Chapter 4 discusses the advantages and disadvantages of the various options for the introduction of retail competition.
Chapter 5, the final chapter, lists the next steps in the implementation process.
The Government has stated its commitment to giving "retail customers in New South Wales real choices between competing suppliers" (NSW Treasurer and Minister for Energy, Electricity Reform Statement, May 1995). To achieve this outcome in the most efficient way, requires the commitment of customers, environmental groups, consumer groups and, above all, the industry.
2. INSTITUTIONAL FRAMEWORK
2.1 Role of Retail Competition in Electricity Supply Industry Reform
The reform program for the NSW electricity industry calls for introducing competition where it is feasible, that is, into generation and retail energy supply (including energy services). Competition in the retail sector will mean that customers will be able to choose from a range of energy service suppliers, and, moreover, will be in a position to make informed choices. This will apply to customers generally, not just those who are intensive users of energy.
In a completely deregulated environment, electricity, which is essentially a homogeneous product, will initially find differentiation only in price. Transportation, both at the transmission and distribution levels, will be regulated and priced identically for all entrants with incumbents having no distinct advantage. Price differentials will come from smart purchasing of electricity (at present, electricity purchases account for almost 60% of retailers' costs), which will rely on complete knowledge of the customer base. Customer-specific market research will offer the single, most effective tool for managing price. The industry must move from institutionalised pricing by service class to "mass customisation" that is, selling a standardised commodity to mass markets with a customised approach.
While the initial battle for market share will be price-based, this alone will not be enough. The retailer will have to learn to combine market intelligence with energy to obtain and maintain an advantage, in managing price and gaining/retaining customers. Strategies to build and maintain the customer base require knowledge of customer preference and choice. Traditionally businesses have used the following strategies:
- customer satisfaction through product performance
- simplification of the buyer's purchase decision
- bundling product-related services
Adding intelligence to energy allows the retailer to offer value-added services such as: detailed usage data, information on how to improve efficiency and beyond-the-meter energy services. Information technology is likely to play a significant role in the energy services arena. It includes services extended to the customer side of the meter via smart appliances and other devices such as multipurpose communications links. Recent studies confirm that there is potential for moving to a "leaner running" transmission and distribution network, with growing use of customised load management and system control including distributed generation and storage (this point is developed in "The future of energy: the battle for world power", The Economist, 7 October 1995, pp23-26). The use of customer-specific knowledge will enable retailers to gain competitive advantage. The customer will also benefit by being supplied with a product (or contract) designed for his/her specific needs.
Retail competition involves more than just bringing choice to customers, although choice is crucial to driving the introduction of competition into the retail market. Competition in retail trading is essential to realising the full benefits of competition in the generation sector. Smart purchasing by retailers has upstream, as well as downstream implications. Retailers who are successful in sourcing energy will derive benefit from a mixture of spot purchases, portfolios of bulk supply contracts and direct retailer involvement in generation. Retailing/generation alliances can provide a natural hedge against unexpected movements in the pool price, thus performing the same function as market-purchased hedging instruments.
These market-driven developments in energy retailing will put pressure on generation companies to contract efficiently with retailers, and, for that matter, to contract with some energy users directly if this makes good commercial sense. The move to efficient contracting over the full span of the energy and energy services supply path will affect investment in electricity generation and networks, creating the potential for moving to a dynamically efficient mix of plant. Thus strategies that are developed and tested in the retail market will underpin generation projects and complementary infrastructure initiatives, that is, investments in the physical network for energy exchange and associated control systems and customer equipment.
Regulated retail monopoly franchises cannot mimic these effects. A regulator has limited information on retailers' costs and even less relevant information on energy users' budgets and preferences, which change over time. For example, preferences in energy purchasing change as energy-using appliances are replaced. Customers will also respond, autonomously and interactively, to any changes in retail pricing and service offerings that emerge from commercially driven market research and associated marketing campaigns.
2.2 Achieving Environmental Outcomes
Section 2.1 made the point that retailers would initially focus on cost control, but this would never be the source of strategic advantage. Retailers must establish a rapport with and gain knowledge of customers. Customer-specific knowledge will overpower the competition and enable a retailer to seize strategic advantage. Retailers must target services at meeting the needs of specialised or niche markets.
Improvements in environmental externalities comprise just one customised services package that can be created for targetted customer niches. There are three basic steps towards this:
- match programs with customer needs
- identify willingness to pay
- assess the market niche.
The first step forestalls spending on products which do little to improve customers' perception of value. There is no point identifying customer needs if customers are unable or unwilling to pay for those services. Hence the importance of the second step. The third step requires an accurate method of measuring how many customers, across groupings, would participate in the program.
Environmentally friendly options can help differentiate retailers and their products from their competitors. Green pricing is such an option. A retailer generally asks customers to pay a rate premium to fund the production, or purchase of "renewable" generation. Customers are assured that some or all of their electricity purchases are from generation using renewable resources. Green pricing has the potential to greatly expand demand for renewable energy.
Retailers offering green pricing benefit in a marketing sense. They are able to test, in a low-risk setting, their ability to develop a niche market package. Marketing skills can be tested and refined and business strategies mapped out. These useful techniques can be applied to future niche marketing. Such skills may well ensure a retailer's survival.
Green pricing is only one of the options available, for achieving good environmental outcomes. It does, however, have the merit of easy implementation. Another option is a regulatory scheme which places limits on total emissions (In response to the Retail Competition Issues Paper, the Australian Institute submitted a paper canvassing the idea of a tradeable permit scheme for greenhouse gas emissions arising from the electricity sourcing activities of energy retailers). Such limits may be imposed per unit of time, or may be allowed above some baseline and specified by amounts per source, firm, state, or even country. An initial distribution of permits could be established by auction or allocation.
While it limits emissions, a permit also confers on a firm (source etc) the right to a certain emission level. If the specification is sufficiently broad, allowing a degree of choice regarding where and by whom emissions may be made, the permit scheme will resemble a system of non-attenuated rights which can even underpin trading in a market. Permits must specify if, and how, they can be transferred. Permits are valuable assets for the holders. If trade in permits is allowed, permits will tend to move to those who are prepared to pay the most. Final owners will use them where most profitable, applying them to those emissions which would be most costly to prevent or do without. Such trading will improve the cost-effectiveness of emission control.
Tradeable permits represent a step towards decentralised decision-making. Firms make decisions on pollution control on the basis of prices they face in markets, as they do with all their decisions. However, permit schemes may not be satisfactory where markets are not fully competitive. In a generation duopoly, for example, if generators can pass the price of permits on to customers, it is in their interest to bid up permit price. The extent to which oligopolistic (oligopoly is limited competition between few producers or sellers) companies can (and may wish to) pass on permit costs to their customers is one of the many issues that would need to be addressed before taking any decision on a permit scheme.
As the retail energy market develops, and customer and retailer awareness increases, other environmentally focused packages are certain to emerge. The Government has given the industry a push in this direction by requiring retailers to develop environmentally responsible business strategies. These are detailed in Section 2.4.2. This policy approach is consistent with the recent international reappraisal of the environment-competitiveness relationship (see M Porter and C van der Linde, "Towards a new conception of the environment-competitiveness relationship," Journal of Economic Perspective, 9, 1995, pp97-118).
2.3 Competitive Access to the Distribution Network
A prerequisite for retail competition is that all energy retailers have ready access to the distribution system. This will involve wires businesses offering access, on regulated terms and prices, to all who request it. Additionally, it will be necessary to ensure that new entrants are not frustrated in obtaining access by receiving second-rate treatment in:
- disconnection/reconnection
- metering
- maintenance of the wires
- technical arrangements, for example, ripple control.
To ensure that distribution businesses are impartial when dealing with their own retail supply business and other retailers, there should be comparability of distribution use of system charges. Recognising this requirement, a condition of the electricity distributor's licence requires:
the affairs of the holder of the licence in relation to the operation of a distribution system to be kept separate, to the extent specified in the condition, from the affairs of the holder of the licence in relation to the supply of electricity (Electricity Supply Act 1995, Schedule 2 6.2(e)).
A working group has been convened by the Electricity Reform Taskforce to prepare an Accounting Separation Code to be taken up in the licence condition.
In the UK, the Regional Electricity Companies (RECs) own the distribution networks and retail supply businesses. Accounting separation was imposed upon them. There is a widespread belief that the RECs have exploited their position as electricity suppliers and network owners. OFFER (Office of Electricity Regulation) has looked into the matter. It is apparent that something more than accounting separation is required for competition to take hold. This issue is also of concern to the gas industry in NSW. In the Gas Council's Report on its Inquiry into Access to the Natural Gas Distribution Networks of New South Wales (January 1996), the following recommendation appears:
Gas Distributors should be required to provide complete accounting separation between gas transportation and gas retailing. The regulator undertakes to further explore the need for restrictions on the flow of operating information between the arms of gas distribution and retail businesses.
OFFER has commented that ownership of the distribution network concurrent with generation, supply and other activities may impede the establishment of satisfactory arrangements for full retail competition. Setting the price for the distribution use of system charges is complicated by the need to assess cost allocations between the arms of the business, and the difficulty associated with differentiating the past and prospective performance of each arm. Clear separation between competitive and monopoly elements of the same business is a well established economic principle.
"In its report the Distribution Review Group (DRG) foreshadows problems inherent in relying solely on accounting separation (Electricity Distribution Structure Review, August 1995, Distribution Review Group). The DRG recommends that the network and energy service components of the new distribution businesses be established as wholly owned subsidiaries within those businesses.
