ELECTRICITY INQUIRY

FULL RETAIL CONTESTABILITY

SUBMISSION TO THE ACT INDEPENDENT

COMPETITION AND REGULATORY COMMISSION

February 2002

CONTENTS

EXECUTIVE SUMMARY

1.INTRODUCTION

2.BENEFITS AND COSTS OF FRC

2.1Benefits

2.2 Costs

2.3FRC Options for the ACT

3.ELECTRICITY MARKET PARTICIPANTS

4.QUANTIFY COSTS AND BENEFITS

4.1Costs and Benefits Quantified

4.2Customer Impacts

5.AVOIDING OR MITIGATING ADVERSE IMPACTS

5.1Consumer Protection

5.2Customer Specific protection

5.3Price Regulation for Small Customers

5.4Observe and Learn from other Jurisdictions

6.DEEMED PROFILE OR FULL METERING

7.EXPERIENCE IN OTHER JURISDICTIONS

8.OTHER RELATED MATTERS

9.ActewAGL’s POSITION

EXECUTIVE SUMMARY

ActewAGL welcomes the Commission's inquiry into Full Retail Contestability (FRC) for electricity.

A decision to implement FRC will directly affect all the Canberra community. For this reason alone it is a very important issue and the best available evidence and analysis must be used to ensure that decisions in this area reflect the interests of electricity consumers, utility businesses and the community.

ActewAGL has previously presented its views on FRC to an inquiry team set up by the previous government. The views expressed at that time by ActewAGL remain current, and there is now some early evidence available on FRC implementation in other jurisdictions to validate some of ActewAGL's concerns at that time.

If the Government decides against FRC:

1.It will lessen the ACT's Government's claim to a Council of Australian Government (COAG) payment of several million dollars. [This, of course, needs to be off-set against potential reduced dividends from ACTEW, if ActewAGL loses market share or is forced to reduce margins under a competitive regime].

2.The ACT will have a different approach to NSW and Victoria as both these jurisdictions implemented FRC in Jan 2002. The ACT would then be more closely aligned with the position taken in the other States including Queensland and South Australia.

3.The electricity market will be inconsistent with the gas market, as there is now a fully competitive market for gas in the ACT. [Notwithstanding the fact that whilst the gas market is open to competition, there has been no activity by other retailers, yet the cost of being FRC ready for gas is to cost each customer $16 per year.]

4.Larger and more affluent domestic consumers, who would be highly prized by external retailers, may be denied access to potentially cheaper energy prices. It would also potentially deny customers access to improved products and retail service.

If the Government decides in favour of FRC:

1.There is the distinct risk that domestic prices will rise because Canberra prices are already 20% below the national average. Wholesale prices are trending upwards and ActewAGL's regulated retail margin is low compared with competitive industry benchmarks.

2.Any benefits from a competitive market will not be shared equally. As external retailers poach larger, more affluent domestic customers, ActewAGL's fixed retail supply costs will need to be shared across the remaining customer base. So prices would be forced higher for those customers that are less able and less likely to switch retailers. This includes the poorer and disadvantaged members of the community.

3.There is evidence to suggest that a safety net price (termed a default tariff) may be used to protect such customers. However, it is likely to be higher than the domestic energy price that would have prevailed if the market had continued to be regulated under the existing retail price cap till June 2004.

4.There will be significantly increased costs that need to be passed on to customers. These include the cost of IT and related systems necessary to support market operations. Dependant on decisions relating to metering versus deemed profiling, there may also be significant additional costs related to the replacement of ActewAGL's meter fleet.

ActewAGL's Position

While the decision on whether to proceed or not with FRC will be a difficult one, ActewAGL's position is quite clear.

1.ActewAGL is neutral with respect to any government decision in regard to FRC, providing it is properly compensated for any prudent and sensible costs incurred in preparing for the market. As stated above, the seeking of the advice from the Commission is a sensible precaution.

2.It will take at least nine months and cost several million dollars for ActewAGL to complete its preparations for FRC and ActewAGL is reluctant to spend this money without a clear indication from the Government that FRC is to proceed.

3.There is significant merit in observing the implementation of FRC in other jurisdictions so as to better understand the impacts and learn any important lessons.

  1. If the Government wanted to move earlier, ActewAGL would be prepared for a further opening of the market to 40 MWh (includes small to medium enterprises). While the exact timing required to implement this phase would need to be properly assessed, it is thought this could be achieved relatively quickly and easily using existing national market metering and related procedures.
  1. ActewAGL also has one over-riding concern. The government must decide between competition or regulation of prices. It should not follow the model introduced in Victoria and California where caps are placed on retail prices but not wholesale prices. This would significantly threaten the viability of the retail business.

1.INTRODUCTION

The Independent Competition and Regulatory Commission (the Commission) has received a terms of reference from the ACT Government to conduct an inquiry into Full Retail Contestability (FRC) for electricity. Specifically, the Commission has been asked to investigate the public benefit of the extension of FRC for electricity in the ACT.

The Commission has produced an Issues paper (Jan 2002) and seeks submissions to assist its review of this issue by 8 February 2002.