Ready access to the distribution network is a prerequisite for retail competition. It is also essential for overall industry competition (See Section 2.1). This requirement reinforces the need for an effective access regime, and prompts the question, will the proposed access regime facilitate equal access? If the answer indicates a need for change is the solution continued reliance on access regulation or should this be supplemented with market initialisation measures?
It is unrealistic to expect an imposed solution to be perfect. In view of the long-standing "closed-shop" nature of electricity retailing, the preferred strategy is to implement a network access regime which, if it errs at all, favours outside retailers.
The Taskforce seeks comments on the desirability of investigating ways of extending the separation requirements between the network and retail supply arms of the distributors, or other means of facilitating access to distribution networks by competing electrical retailers.
2.4 Legislation for the Retail Market
The material presented here is not intended to cover all aspects of the legal framework within which the new competitive electricity market will operate. The aim is to provide an overview of the new legislation and then to highlight those areas of particular relevance to the operation of the retail market.
2.4.1 Overview of legislation
Three new Acts contain the core legislation which will govern the working/operation of the NSW electricity supply industry under a competitive regime. These are:
- Electricity Supply Act 1995 (No. 94 of 1995)
- Energy Services Corporations Act 1995 (No. 95 of 1995)
- Sustainable Energy Development Act 1995 (No. 96 of 1995)
Electricity Supply Act 1995
This Act provides the necessary statutory underpinning for:
- establishing a competitive wholesale and retail market in electricity to promote efficient and environmentally responsible production and use of electricity, and to deliver a safe, reliable supply of electricity
- regulating network operations and wholesale trading in the wholesale market for electricity in anticipation of the introduction of the national electricity market
- regulating network operation and electricity supply in the retail market in a manner that ensures open access to electricity distribution systems, promotes customer choice, and creates customer rights in relation to electricity connections and electricity supply.
Energy Services Corporations Act 1995
The effect of this Act is to :
- establish certain statutory state owned corporations as electricity generators or distributors (including outline of objectives and functions)
- amend and modify the State Owned Corporations Act 1989 as required
- provide for the transfer of the staff, assets, rights and liabilities of dissolved energy service corporations.
Sustainable Energy Development Act 1995
- The effect of this Act is to establish the Sustainable Energy Development Authority and to define its functions.
2.4.2 Provisions relevant to the retail market
Electricity Supply Act 1995
The provisions of the Electricity Supply Act 1995 are designed to regulate:
- network operations in the retail market
- the supply of electricity in the retail market.
To operate a transmission or distribution system for retail supply a network operator's licence is required. To obtain a connection to premises, a customer must apply either directly or through a third party to the distributor within whose area the premises are located. The distributor is obliged to provide customer connection service to the premises or to ensure that the services are provided. A distributor must prepare a standard forms connection contract to establish conditions for service. In cases where standard forms contracts do not suffice, there are provisions for negotiated customer connection contracts.
To supply electricity a retail supplier's licence is required. As with connection, if an application for supply is made to the local distributor (who must hold a retailer's supply licence) the local distributor is obliged to supply electricity to the applicant's premises or ensure that electricity is supplied. This obligation holds for all franchise and non-franchise customers. However, if the retail supplier is not the supply arm of the local distributor, there is no obligation to supply. Supply must be provided under customer supply contracts prepared by the retailer. Negotiated supply contracts can be used for supply to franchise customers. Contracts for supply to non-franchise customers are intended to be unregulated under the Act.
Compliance with the provisions of the distribution and retail licences will be monitored by a four member Licence Compliance Advisory Board. Membership of this will comprise one member nominated by each of the following:
- Nature Conservation Council
- Australian Consumers Association
together with two members representing the Minister of Energy. The Department of Energy is responsible for ensuring establishment of the Licence Compliance Advisory Board.
The Minister for Energy is obliged to impose the following additional conditions for a retail supplier's licence:
- that the licensee develop strategies based on a reduction of greenhouse emissions in negotiation with the Minister and including independent verification of emissions
- that the Environment Protection Authority audit, at intervals of no more than three years, the effectiveness of the greenhouse gas reduction strategies - the report on each audit be made publicly available at the offices of the Environment Protection Authority, sent to the Licence Compliance Advisory Board, and tabled in each House of Parliament
- that the licence holder develop one, three and five year plans for:
- energy efficiency and demand management strategies
- strategies for purchasing energy from sustainable sources cogeneration, purchasing of renewable energy, buyback schemes from grid-connected solar cells on buildings and remote area power systems
- annual reporting in relation to the above.
It is proposed that the licence conditions be justified on the basis of their specificity to the electricity industry and its products and services, and on:
- the cost-effective protections they afford consumers, the community impacted by the licensed activity, and the environment
- necessary complementation of the Independent Pricing and Regulatory Tribunal, wholesale market rules and authorisations, government social programs, customer supply regulations, the Electricity Safety Act, and shareholder policy mechanisms.
Sustainable Energy Development Act 1995
The objects of this Act are:
- to bring about a reduction in the levels of greenhouse gas emissions and other adverse by-products of the production and use of energy
- to encourage the development, commercialisation, promotion and use of sustainable energy technology.
These objectives are to be achieved through the establishment of the Sustainable Energy Fund.
2.4.3 Retail licences and market structure
Although a distribution company must hold both a retail supplier's licence and a network operator's licence, it is not obliged to operate a retail supply business. This means a distribution company could decide to become a wires only business. In the national market, market forces may exert pressure to move to some form of amalgamation of retailers. Complete separation of the wires and retail supply businesses may be desirable; the Act and licences do not preclude this from happening.
New entrants from outside the electricity industry and interstate retailers face the same terms of entry as existing NSW distributors.
2.4.4 Customer contracts
By setting minimum standards for the contractual relationship the Customer Supply Regulation governs the provision of customer connections services and electricity supply. Depending on the nature of the service, the relationship is between a customer and either a licensed distributor or a retail supplier.
To protect customers against the possibility of a licensee's abusing market power by imposing arbitrary or unfair provisions, the regulation requires a high standard of disclosure to the customer of rights and obligations. The customer contract is written in plain English so that customers can understand to a general level, if not in full detail, the rights and obligations of parties contracting for provision of connection/supply services.
Explanatory notes will be provided in the contract, including information about the licensee's:
- standards of customer service
- programs providing for advice/assistance about:
- delivery of social programs (sponsored by the Government)
- the efficient use of electricity
- services for elderly or disabled people.
3. IMMEDIATE ISSUES FOR THE INTRODUCTION OF RETAIL COMPETITION
3.1 Overview
Key issues to be addressed in setting the framework for the opening of the market to retail competition were identified and discussed in the paper, "Retail Competition in Electricity Supply" (NSW Electricity Reform Taskforce, Issues Paper: Retail Competition in Electricity Supply, November 1995) circulated for comment in November 1995. Submissions were received from distributors, electricity users and consumer groups representing a broad range of interests (see Appendix B). Comments were constructive and tended to address issues of special relevance to the respondent.
It should be stressed that the submissions were not the sole input to the decision making process. Developments interstate and overseas are being watched. The Taskforce has also received valuable assistance from individual communications and discussions held with industry and customer representatives. An open forum and a workshop provided further opportunity for interested parties to make their views known to the Taskforce (Forum: 11 December 1995; Workshop: 19 January 1996).
The issues raised in the Issues Paper ranged from fairly technical areas such as metering, to the more fundamental questions of framework. Many of the issues were interrelated. The Taskforce is grateful to the respondents for the considered information contained in the submissions. An initial decision has been made regarding the approach for removal of the franchise. The recommendation of the Taskforce and the reasons for that decision are contained in the following section.
3.2 Approach for Removal/Elimination of Franchise
A competitive retail market has no statutory franchise customers. To achieve this situation necessitates devising some means of reducing and ultimately eliminating the statutory franchise that exists today. If the Government's reform objectives are to be met, the approach chosen must deliver effective competition within the retail sector For example, the process must be cost effective, minimising inconvenience to customers seeking alternative suppliers. While new entrants must not face artificial barriers to entry, the financial viability of existing retailers must be considered. A realistic timetable for achieving the desired outcomes needs to be set. Any change is constrained by the state of the industry, that is, the systems in place, both technical and commercial, and anticipated changes in technology. Time estimates must be predicated upon this. The process needs to be one in which dates for major outcomes are set and achieved, while allowing flexibility for the path to the outcome.
Two different approaches were detailed in the Issues Paper and comments on both were sought. One approach suggested opening up the market through controls on the entry of new retailers while allowing open entry for customers. This is termed the "supply rights" approach. The other approach, the "threshold level", proposed staging the entry of customers into the market with no restrictions on retailers' entry.
Main points arising from submissions
Supply rights approach
There is limited support for the supply rights approach. Those who favour this approach agree that, though it has merit, it is an untried methodology and difficulties would be likely to arise in the details. On the positive side, limiting new entrants affords a degree of protection to existing retailers and offers time in which to test the market without the risk posed by new entrants, especially those with considerable trading expertise.
Those strongly opposed to the use of supply rights as a mechanism for controlling the entry of new retailers maintain that the approach is contrary to the spirit of competition. Indeed, it is questionable whether such a regime would comply with ACCC (Australian Competition and Consumer Commission. This authority came into being November 1995 as the successor to the Trade Practices Commission and the Prices Surveillance Authority) requirements. There is some concern that any restriction placed upon new entrants in the NSW market could impact adversely on NSW participation in markets in other states.
A common concern is that the supply right approach adds an unnecessary degree of complexity to an already overburdened industry. Additionally, it is felt that industry would be placed in the position of a scapegoat. Customers, given contestability and then prevented from exercising their choice by high metering costs or the non-availability of meters, would blame the industry.
Threshold limits approach
Initially, general comments on the desirability of using this approach were sought. Then a series of more specific issues of detail was developed and again comments requested. In the area of detail, the Taskforce sought opinions concerning setting the initial limit and the time path for introducing in more customers as well as alternatives to using threshold limits to define customer groupings. A third issue was the desirability of this state's matching developments in other jurisdictions.
There is an overwhelming preference for this threshold limits approach to introducing retail competition. Reasons given point to the existing body of experience. Citing the Victoria experience, many of those responding felt that NSW should match Victoria and set threshold limits accordingly, arguing that a uniform approach and equal market access would create "level playing field" for market participants.
Matters of detail here produced a broader spectrum of opinion. Not surprisingly, customers, particularly commercial customers, focus on timing. The comments from the larger customers are summarised in the phrase, "sooner rather than later". The reasons cited for this stance are commercial. Where detail on choice of threshold limits was provided, opinion favoured entry at a level commensurate with Victoria and following the Victorian timetable thereafter.
NSW distributors generally favour a measured transition with well-defined limits at each stage. Country distributors express a preference for a reasonably high initial threshold to give them time to become accustomed to a market-based operation. Most agree that it could be possible to accelerate the pace at which the franchise is eliminated, to achieve full retail competition by the same date scheduled for Victoria, 31 December, 2000, subject to technical difficulties being overcome.
A note of caution was sounded by some distributors, who highlighted the lack of universal readiness in metering/communications systems. As stated above there are real concerns about the time that may be required to prepare for commercial operation.
Energy limits are preferred to demand-base measurement, but at the higher levels an "either/or" criterion is felt to be acceptable.
Discussion
The supply rights approach is a market-driven solution which offers a mechanism for introducing competition to all customers at the start of the market. However, it is felt that time taken to design a framework to accommodate this approach could delay the start of the market.
The threshold limits approach is being used to introduce retail competition into the market in Victoria and the UK. The national market is planning to open up the wholesale market using the same approach, although the NGMC (National Grid Management Council) has not spelt out the limits beyond announcing an initial threshold limit of 10MW.
Mindful of the impending national electricity market and the need to have a state market in NSW as soon as practicable, the decision has been made to recommend threshold limits as the mechanism for controlling the pace at which the market is developed.
The Taskforce recommends that threshold limits be used to manage the introduction of competition to the retail sector.
In choosing the implementation time path, the emphasis should be on developing a manageable system for NSW, and not on blindly following developments in other jurisdictions. However, these must be considered, as must the requirements of the national market. Opening the market to competition immediately, while this seems desirable to many customers, unfortunately is not possible. The practical reality is that the systems do not exist to cope with the numbers of customers wishing to take advantage of competition in electricity supply. However, alleviating this problem is the fact that the prospect of an early open market could encourage accelerated system development. Regardless, there must be a managed and manageable transition. Setting the time path requires decision on:
- the initial threshold
- the rate at which the market is to be opened up to competition
- the unit of measurement for the threshold.
The first two decisions will set the rate at which customers become contestable. This means weighing up the potential benefits to customers against possible disadvantages to existing retailers who operate within a variable customer base. This scenario must be assessed against the existing and likely future industry structure. The implications for retailer security impacts on retailer willingness to enter into long term contracts with generators. This, in turn, may affect the willingness of generators to invest in additional capacity.
In the transitional phase, vesting contracts will be used for risk management. Retailers must use this period to become familiar with operating in a market environment which includes the need to develop customer awareness. There must be sufficient time for systems development. Metering, communications and data processing systems will have to be upgraded, expanded or installed. These considerations will determine both the choice of initial entry threshold and the rate at which the market develops. These issues are discussed in more detail in later sections of this report.
The choice of the unit of measurement for thresholds is far simpler. It is appropriate to use energy-based limits, particularly at lower thresholds where annual energy consumption is the common measure. At higher thresholds there are good reasons for an approach as, it would be acceptable to use either energy or the accepted equivalent demand-based limit. Customers with large annual loads already have adequate metering in place. Depending on the initial threshold, moving to a system of energy-based limits may exclude some of them from the contestable market. The number of contestable customers will not alter significantly if this variation is permitted.
The Taskforce recommends using energy-based limits, but recognises that at the higher thresholds in certain circumstances, it may be appropriate to use the demand-based equivalent.
3.3 Market Power
Market power is not a bad thing. Market power, and more particularly shifts in market power, can bring dynamism into a competitive market. Indeed for years a well-known car rental firm ran an advertising campaign based on the theme "as number 2, we try harder". It is only when the behaviour of an individual firm has a detrimental effect on competition that market power is misused. Competition in the retail sector will be introduced in a situation where the incumbent retailers are well entrenched. Under certain circumstances, simply being there first, or being the first to take up some new industry practice, can create advantages which impact market power. So-called "first-mover advantage" is the firm-specific counterpart of entry barriers. At this point it is pertinent to ask whether such advantage is likely to compromise market effectiveness.
3.3.1 Will inherited market power impede retail competition in NSW?
All NSW retailers have a degree of inherited market power in their local area. This stems from their long association with the community, in other words, the customers. This association still has some holding power, notwithstanding recent amalgamations and name changes. Additionally, customer inertia is a contributing factor. This inertia conceivably could be so widespread as to leave large patches of de facto monopoly in the retail market. Competition would then fall well short of achieving the benefits outlined in Sections 2.1 and 2.2. Aggressive marketing by one or more retailers seeking to gain market share, would solve the problem. However, the reality is that shareholders and creditors limit the practice of buying market share.
Some retailers have an additional advantage by virtue of the size of their customer base. When it comes to sourcing and on-selling electricity, retailers with larger inherited customer bases may have a distinct advantage over smaller retailers. This may dampen incentives for competitive performance. Since retail competition in the electricity supply industries is at the embryonic stage, evidence to prove or disprove this assertion is not available. However, experience in other industries suggests that when evidence on questions of economies of scale and/or scope in retail trading does emerge, the answers will be that retailers with larger customer bases are advantaged.
If one retailer retains market share, the opportunity for other retailers to gain market share is restricted. Thus, the incumbent, equipped with knowledge of customers' contact details and payment and consumption patterns, is better placed to retain market share. A larger retailer with access to greater human and financial resources has a decided advantage. The battle for market share is what drives competition. The Taskforce's concern is that the presence of market power in the market's early stages might hinder any serious effort to gain market share, giving competition only a slim prospect of taking hold.
The relative positions of the six NSW retailers, in respect of electricity sales, are shown in Table 3.1. A disproportionate share of the market rests with just two retailers. If market share gives these two an advantage in retail trading, a problem of market dominance might emerge. To prevent this, the inherited power of incumbent retailers can be reduced. Measures to achieve this are discussed below in Section 4.3.2.
Logically, the first step is to establish the extent of the problem of market power by undertaking more detailed investigation of the issues outlined above. The findings from such an investigation will inevitably hinge on the prospects for a fully competitive national electricity market, which ideally needs to include national retail competition. As shown in Table 3.1, in an integrated retail market across three states (NSW, Victoria and South Australia) the initial market shares of the two biggest NSW distributors (MetNorth Energy and Integral Energy) are relatively modest, though still making them the leading players.
The findings of the proposed investigation of market power issues will also depend on the outlook for competition in gas supply.
Percentage shares of energy traded 1994/95:Note: Sum of percentages differs from 100% due to rounding.
- in NSW - in three states (NSW, VIC, SA)
MetNorth Energy 50% 26%
Integral Energy 30% 16%
ETSA 12%
Powercor 9%
United 8%
Eastern 6%
Citipower 5%
NorthPower 8% 4%
Energy South 8% 4%
Solaris 4%
ACTEW 3%
Advance Energy 5% 2%
Far West Energy 1% 0%
100% 100%
Total Units (GWh) 41,266 78,304
Source: Compiled by NSW Electricity Reform Taskforce from NSW Department of Energy statistical returns and from data published by the Electricity Supply Industry Reform Unit, Victoria.
3.3.2 Vertical and horizontal integration
Concentration of the industry by way of merger or the acquisition of the NSW based distributors is not an issue for the foreseeable future, given that the distributors are to remain wholly government owned. There is, however, the possibility of alliances or mergers involving some of the NSW based distributors' retail businesses. As mentioned in Section 2.1, such an alliance would provide a natural hedge against unexpected movements in the pool price.
The following could occur:
- backward integration of a retail business into generation
- movement of generators into the retail side via purchase or establishment of a retail business.
There are two issues of concern:
(i) integration of established generators and retailers
(ii) cross licence holding.
The integration of established generators and retailers raises the issue of market power resting with incumbents. The objection to extensive vertical integration is that it amounts to a concerted exploitation of both parties' first-mover advantages in the crucial period before competition takes hold. However, rigid separation of generation and retailing would remove an important potential source of competition in the retail market.
As an alternative, generators wanting to move into the retail market could apply for a retail licence (cross licence holding). There are potential benefits to customers. Larger customers, those most likely to be targeted by generators, would save the administrative costs associated with participation in the wholesale market. Customers generally would benefit from increased competition. However the problems described above still exist. For this reason, the UK RECs have limits placed on their ownership of generation capacity. National Power and PowerGen (the two major non-nuclear generators) are not allowed to contract directly to supply more than a specified percentage of the load in any REC's distribution area.
The Taskforce seeks comments on:
- the desirability of placing limits on the extent of reintegration by established participants
- the advantages and disadvantages of cross licence holding and of limiting market penetration by cross licence holders.