ActewAGL welcomes the opportunity to assist in this review. In the first instance, it has prepared this submission. The submission has been tailored to address the relevant items in the terms of reference. ActewAGL has focused on those areas of the reference where it has specific knowledge and expertise.

This is a public submission to assist community discussion and understanding of this important issue. As a result any commercially sensitive information will be made available separately to the Commission. Further information will also be provided separately in accordance with any specific requests. Through this submission and any additional information provided, ActewAGL wants to ensure the Commission has the information it needs to properly consider and evaluate this issue.

While FRC is primarily a retail issue and most of ActewAGL’s submission presents a retail perspective, FRC will have a significant impact on the network business. ActewAGL networks has been careful to ensure all these impacts and costs are identified separately in the submission. Where appropriate, the submission identifies the specific contribution of ActewAGL Distribution to the submission.

ActewAGL has given long term support to the ACT Government’s competition policy initiatives and has assisted with its ongoing reviews into market reforms. In this regard, in August 2001 ActewAGL made a public submission to the Urban Services Standing Committee Inquiry into Extending Retailer Choice. This presentation material is also available to assist the Commission’s review.

ActewAGL will support any decision reached by the Government as a result of this review. This is with the understanding that there be appropriate pass through of legitimate and commercially sensible costs incurred by ActewAGL in preparing for, and giving effect too, an eventual government policy decision in relation to FRC. These costs need to be recoverable even in the event that FRC does not proceed in the ACT.

ActewAGL has been working closely with the National Electricity Market Management Company (NEMMCO) and Government departments in preparing for FRC. It has been developing the “physical” elements of the contestable market including processes for customer churn, market settlement and new IT systems to enable participation in the FRC markets in other jurisdictions and to interface with the new NEMMCO systems required for FRC.

Competition in electricity has been progressively introduced in the ACT since December 1997. ActewAGL has been very active in this market. There are now some 13 registered retailers in the Territory. Any electricity consumer using more than about $10,000 worth of electricity per annum (ie greater than 100MWh pa) is free to buy their power from any one of these retailers. There are currently over 1,600 contestable customers that consume about 47% of electricity imported into the ACT. A further 135,000 franchise[1] customers consume the remaining 53%.

ActewAGL also operates a retail gas business in the competitive ACT gas market. This market has been competitive for large customers for some time, with retailer choice extended to all customers in July 2001.

Competition in this market has been largely nullified by the lack of participation by retailers other than ActewAGL, and to this date no gas customer has changed retailer. The result of this is the costs associated with the introduction of FRC in the gas market have been passed on to a market that has no real choice available to it.

2.BENEFITS AND COSTS OF FRC

Reference Item 1

The costs and benefits of the implementation of full retail contestability for electricity for the ACT, taking into account the Territory’s obligations under the Council of Australian Governments (COAG) and National Competition Agreements. The review should include options for the ACT in relation to :

  1. proceeding as soon as management and administrative systems allow; and,
  2. not proceeding at this time.

2.1Benefits

Some of the specific benefits from FRC would include:

  1. Creation of a fully competitive energy market in the ACT, as both gas and electricity would then be open to competition;
  1. Alignment with competitive electricity markets in Victoria and NSW;
  1. Enhancing the ACT Government’s claim to relevant competition policy payments;
  1. The potential for improved products being made available to customers. Customers may benefit from a more varied product offering as retailers differentiate themselves to capture market share, and as new and innovative marketing strategies emerge. Customers who do not move may be offered additional services to remain;
  1. A similar potential for improved retail service quality. Customer benefits should also emerge as retailers sharpen service quality skills in order to capture or retain customers;
  1. Some customers may have better incentives to manage their demand for electricity and reduce costs in response to specific prices that reflect costs on a more accurate and timely basis via smart metering;
  1. Larger customers with ‘good’ loads and credit rating may be able to exercise increased market power in direct negotiation with retailers. This can result in some customers gaining concessions and service levels that may not have previously been available to them. This level of market power would generally not be available to individual small customers unless they were formed into a buying cooperative;
  1. Some customers may also be able to use their knowledge of the market to advantage in a contestable environment;
  1. There is a community expectation that with FRC, prices will fall. However, the overall effect of competition on retail prices is less certain, as is the pricing effect on specific market segments. This aspect will be addressed in more detail in section 4.

2.2 Costs

Some of the specific costs from FRC would include:

2.2.1 Dividend Payment to Shareholder

At present ACTEW as a 50% shareholder of ActewAGL, pays a dividend to the ACT Government. There is the potential for reduced dividends from ACTEW if ActewAGL loses market share or is forced to reduce margins under a competitive regime. This would offset to some extent, any potential benefit from FRC in enhancing the ACT’s claim for competition policy payments.

2.2.2 Regulation vs Competition

ActewAGL takes this opportunity to register its view that there must not be a cap on retail prices to protect customers in a competitive market whilst there is no cap on wholesale purchasing costs. Based on recent local and international evidence, there is potentially a significant risk to the incumbent retailer that needs to be recognised in this review.