Vertical integration through embedded generation is a different matter. Apart from exerting market pressure on incumbent generators, this form of vertical integration can promote the use of sustainable energy sources, thus contributing to the reduction of greenhouse gas emissions
If the circumstances were such that a formal determination was required, the question of whether any merger leads to market dominance could be determined under the merger provisions of the Trade Practices Act (Commonwealth). This determination would be in keeping with foregoing comments on the potential "problem" cases of horizontal and vertical integration.
The Taskforce seeks comments on market power as a possible hindrance to competition in relevant markets including the NSW electricity market, the national electricity market and the corresponding energy and energy service markets. Responses will be taken into account when drawing up the terms of reference for the proposed investigation into the impact of market power and market effectiveness on the introduction of retail competition.
3.4 Aggregation
The question of whether customers should be able to aggregate loads, whether across one site or several, in order to meet threshold level requirements is a contentious issue. Customers with large electricity bills about which they can do nothing, feel frustrated. Retailers fear the uncertainty that aggregation would bring to determination of the customer base. To implement any policy, either allowing or disallowing aggregation, involves formulating a definition of "site". The question is whether one supply point can be classed as a site or whether a site defined by its boundary of ownership. The Taskforce has sought comment on the definition of "site".
The Taskforce also sought comments on allowing aggregation, first, by one company across multiple sites and second, across the same site by different companies. With the latter scenario, the issue of on-selling arises. On-selling occurs primarily in shopping centres, caravan parks and large commercial buildings, where the owners of the complex or site buy energy from the retailer and then on-sell (supply energy) to the tenants. The effect of the existing legislation, is to limit the on-seller's profit on the energy component of the electricity sold by prohibiting selling at more than the standard tariff. This situation will continue under the new legislation.
Main points arising from submissions
Distributors are opposed to aggregation unless the sites individually meet the threshold limit eligibility criterion. The distributors' strongest argument against aggregation is its inherent capacity to destabilise orderly opening up of the market. However, distributors are not against aggregating across metering points, if these metering points are on a single site and are associated with a single customer. This argument supports continuing with the geographic definition of a site. Distributors do provide, as a service, consolidation of accounts for multi-site customers.
With regard to the aggregation of customers across a single site, distributors express their concern about the possible difficulty of establishing responsibility in the event of non-payment. Generally, retailers feel that administering such arrangements could prove onerous. However, this really is very little different from the situation existing today in, for example, a large shopping centre. The contract to supply electricity is between the distributor and the owner/operator of the complex. There is no contract, per se , between the distributor and an individual tenant. The on-selling is part of the tenant-landlord relationship.
Major purchasers of electricity across multiple sites are concerned that if aggregation is prohibited, avenues for improved commercial opportunities could be lost to them. They wish to be treated as single corporate customers, with their status as multi-million dollar account customers acknowledged, sooner rather than later. It has been noted that, for some, the costs of the additional metering system would form a natural barrier to entry. The cost versus benefit comparison would determine whether a customer pursued aggregation, and would alleviate the retailers' fears of destabilisation. With aggregation, the definition of a site becomes less important. The majority of respondents commenting on the issue of aggregation across a single site feel it is desirable. However it is stressed that there should be no coercion; each customer must be free to choose aggregation or not.
Responses indicate that on-selling is considered to be compatible with a competitive market. However, there is a view that any customers who could be termed "captive" should be afforded protection. There is concern that the final customer may not share equitably in the benefit of aggregated purchasing. According to this view, in addition to the protection existing under general trade practices regulations a framework for on-selling in the retail market, should be established as soon as practicable.
Discussion
Aggregation is an issue only in the transitional period. Once the franchise has been removed. There will be no barriers to aggregation. However, depending on the time path chosen for franchise removal, this transitional period may last several years. Some customers may feel disadvantaged by even a short delay.
One group for whom aggregation is a pressing issue are the so-called "distributed customers". These are commercial large users of electricity who operate across a series of small sites. Under present arrangements they, like domestic customers, are price takers. Although these customers do have a wider range of tariffs from which to choose, they have not been able to negotiate the terms of their supply with retailers. The introduction of aggregation across multiple sites would allow them this opportunity.
Ideally, under certain conditions, aggregation should be accommodated within the market. Under national market regulations, sites located outside "local" distribution boundaries require half-hourly metering. However, if communications and metering are not in place, it should be possible to make temporary arrangements. These could be agreed by the parties involved. Arrangements would need to cover such matters as risk level and allocation. It may even be that these arrangements could become a permanent measure for customers with sets of near identical load profiles, such as supermarkets or service stations. This would involve negotiations between retailer(s) and the customer. If total aggregation across the entire state was not feasible, aggregation within a distribution region could be considered as an interim measure.
The question of aggregation is a much broader issue than relates to eligibility for the retail market. For many industrial and commercial customers, alternative sources of energy are available, gas and fuel oil, for example. Domestic customers also have alternative energy sources available, such as gas hot water heating but, as yet, less opportunity to aggregate. It is important that constraints on benefiting from competition in electricity do not provide artificial incentives for users of electricity to switch to alternative sources to take advantage of the price differentials created by these constraints. For example, a customer constrained to an electricity tariff, which did not represent the true cost of production and delivery, might see financial benefit in committing capital to switching energy sources. This action certainly does not serve the interests of the electricity sector and capital misapplication on the part of the customer may result.
Rather than facilitating an orderly entry into the market, constraints on aggregation may have the reverse effect by encouraging customers to exit the market. Having committed capital to the move there is likely to be great reluctance to commit further capital to return. The economic impact of not allowing aggregation may be more permanent.
The Taskforce recognises that a customer with a significant energy bill should not simply be offered a tariff. Electricity is an input to production and should like most other inputs be sourced competitively. In most cases this means it should be purchased economically under a contractual arrangement with the terms and conditions decided by the parties to the contract. Benefits will flow through to customers of companies which are able to source electricity purchases competitively. In the move to a competitive environment, the appropriate question is not whether aggregation is appropriate, but rather, at what rate it should be included in transitional arrangements.
3.5 Metering Issues
The NSW state market will operate a wholesale market with half-hourly pricing. Under national market rules, those contestable customers taking supplies from retailers other than the local retailer will require a half-hourly meter, the responsibility for which will lie with the customer. At today's prices, metering costs, which include the cost of the meter, the cost of the communications link to the data base and the cost of data analysis for calculating charges, call into question the efficacy mandating compulsory metering, particularly at the domestic level.
Results of a recent survey of costs are given in Table 3.2 below.
$ $Source: Issues Paper: Half Hourly Metering, Office of the Regulator-General, Victoria, November 1995.
Benchmark cost ($) summary Retailer A Retailer B
Meter capital cost 192 188 amortised over 5 years
Telecommunications cost 506 495 amortised over 5 years
Installation 165 161 amortised over 5 years
Maintenance 9 9
VPX meter reading charge 1,095 1,095
Total annual charge 1,967 1,949
The VPX (Victorian Power Exchange) meter reading charge covers remote monitoring, data collection and settlement service. The annual charge is based on a cost of $3 per day per supply point. It is not known what proportion of this charge can be ascribed to settlement costs.
Table 3.3 demonstrates that the cost of half-hourly metering and communications is not material to large electricity users. At the consumption level of 160MWh per annum, metering costs do become significant. At the consumption level of the domestic household, metering costs are greater than the cost of electricity and would create a barrier to entry for households participating in the retail market. At consumption levels less than 160MWh per annum, the costs of entry far exceed potential benefits from retail competition.
Customer Category 1MW+ 750MWh/year 160MWh/year <160MWh/year(a) Table assumptions:
Customer Usage -
demand kW 1,000 132 28 1
usage kWh pa 5,694,000 750,000 160,000 5,000
Charge -
Network Tariff
standing pa $4,000 $4,000 $65 $50
demand kW pa $55 $55 $0 $0
rate kWh $0.02 $0.02 $0.06 $0.05
Energy kWh $0.04 $0.04 $0.04 $0.04
Charge per year -
Network $172,880 $26,244 $9,665 $300
Energy $227,760 $30,000 $6,400 $200
Total $400,640 $56,244 $16,065 $500
Meter $1,960 $1,960 $1,960 $1,960
Meter as % of total 0.5% 3.5% 12.2% 392%
- one supply point per customer
- customer load factor 0.65
- pool price average 40/MWh
- approximation of network tariff applied.
Estimates by the Taskforce show that the expected future cost of half-hourly metering and communication will decrease, becoming less of a barrier to entry for small customers in the future. Meters are long lived assets and if amortised over a longer period than five years, their cost is lower than indicated in the Table 3.4 below. However in order to be able to make a direct comparison with the figures from Table 3.3, a five year amortisation period has been used.
NSW EstimateNote: Capital Cost amortised at 10% pa interest rate.
Existing Polyphase Single
meter phase
Capital cost ($)
Meter 300 700 400
Meter Board 20 20 20
less: Network Tariff Meter -300 -300
Meter capital cost 320 420 120
Installation costs 180 315 180
Telecommunications 850 850
Total Capital Cost 500 1585 1150
Amortised over 5 years 132 418 303
Annual Cost ($)
Telecommunication rental 135 135
Maintenance cost 9 9 9
Electronic meter reading 365 52
Tariff meter reading 50 -50 -50
Total annual costs 59 459 146
Total per annum cost 191 877 449
Total per annum cost after 59 459 146
capital costs are recovered
Source: Electricity Reform Taskforce.
There is no settlement cost item in the total. In Sweden an annual "all-up" charge of $US182 ($250) is payable. The UK annual operating costs to support trading and settlement for 22 million customers are estimated at ±70 million. A settlement charge of $100 per annum would seem realistic at the domestic level. For larger users, $500 per annum could be achievable. This would increase the total per annum cost for an industrial polyphase metering system to just under $1,500. This compares very favourably with the almost $2,000 cited in Table 3.3. A customer with annual consumption of under 160MWh would face an annual bill of $550. This, while still high, does at least indicate that the expectation of a reduction in metering costs is not misplaced.
The Taskforce requested information on half-hourly metering penetration within customer groups and sought comment on the development of metering costs over
time, as well as detail on communication and settlement systems required to enable metered data to be processed. Responses to these requests tended to come from electricity personnel and meter manufacturers. Recognising that metering for all customers may not necessarily be achievable or even desirable based on current cost estimates in relation to average electricity bills, comments were sought on the possibility of having alternatives to metering. Deemed load profiling was offered for comment as one such alternative. This issue elicited considerable response.
3.5.1 Metering systems
Main points arising from submissions
Metering penetration
Replies from the NSW distributors indicate that over half of customers with loads greater than 1MW (4GWh) have half-hourly meters installed, though not all have communications links in place. There is reasonable half-hourly metering penetration below this level, though fewer have the necessary communication links in place. Penetration varies between areas, being greater in those areas where upgrading programs have been a priority. At the existing rate of introduction, it is estimated that by the middle of next year the majority of customers above the 1GWh level will have half-hourly metering. Table 3.5 gives a breakdown of half-hourly metering penetration.
No of "Customers" ------Half-hourly meters------ % of total* This includes distributor contracts but not direct contracts with Pacific Power.
energy in GWh*
Total with comms without
>4GWh 659 401 270 131 29%
>750MWh 3,545 1,823 785 1,038 40%
>160MWh 10,748 3,479 834 2,645 47%
Source: Industry.
Metering systems costs
As stated above, these costs are made up of meter cost, communication cost and settlements cost. There is an upfront cost for installation of the meter and communications system and there is an ongoing operation/maintenance cost. Indicative costs are given below.
In providing the following information on the upgrading of metering systems, industry sources note that the cost may vary with the installation type most suitable to the application. Overheads are not included.
Indicative Meter CostsSource: Industry.
Cost Notes
Single meter system $1,900
Using existing meter $1,300 multiple feeders, install data logger
New meter $1,700 per feeder multiple feeders
Indicative Communications costs
Cost Notes
Phone line $300-2,000 high voltage isolation if required, $1,110
Cellular phone $1,100
Modem $500
It should be noted that these costs do not include expenses associated with equipment procurement, coordination of telephone installations, engineering design or interface/inclusion to data interrogation system and customer information systems.
Estimates of times required to install or upgrade meters are as follows:
Indicative Installation TimesSource: Industry.
Time Notes
Single meter system 0.5 person days
Using existing meter 0.5 person days multiple feeders, install data logger
New meter 2.0 person days multiple feeders
Communication does not have to be via individual direct phone link. An alternative is the radio-based Bi-directional Communications System (BCS). Testing & Certification Australia believes that a cost of $3,500 per metering point, including the meter, communication system, installation labour and central processing equipment is achievable for industrial customers. The incremental cost of additional meter points is approximately $1,500. As volumes increase, this cost is expected to fall below $1,000. Approximately two-thirds of the $3,500 cost is for the three phase industrial meter.
For domestic installations with less onerous metering requirements, significant cost reductions can be achieved. Indicative set-up costs for a simple one meter single phase domestic metering system providing half-hourly energy reading and daily communications are given as approximately $300. Ongoing costs for domestic metering are on the order of $20-100 per annum, depending on the type of communication system used and the number of times the meter is interrogated. Based on having 20 or more premises served by one communications concentrator, these estimates show substantial reductions over current costs.
Metering for all customers
Metering is generally felt to be desirable. However this is a long term option and interim arrangements are needed. Arguments put forward for metering are that it allows customers to respond directly to pricing signals, giving them greater opportunity to implement demand management strategies. For retailers, metering removes the risk inherent in deemed load profiling, where mismatch of actual and "deemed" profiles can place significant risk on the incumbent retailer.
Responses indicate that mandatory metering for large customers is not an issue. For domestic customers, however, the requirement for metering to be mandatory is questioned. In defence of metering, several submissions note that the prospect of a large market for single phase half-hourly meters and associated communications should lead to lower costs and new technologies which could, in turn, further reduce costs. The submissions stress that any system put in place should not discourage meter development. The ability to introduce additional services with "smart" meters is cited as a way of making a package deal viable, whereas half-hourly metering alone would not necessarily be so. The package could include better billing information, improved hot water monitoring and even appliance control. As a corollary to this, manufacturers are developing "smart" appliances, which would respond to signals sent through the communication link between systems operator and customer premises.
Discussion
The introduction of the electronic meter, developments in two-way communications, and the prospect of continuing advances in these technologies, benefits to the electricity customer. To paraphrase the words of the Director General of Electricity Supply in the UK, it would be a pity if the NSW electricity industry were to enter the 21st century with metering and communications technology based on the 19th century.
Modern metering systems benefit customers, retailers and the environment. Retailers who know the detail of a customer's usage patterns can offer contracts and tariffs individually tailored to meet that customer's precise requirements. Customers can benefit from the control that metering permits. For example, some appliances which are not time-of-use critical could be switched to off-peak periods, when the same function can be performed at lower cost.
Remote meter reading will cut the retailer's costs and also enable billing to be more frequent, monthly instead of quarterly, for example, making financial management easier for some customers. Greater knowledge of power flows on the network, and the demand management and load shifting opportunities which metering and communications present, will ensure that generation and the network (both transmission and distribution lines) are augmented or upgraded only when customer needs dictate. This is an obvious benefit for the environment. The communications system would be able to monitor the system and report outages to the network operator, enabling rapid response to power failures.
However, whether half-hourly metering should be forced upon domestic customers is an issue to be decided. Real time pricing is of value to those who can benefit from it, that is, those who can change their usage to match price patterns. This is more applicable to the larger customer. Domestic customers may well be satisfied with two-period (peak and off-peak) charging. For the majority of smaller customers, installing a half-hourly meter may not be an economic option for some time to come, at least based on today's costings.
In the transition period there may be customers who want metering but who are unable, because of installation delays or meter non-availability, to have a meter supplied immediately. These situations impose constraints on the uptake of competitive supply. In the absence of full half-hourly metering, some alternative will be needed to ensure that customers wishing to change retailer are not disadvantaged.
The nature of this arrangement, be it temporary or permanent, merits careful consideration. Load profiling is one alternative. (See Section 3.5).
Communications costs vary with the structure chosen. Different technologies are more suited to one information requirement than another. It is unlikely that one method would be suitable for all situations. In densely populated areas, information exchanged is large compared with that in rural areas. The customer mix in an area can also influence the choice of communication medium. The method chosen for communication should be tailored to suit individual area needs. There should not be a single system for the whole state. Of course it is essential to ensure that various systems can communicate with each other.
The requirements for half-hourly metering should be specified in terms of the data which must be provided/collected, information exchange needs, and the functions it must perform, rather than be specified by the physical hardware required. The specifications of requirements for the communications system must be similar. That is specification should be in terms of functionality, points of interface with meters and other information systems and the protocols. Communication does not necessarily have to be restricted to one medium, the most effective system could be multi-media. A communications infrastructure could also be utilised for water and gas metering, thus defraying the cost of the communications system. There would be the added benefit of avoiding duplication of infrastructure.
It is vitally important that the framework chosen for implementing retail competition should not impose a particular metering or communications technology. Government policy should not restrain the development of technology in either area.
3.6 Alternative to Metering: deemed load profiling
In recognition of the fact that universal metering might not be feasible for all, because of problems of availability or cost, deemed load profiling was offered for comment as an alternative in the Taskforce's November 1995 Issues Paper. This approach assigns a generic load profile to each customer (usually a low energy use customer, but not necessarily). The customer uses the profile in lieu of a half-hourly meter, thus obtaining entry to the contestable market with relative ease.
Main points arising from submissions
The load profiling issue has elicited a mixed response. There is definite agreement that the technique is not suitable for large loads, as it could expose retailers to considerable risk. The process of "netting-off" purchases from contestable customers who opt to move to other than the local retailer would be based on some average value and yet, payment at the bulk supply point would be on actual half-hourly usage. It is agreed that in those situations where metering installation was delayed, contestable customers should be able to negotiate a deemed load profile with the local retailer, which could be used for settling with another retailer. This would provide an incentive to ensure that new, cheaper technology meters were introduced quickly.
On the issue of load profiling for smaller customers, the response was less uniform. Those who are opposed to load profiling at any level cite the lack of pricing signals in deemed load profiles, and the real danger that settling on load profiling will stifle the development of inexpensive smart metering systems. However, some respondents favour load profiling as a temporary measure and, feel it would not discourage meter development provided that the commitment to metering was total.
Discussion
Even if the decision is made to aim for universal metering, realistically there will be periods when it will not be possible to guarantee the availability of a meter to those who wish to choose an alternative retailer. Some alternative to metering will have to be offered to these customers. Load profiling would seem to be such an alternative.
Where profiles are predictable, deemed load profiles together with sampling (to audit consumption) could be used satisfactorily as an interim measure in the contestable market. The contract between the retailer and customer could include a negotiated margin to cover the risks to the retailers (both local and remote retailer face risks). Allowing this option for all contestable customers would place a strong incentive on retailers to work towards the rapid installation of metering systems.
The feasibility of using deemed load profiles as the threshold limit drops is more problematic. Having load profiling as an option offers customers a low cost route to competition, particularly if the costs of metering far outweigh the benefits, as is likely for the smaller customer. Retailers face the risk of a mismatch of the deemed profile with the actual profile, though this can work both ways. The choice of profile, and who chooses it, could lead to disputes between retailers, adding to the administrative load. It is understood that the UK electricity supply industry is developing a system to assign load profiles and to calculate retailer settlements without exposing local retailers to additional financial risk. Developments in this area will be monitored.