This position is not necessarily inconsistent with the application of a safety net price (default tariff) that may be used to protect some customers, at least during a transitional phase. However, any such default tariff must be market based and flexible enough so as to ensure an ongoing commercial return in a market environment. This is addressed more fully in section 5.

2.2.3Electricity Networks Costs

ActewAGL Distribution is responsible for transforming the energy entering the ACT from the very high voltages used to transmit the energy from the generators to usable lower voltages and to distribute that energy for Retailers. It is also responsible for the quality of the consumers’ supply. FRC does not change these responsibilities.

Some of the specific distribution costs from FRC would include:

  1. Billing System. Under current arrangements, ActewAGL has a single database for franchise customers to which both the retail and network sides of the business have access. That system is designed to issue retail bills to retail customers. ActewAGL Distribution needs to modify that system to provide network bills for network use of system (NUOS) charges and other services. These bills have to be issued to ActewAGL Distribution’s customers ie. the retailers, rather than end users.
  1. Data Processing. Currently, the responsibilities of ActewAGL Distribution and ActewAGL Retail are clearly defined and communication channels established. FRC will require a range of standards and procedures for distributor to retailer communications. This is necessary to facilitate the smooth operation of the electricity industry in the ACT. These include procedures for:

disconnection of a customer premise at the request of a retailer;

connection of a customer premise at the request of the customer;

connection of a customer premise at the requested of a retailer;

network outage notifications from a distributor to a retailer;

passing information about meter configuration data to relevant parties;

sending details of meter readings to the appropriate parties;

raising a service request such as a special meter read;

invoicing network charges and other distributor services to a retailer; and

forwarding retailer type inquiries to the responsible retailer.

  1. Customer Database. ActewAGL Retail is currently managing the shared customer database for the distribution and retail business. With FRC, the customer database for the distribution system would include data relating to the customers of other retailers which are confidential to that retailer and the host distributor. For ring-fencing purposes, ActewAGL Retail should not have access to that data. Therefore, ActewAGL Distribution is likely to be required to establish the capacity to manage its customer database. Establishing and maintaining that capacity would add to distribution costs.
  1. End User Interface. ActewAGL Distribution may also need to establish its own interface to deal with end users. This is an additional cost for the distributor that will need to be recovered in network charges.
  1. IT Costs. Prior to FRC in NSW and Victoria and the introduction of NEMMCO’s market settlement and transfer system (MSATS) the administration costs of a customer transfer (churn) was around $40 to $60. With the deployment of new central IT system and business-to-business processes to deal with FRC in NSW and Victoria, these costs have increased. These centralised procedures need to be rigid, to deal with every possible situation, but this means that they are time consuming.

In addition, IT systems will need to be established to manage customer churn. These additional costs will need to be passed on to consumers either through a transfer charge or through higher network charges.

NEMMCO’s systems are built around machine to machine interfaces. For ActewAGL to enter FRC, it must establish the IT systems that interface with NEMMCO’s system. For example, ActewAGL will typically process 2,500 manual meter readings daily. The NEMMCO system requires daily updates of the next scheduled read date for each of these meters so that retailers are aware of opportune times for customer transfers. While this would become routine after the introduction of FRC, the systems have to be developed and then maintained, adding further to ActewAGL’s distribution costs.

It will take at least nine months and cost several million dollars for ActewAGL to complete these preparations for FRC. ActewAGL is reluctant to spend this money without a clear indication from the Government that FRC is to proceed.

  1. Disconnection and Reconnection Costs.Currently, it is ActewAGL’s practice to leave vacated premises connected to the network until they have been vacant for two weeks or more. Most premises are re-occupied within two weeks so ActewAGL does not need to send a serviceman to the site. This practice saves the new tenant the cost of reconnecting the power as ActewAGL charges for a reconnection only if a serviceman is required to visit the premises to reconnect the power. It also facilitates the cleaning of premises between tenancies.

However, with FRC, this practice will no longer be possible. When a customer vacates a premise, their retailer will sever any responsibility for that site. The new host retailer would be unknown until the new tenant applies for a connection. Hence there is no retailer prepared to be responsible for the energy that may be used at that site. Therefore, the site must be disconnected. This involves additional costs for the network, a cost that must be recovered from the consumer.

This practice will make it difficult for landlords to have a premises cleaned between tenants. If the landlord wants power to be reconnected to a premises for cleaning purposes, they would need to nominate a retailer, pay for reconnection and then pay for a final read and disconnection. These changes will represent a significant cost increase in the ACT.

  1. Customer Churn Costs. Churn rates in the Australia’s national energy market are unclear at this stage. In the UK, Ofgem has reported that 15 million people (38%) have switched their gas and electricity suppliers, with almost a million customers now switching each month. Regardless of the number that switch, retailers will incur the overhead cost of establishing IT and other systems to handle customer churn.

Those additional costs will need to be recovered. Some may be recovered from the customers that churn. However, it is likely that some of these costs will be recovered from customers who have the opportunity to change but no intention to do so.