3.7 Comments
Requiring meters for all retail customers would impact positively on the rate of meter and communication penetration by channelling resources to metering systems development. However, the questions regarding mandatory metering would persist, that is, will timing and pricing work together to provide an inexpensive smart meter when it is needed? Load profiling offers a low cost path to contestability, however, would its use stifle the development of metering technology? The advantages and disadvantages of the various options require careful consideration.
Assessment of the issues surrounding the questions posed above will be crucial to formulating the details of the trading arrangements for retail competition selected from the options presented in this report.
The Taskforce considers that work should be undertaken to investigate the feasibility of working towards more customers having a half hourly meter..
Chapter 5 outlines the implementation process. As soon as decisions on the issues presented in this chapter have been resolved, arrangements for implementation can be formulated. These arrangements should:
- allow for satisfactory implementation within the timeframe proposed
- be cost-effective for customers and retailers
- not discourage new entrants.
3.8 Other Issues
Vesting contracts
Vesting contracts are a form of financial instrument used to control the price path during transition. Their use is as a risk management tool. Applying only to the wholesale market, the contracts are written between generators and retailers. They can cover all or part of a retailer's purchases. Care must be taken when specifying the price and quantity terms of the contract. The contract must be linked to expectations of the retailer's customer base over the transitional period. Ideally, the price in the contracts should be related to the expected wholesale market price, so that the transition to a market-driven price is seamless.
In the transition to retail competition vesting contracts will be used to manage the risk to generators and retailers. The nature of these contracts is the subject of ongoing discussion. Vesting contracts will take into consideration the option selected for removal of the retail monopoly franchise.
4. OPTIONS FOR INTRODUCING RETAIL COMPETITION
In the previous chapter discussion centred upon the various issues that needed to be addressed in deciding upon a framework for the introduction of retail competition. The Taskforce recommends using the threshold limit approach to facilitate implementation. Under this approach, customers become contestable once they reach a threshold limit. The unit of measurement determining the threshold level will be annual energy use measured in Wh.
From the submissions and subsequent discussions with various interested groups, both private and public, a set of options emerged. Further analysis has reduced the number of options to four. The Taskforce feels that these four options are feasible, accommodate the needs of customers and the industry, are in line with national market requirements, and represent the set of best prospects for retail competition.
4.1 Description of the Options
A brief overview of the options is given in the Table 4.1. This format was chosen to provide immediate opportunity for comparison. In Section 4.2, the advantages and disadvantages of each option are highlighted. This is followed by an overall evaluation.
For each option further investigation is required to nominate appropriate threshold levels for the gas market as foreshadowed in the report recently submitted to the Minister for Energy by the Gas Council of New South Wales (Gas Council of New South Wales, Inquiry into the Natural Gas Distribution Networks of New South Wales, January 1996). The rates at which both the electricity and gas markets are opened to competition should be such as to ensure competitive neutrality.
The opening up of the market, after the initial stage, is planned as an evolutionary process. Workgroups with membership from the electricity industry, communications sector, business user and consumer groups) will be set up to determine trading and administrative arrangements. Alongside this will be a sustained market research and customer awareness campaign. These aspects are discussed in Chapter 5.
Timing Customer thresholds Handling of aggregation
Option A
- Stage 1 Oct 1996 4GWh pa No aggregation for multi-site users
- Stage 2 Apr 1997 750MWh pa Still no aggregation
- Stage 3 Dec 2000 + All customers Aggregation disappears as an issue
Option B
- Stage 1 Feb 1997 750MWh pa No aggregation for multi-site users
- Stage 2 Jul 1998 160MWh pa Still no aggregation
- Stage 3 Dec 2000 + All customers Aggregation disappears as an issue
Option C
- Stage 1 Oct 1996 4GWh pa No aggregation
- Stage 2 Apr 1997 4GWh pa Aggregation permitted
- Stage 3 Jul 1999 All customers Aggregation disappears as an issue
Option D
- Stage 1 Oct 1996 4GWh pa No aggregation
- Stage 2 Apr 1997 750MWh pa Still no aggregation
- Stage 3 Oct 1997 All customers Aggregation disappears as an issue
4.2 Comparison of the Options
Option A
Timing Customer Number of % NSW
thresholds "customers" consumption*
Oct 1996 > 4GWh pa 650 21
Apr 1997 > 750MWh pa 3,500 33
Dec 2000 + All customers 2,700,000 100
* Excludes contracts.
Under Option A, aggregation would not be permitted, but, the period between Stages 1 and 2 would be relatively brief. The period between Stages 2 and 3, in contrast, would be quite long. This would allow retailers time to conduct market research and
market trials and develop environmentally-focused strategies. The provisions of the Electricity Supply Act give the Minister for Energy the power to require retailers to undertake such programs.
Advantages
- a large percentage of customers in the > 4GWh range already have half-hourly metering with communications
- customers in the first tranche are reasonably familiar with planned market operation
- retailers have ample time to prepare for the contestability of domestic customers
Disadvantages
- early entry to the market is not possible for customers, operating across a number of sites
- commercial customers in the < 750MWh may be unhappy at the slow path to contestability
- there could be problems in metering and communications provision for the second tranche of customers.
Option B
Timing Customer Number of % NSW
thresholds "customers" consumption*
Feb 1997 > 750MWh pa 3,500 33
Jul 1998 > 160MWh pa 10,800 41
Dec 2000 + All customers 2,700,000 100
* Excludes contracts.
The time path of Option B matches that of Victoria in the later stages. To allow sufficient time to develop the systems needed to manage the entry of 3,500 customers to the market, Stage 1 would commence in February 1997, not July 1 1996 as in Victoria. No aggregation of sites would be allowed.
Advantages
- alignment with Victorian market achieved quickly
- after initial opening, phased entry allows time for systems development
- larger individual commercial customers enter the market ahead of domestic customers.
Disadvantages
- at onset there may be too many customers. This could lead to delays in metering provision
- alternatives to half-hourly meters would probably be required from the outset and would need fast-tracking (which could compromise the solution)
- very short timeframe to advise the large number of customers of imminent changes.
Option C
Timing Customer Number of % NSW* Excludes contracts.
thresholds "customers" consumption*
Oct 1996 > 4GWh pa 660 21
Apr 1997 > 4GWh pa** see text below >21
Jul 1999 All customers 2,700,000 100
** At April 1997 aggregation will be allowed (conditions apply).
Option C would allow aggregation after a six month period. Delaying the introduction of this measure is designed to give retailers time to accustom themselves to the marketplace. Aggregation would not be unfettered. To qualify for aggregation, all premises would have to be owned, occupied or controlled by the corporate customer. Metering of aggregated sites will be a contractual issue between the customer and the retailer. However, it would have to be consistent with the metering provisions of the state code of conduct (see Chapter 5).
The significance of aggregation as an issue became apparent as this report was being prepared. Given its importance, rather than make an uniformed guess as to the likely uptake by this customer group, the Taskforce is now seeking information through various channels. Note the request in this report (see Section 4.4).
Advantages
- a large percentage of customers in the > 4GWh range already has half-hourly metering with communications
- distributed customers can achieve early entry to the market conditional upon certain requirements
- retailers have time to prepare for full contestability.
Disadvantages
- the added contestability of the customer base due to aggregation could pose a problem for retailers in contracting supplies
- customers not able to aggregate may feel disadvantaged by the lack of an intermediate threshold
- the process requires fairly heavy commitment of resources.
Option D
Timing Customer Number of % NSW* Excludes contracts.
thresholds "customers" consumption*
Oct 1996 > 4GWh pa 660 21
Apr 1997 > 750MWh pa 3,500 33
Oct 1997 All customers 2,700,000 100
Option D is the "courageous" option. Although aggregation is not permitted, the period to full contestability is very short. Of all the options this would require the most commitment from the industry and from customers. There would need to be a general acknowledgment that acceptable interim solutions were the order of the day and that flexibility is more helpful than rigidity.
Advantages
- fast-track path to full contestability
- although there is no aggregation, the delay for distributed customers is minimised
- retailers gain commercial experience at all levels ahead of full national market contestability.
Disadvantages
- little time for systems development thus will result in interim solutions which may inhibit future development
- customer dissatisfaction levels likely to be high as unprepared retailers adapt to the new environment (many customers will also be unprepared)
- time and resource commitment to ensure smooth transition is very high.
4.3 Evaluation of the Options
4.3.1 Growth of contestable trade
Figure 4.1 compares the proportion of total energy demand opened up to contestability under each of the four options. Calculated for the year ending 30 June, the figures take into account the phasing-in of customers. This contrasts with the numbers presented in the tables in Section 4.2 where the figure represents the proportion of energy sold to customers in a particular "class".
On the surface, Option C differs in two notable respects from Options A and B:
- The first difference is the apparent low level of contestability in the initial years. However, this is not so much a function of the characteristics of Option C as a consequence of not being able to assess the impact of aggregation. The absence of reliable data has precluded any realistic figures being included in this report. The level of contestable load will inevitably be higher than shown, how much higher will be indicated in the Final Report (based on responses from the distributors).
- The second difference is a shorter transitional period for Option C than options A and B. The market is fully contestable in July 1999 compared with the December 2000 date of the these two options.
The percentage level of contestability shown in Figure 4.1 is the total across the state. As expected, there is a variation across individual distributors, which is a function of customer base. For each option, the ranges of variation across distributors is presented in Table 4.2. Under Option B, for example, the overall state average for contestable load is 17% in 1997. However, for one distributor it may be as high as 21% and for another it may be as low as 8%. Each retailer has a different risk exposure to the contestable market at a given threshold level. The range of variation under Option C may be wider than indicated, depending upon the number of customers within each distributor's customer base who are eligible to aggregate and likely to do so.
VARIATION IN THE LEVEL OF CONTESTABILITY ACROSS DISTRIBUTORS COMPARED WITH THE STATE AVERAGE FOR EACH OPTION
Year Option A Option B Option C Option D
State Range State Range State Range State Range
Average Average Average Average
1997 19% 6 17% 8 16% 3 19% 6
1998 33% 15 33% 15 21%+ 4+ 83% 79
1999 33% 15 40% 21 21%+ 4+ 100% 100%
2000 33% 15 40% 21 100% 100% 100% 100%
2001 66% 57 69% 60 100% 100% 100% 100%
2002 100% 100% 100% 100% 100% 100% 100% 100%
4.3.2 Market power and choice of option
The figures in the above tables and those quoted in the discussion implicitly assume that all contestable customers will have a viable choice. However, because lead times for meter and communications installation are likely to be long, and for a variety of other reasons, not all customers fulfilling the eligibility requirements will actively consider changing their supplier, and only some of those will make a change. Both the degree of interest and the extent of uptake will depend partly on trading arrangements and systems development, and partly on any action taken against inherited market power.
Should expected uptake rates affect the choice of option? Entering an unprepared market too early may result in chaos. Customers prevented from exercising their choice by lack of commercial infrastructure, will naturally be frustrated. Many of these may just give up. Thus it may be better to have an implementation path which allows time to develop the rules, the systems and the expertise which will facilitate customer choice.
Systems development takes time. Delays favour incumbents, heightening concerns about incumbent retailers' market power as expressed in Chapter 3. However, it is possible to introduce measures designed to prevail against the market power of incumbents.
One possibility is to require local retailers, in the lead-up to the latter stages of franchise removal, to institute competitive tendering for the supply of some or all of their franchise customers. This would give interested outside retailers access to relevant information on the customer base, reducing information asymmetry. All who tendered would be able to develop more realistic corporate strategies for increasing shareholder value during the transition to the market and beyond. A variation on this would be to re-allocate customers by means of a centrally managed process, along the lines used for third party personal motor vehicle insurance cover in NSW a few years ago.
The market itself may produce the solution. Business alliances between market participants or even withdrawal from the market may be strategies that warrant serious consideration. Regrouping and rethinking is a natural part of market development. The competitive tendering of franchise supply (either on a selective basis or across the board) would facilitate this process. It would also help to attain a market structure that was not only less hostile, but was positively inviting to effective competition.
Incumbent market power is an issue in introducing competition. If customers who are eligible to choose are both able, and encouraged, to exercise that choice, incumbent market power will be diminished. This should be borne in mind when considering the options.
4.3.3 Ranking of options
As stated above Option D would require heavy resource commitment. In theory, all customers, in theory, would be contestable as of October 1997, but in practice, all may not be able to exercise the choice given to them. Metering and associated communications systems will not be in place to serve more that the top customer classes. Load profiling is a feasible alternative to metering, but has yet to be tested in a situation involving large numbers of customers. Load profiles have to be agreed upon and the processes associated with settlements and the administrative and cost burden these impose have to be considered.
It is possible that the numbers of customers who actually chose an alternative retailer, either via metering or other agreed arrangement, would be manageable. However, this would not be known till after the fact, making Option D a somewhat risky choice. The shortened timeframe would provide minimal opportunity for customer education.
Option B proposes a more regular phased approach. Matching the Victorian threshold limits would make for a simpler transition, eliminating confusion among customers, particularly those who buy in both states. Having the two states move in unison would facilitate the introduction of the national market and encourage cooperative system development. In theory, Option B ensures a level playing field for competition. In practice, NSW distributors may be disadvantaged for a variety of reasons, including shortcomings in other states' access regimes, which are being taken up in the national market development process. Furthermore, development of the NSW system may be too rushed, necessitating stop-gap measures which may prove less than satisfactory. There is a rather short-term focus to the Option B approach. In prescribing a path to follow, this option leaves little space for adapting to changed conditions which may arise. Developments in technology, for example, are likely to make systems chosen in haste obsolete.
In contrast, Options A and C do not have a low intermediate threshold. These two options provide for processes to elicit information about the market and its direction and then provide feedback to the participants. These options give a "breathing" space to the industry for development of "open-interface" systems development and to retailers to hone their marketing skills. Retailers would have time to plan the energy efficiency and demand management strategies required under their licence conditions. Options A and C recognise, to differing degrees, the distributed customer (Option B makes no allowance for this customer class). There is also more recognition of the domestic customer in Options A and C.
The apparent downside for the smaller customer under Option A is the rather long wait for contestability. However, a program of trials would precede implementation. This would involve testing the full competitive market arrangements in a selected area, or areas, thus providing a mechanism for introducing retail competition to at least a sample of domestic customers. The exercise would be invaluable in assessing and fine tuning market arrangements. It is likely that there would be interest from other energy providers and possibly the communications sector. Encouraging the involvement of others will broaden the appeal and help defray costs. Ongoing market research programs would also be implemented. Customers, especially the smaller customers, will be encouraged to take a more proactive role. Education programs would be an integral part of the process.
Option C shortens the waiting time for domestic contestability and more importantly, allows distributed customers almost immediate entry to the contestable market. This would be implemented by allowing aggregation. As stated above, the threshold for aggregated loads would be 4GWh. Aggregation, however, does pose an unquantified (at this stage) risk for retailers' profitability. Insufficient is known at the individual distributor level about the impact of aggregation on the customer base. However, some distributed retailers might switch energy sources. The risk to retailers of this happening would need to be taken into account when making any decision on the merits or otherwise of aggregation.
4.4 Observations and Requests for Input
The Taskforce considers that Option C has considerable merit in that it presents distributed customers with an early opportunity to source their electricity purchases competitively. However, the Taskforce recognises that Option C also presents, at this stage, an unquantified risk to existing NSW retailers.
The Taskforce seeks, in confidence , detailed information from NSW distributors on the potential erosion of their sales and profit under Option C relative to Option B.
Deciding upon an option will mean trading one set of customers' wishes against another, customers against retailer and so on. There is no simple decision. As a general observation, the Taskforce supports the introduction of retail competition in a way which permits customers entry as early as possible, bearing in mind that the Taskforce has a responsibility to provide a managed introduction which:
- minimises disruption
- minimises confusion for customers and the industry
- provides the existing electricity businesses with a reasonable opportunity to be profitable.
If early entry is not possible for all customers, then the transitional period should be used to good advantage to carry out market research programs designed to ascertain customer needs, to organise trials, to implement an education program aimed at heightening customer awareness and for systems development.
The Taskforce seeks comments on the options presented and asks respondents to indicate their preferred option.
With regard to the opening up of the gas market and the benefits of opening the gas market in parallel with the electricity market:
The Taskforce seeks information, for each of Options A, B C and D, on a suitable equivalent threshold for gas which would leave both markets competitively neutral.
5. NEXT STEPS
Immediately the decision is made regarding which of the options to adopt for the introduction of retail competition, the implementation process must begin. Competition in the retail market must be introduced in a way that not only ensures customers have a choice, but also encourages customers to take advantage of that choice. Customers will participate if they have confidence in the system and are aware that there are proven benefits which can be accessed without hassle. Competition should be introduced in an orderly fashion, giving full and careful consideration to all the issues. Timetables should be set, and adhered to, activities coordinated and progress monitored.
5.1 Managing the Implementation
The nature and quantity of the work involved in ensuring retail competition is introduced in an effective and efficient manner demands a project management approach. Top priority is the immediate formation of a coordination group (or similar). This group will oversee, and take full responsibility for, market implementation. Concurrent with this must be the establishment of a series of quasi-autonomous taskforces, each charged with responsibility for specific major issues and accountable to the coordination group.
Many issues need to be resolved. For the market to function, regardless of the option chosen, decisions will need to be made on many issues in the next six months. There are two broad groupings into which the issues can be divided. First, there are those issues which essentially relate to the practical and technical side of the implementation, that is, the trading arrangements. Second are those issues which are more commercial/legislative in nature, defining the relationships between customer, retailer and distributor both in the transition and in the fully competitive market.
5.1.1 Trading arrangements
Early decisions on trading arrangements are crucial to the introduction of retail competition. Practical issues associated with trading arrangements cover metering, data collection and settlement.
Trading arrangements manage information flows, and cover both the actual physical arrangements for transfer of information, and the assignment of responsibility for that transfer. The practical activities that come under this general descriptive umbrella form the link between the energy flows and the financial flows. Electricity usage data from the customer is collected for verification and initial processing. This information undergoes further processing for account management. At this last stage, the settlement accounts for market participants are determined.
Communication systems
Communication systems link activities. A number of options are available. For instance, meter interrogation can be via dedicated phone lines, cellular radio or distribution line carrier. Communication systems using different media have strengths and weaknesses in dealing with different data exchange requirements. These requirements are functions of geographic terrain, customer density and data exchange needs.
Developing a communications strategy requires identifying the functional needs of the customer and the industry (retail, network and generation) currently and in the future. Speculation about the role of the industry and the value added services likely to be provided will help justify the cost of communications. There are many prospective and emerging technologies. It is desirable not to constrain solutions any more than is absolutely necessary.
The results of these studies will enable multimedia communications structures to be developed to utilise the benefits of each medium in the most efficient and effective way with regard to complexity, reliability, security and cost.
Task A: To develop a trading system communications strategy that will allow a cost effective utilisation of current and future technology.
Metering
Metering is the provision, installation and ongoing maintenance of meters. Under national market rules, metering provision is designated a contestable activity. Accreditation arrangements have yet to be developed. An assessment of personnel availability and experience, current and forecast, has to be made to determine whether transitional arrangements may be necessary.
Although half-hourly single-phase meters are readily available, the cost to the domestic customer could be high. Cost reduction will undoubtedly accompany increased production and it may be possible to simplify the design to achieve further reductions. In order to increase meter penetration, half-hourly metering could be mandated in new buildings and in replacement programs.
Task B: To assess the costs of metering and to make recommendations on transitional arrangements.
Relevant to Tasks A and B, Standards Australia has several groups working in the areas of metering and communications. These include Committees EL/11, Electricity Metering Equipment; TE/18, and Customer Metering and Services Interfaces; and Subcommittee TE/18/2, Network Communications.
Data collection & verification and retail settlement
In a competitive market, customers can choose a contract with a pricing structure related to pool prices or a tariff-style contract. For customers with a tariff-style contract, daily data collection may not be necessary. Less sophisticated, and hence less costly, communications systems could be used. However, the introduction of weekly or monthly data collection would send large volumes of data to be processed at a date in the future, not on the day in question. This would have to be accommodated in the settlements process.
As with metering, the functions of data collection and settlements could be provided by an independent body. This would ensure that the provider of the service was independent of the user of the service.
Task C: To assess the cost of data collection and settlements and make recommendations on the choosing of service providers.
All the implementation issues discussed so far have a bearing on the trading arrangements. They are the practical issues. Information gathered for completing Tasks A-C will enable a decision to be made in respect of a possible all-metering solution to form the basis of the trading arrangements.
Task D: To investigate the feasibility of implementing an all-metering solution.
Load profiling
Previous discussion, both in this document and the Issues Paper, has acknowledged that in the transitional phase external factors may inhibit the development of an all-metering solution. For example, lack of meters and high costs for the domestic customer for example, were cited. For these reasons, an alternative to metering, in the short term, or even the longer term must be considered. That alternative is load profiling.
Some of the areas that need investigation are: choice of profiles, the introduction of a mechanism for dispute resolution, how often meter are read. On a macro level, there are various approaches to using profiles in the settlement procedure. These are either assigning profiles to all, or assigning profiles only to those who choose other than the retailer in their distribution area. As with requiring half-hourly metering, in this process an advantage may be given to the incumbent retailer. All these issues must be considered.
Task E: To examine the feasibility of load profiling as an interim or more permanent solution.
The investigations detailed in Tasks A-E will provide the background information upon which a sound judgment can be made regarding the following decision.
DECISION: WHICH TRADING ARRANGEMENT TO SELECT FOR RETAIL COMPETITION
5.1.2 Commercial framework
Allocation of responsibility
Deciding upon the trading arrangement is the first of many decisions. In order for the implementation to move forward, responsibility for the various stages in the trading arrangement must be assigned. This is necessary for the proper development of system specifications and for the tendering process.
Task F: To resolve the issue of who is to bear operational responsibility for the various activities of the trading arrangement.
Cost of implementing trading arrangement
Implementation will incur costs. There are the twin issues of costs and cost recovery. A percentage of the costs will be borne by the customers directly concerned, and the remainder will be borne by customers in general. Costs must be carefully monitored to ensure that, for customers, the benefits of competition outweigh the costs.
Task G: To monitor costs of the trading arrangements and examine the allocation of costs.
5.1.3 Retail licences and a code of conduct
Practical arrangements for customers in the retail market will have to be worked out. For example, what happens when a customer changes retailer? What notification period has to be given and to whom? Is it the customer's responsibility to notify the network? These and other issues will need to be addressed. They indicate the need for a retail code of conduct.
Then there is the question of the access to data. This is a far from trivial area. Indeed, the issue of data ownership and the associated issue of confidentiality of data are of great concern to market participants. A register will be kept of meters - what information will be required and who will be able to access the data base? Who will own the meter? While the code of conduct for the national market, and that for the interim state wholesale market, deal with some of these issues, there are others that need to be resolved within the context of the retail market. Given that customer interests are involved, it is appropriate that representatives of customer groups be involved in the process.
In parallel with the development of the code, there will be a legislative implementation process. The development of the conditions of the retail licences will be a major task. As detailed in Chapter 2 (Section 2.4.2) licence holders will have to develop energy efficiency and demand management strategies. It is important that conditions covering these requirements be clarified prior to the full onset of competition. A workgroup with responsibility for legislative implementation matters is an essential part of the implementation process.
The suggested arrangement is illustrated in Figure 5.1.
Task H: To develop a code of conduct for the retail market referenced to that developed for the national market, and consistent with retail licence conditions.
5.2 Related Issues
Education
The existing retail market is one in which centrally determined standards of service are offered to customers at tariffs which are quite tightly constrained by regulatory edicts. With retail competition, customers will be have to select a package from a wider range of services and prices. This should be an informed choice. Customers will value different services, and retailers will have commercial reasons for discovering what these are, in order to respond. Successful retailers will be those who establish a rapport with, and gain additional knowledge of, customers.
Retailers must gain customer awareness, and customers must acquire market awareness. During the transitional period, there will need to be a significant publicly managed effort to raise customers' awareness of the market. Customers will need to be informed in simple terms of their rights and obligations, and of procedures for changing supplier. Basic information should be disseminated regarding who the licensed retailers are. Many customers will need general guidance on how to take up their new opportunity to shop around.
It will also be useful for the groups working on Tasks A-H to have some means of:
- obtaining information on customers
- testing customers' awareness of specific issues
- gauging customer opinions as market development progresses.
Task I: To develop strategies for raising customer awareness of the market, collecting relevant customer information and gauging customer opinions in order to assist with market development .
During the transitional period there will be a monopoly franchise, albeit a diminishing one. It is the responsibility of the Independent Pricing and Regulatory Tribunal of NSW to set tariffs for franchise customers.
Task J: To monitor market development and prospective changes in price when customers move from franchise to non-franchise status.
5.3 Strategy
The discussion above is a brief overview of some of the tasks ahead. It reinforces the need to adopt a project management approach. The structure envisaged is shown in Figure 5.1.
It is imperative that customers and the industry know broadly, well in advance, what is going to happen and when. Uncertainty in the public sphere is no friend of business.
In discussions held with those involved in the UK reform process, this advice was given:
- decide on a market development strategy and stay with it
- at the same time, allow for flexibility to have review or adjustment on fairly narrow criteria and include this in the project brief - above all set firm dates and don't allow slippage
- don't introduce major changes in mid-course
- be very clear about responsibilities and obligations
- don't seek perfection, be realistic
- keep everyone well informed.
As a set of guidelines for the implementation process in NSW, the above points seem eminently suitable.
5.4 Future Directions
To establish the contextual framework for the operation of the retail market, a high level resolution to move forward with an overall sense of purpose and the direction established in advance, is imperative. However, in order to take maximum advantage of technological developments, and to benefit from operational experience, an adaptive approach is preferred regarding the detail.
While there should be definite staging points and a firm timetable, there must also be sufficient flexibility and recognition that development in a number of areas is best served by being introduced progressively or even left open to capture the benefit of experience. This approach will require that there be mechanisms for future amendments which must work well in practice. Any changes made must be within the overall framework and in line with the overall sense of direction.
Low barriers to entry and a sufficient number of retailers are the best guarantees of adequate competition. To protect the interests of customers, the market should be of sufficient transparency that any attempt to exploit a dominant position would be quickly detected. This necessitates that the market design ensure good information flows. No company should have a dominant position with regard to information.
Retail competition will give customers the freedom to choose from among competing retailers. Setting the framework and ensuring its implementation will make that freedom and choice available to customers. Achieving a workable competitive retail market requires careful planning and unwavering commitment. This is the start of an exciting and challenging period.
APPENDIX A
GENERATORS AND DISTRIBUTORS
GENERATORS
First State Power
- Mount Piper
- Munmorah
- Vales Point
- Wallerawang
Macquarie Generation
- Bayswater
- Liddell
DISTRIBUTORS
Six new electricity distributors were formed in October 1995, replacing the former 25 distributors. The new distributors and their predecessors are:MetNorth Energy
- Sydney Electricity
- Orion Energy
- Prospect Electricity
- Illawarra Electricity
- Namoi Valley Electricity
- New England Electricity
- NorthPower
- Northern Rivers Electricity
- North-West Electricity
- P-CCC Electricity
- Tenterfield Shire Council Electricity Division
- Central West Electricity
- Ophir Electricity
- Southern Mitchell Electricity
- Ulan Electricity
- Western Power
- Monaro Electricity
- Murray River Electricity
- Murrumbidgee Electricity
- Northern Riverina Electricity
- Southern Riverina Electricity
- Southern Tablelands Electricity
- South-West Slopes Electricity
- Tumut River Electricity
- Broken Hill Electricity
(name change and corporatisation)
APPENDIX B
SUBMISSIONS RECEIVED
Advance Energy
AGL
AGL Gas Companies
Ampol Refineries
BHP
Boral Energy
Capral Aluminium
CitiPower
Combined Pensioners Association
Department of Energy
Greenpeace Australia
Integral Energy
MetNorth Energy
NorthPower Energy
Pacific Power
Pasminco
PowerCor
Retail Traders’ Association of NSW
Solaris Power
Energy South
Standards Australia
Telstra
Testing & Certification Australia
The Australia Institute
UCI Deloitte
University of New South Wales