ACER CONSULTATION ON “Energy regulation: a bridge to 2025”

CONSUMERS AND DISTRIBUTION NETWORKS

Gas Natural Fenosa is a leading multinational company in the gas and electricity sector. The company operates in more than 24 countries.

Within the European Union, Gas Natural Fenosa activity is developed mainly in Spain.It is an active player in France, Italy and to a lesser extent in Portugal,Belgium, Germany and The Netherlands.

Future challenges

•C1. Do you think that further European level measures should be taken to enhance the operation of retail markets to the benefit of consumers?

The main measure to promote competition in the retail markets in the short term is the necessary deregulation of energy tariffs.

Once said this, the second most important thingto bring benefits for customers is enhanced transparency.

Half of the contacts with customers received in our customer services are related to energy prices. First of all, customers (often even some energy customer associations) tend to confuse energy prices with energy bills. Full transparency of costs isrequired to let European customers to really understand what they are paying for. This information is crucial to optimize the energy price paid for the most convenient supply to satisfy their needs (for instance, to optimize the grid capacity contracted at home).

Customers suffer from an unclear breakdown of costs in their energy bills and could be biased to identify energy suppliers as the responsible parties of many of the costs of the energy bill. We complain about the deliberated disguise of many costs inside others, such as many energy policy costs (e.g. RES subsidies, Spanish tariff deficit) or social costs (e.g. social bonus for vulnerable customers, equalization of costs for insular territories)which are recovered via de third party access tariffs (in some cases even under-recovered due to political reasons). As a golden rule, energy prices should reflect only costs attributable to the provision and the services of energy supplies, no other energy policy and social costs.

This problem is also aggravated due to bad tariff structures which tend to recover fixed costs (mainly network costs) into variable components. This practice is extremely detrimental in terms of information (grid and others costs which are recovered via a variable term are associated to a bad functioning of energy markets, especially if they are increasing). Even worst,with those tariff structures, grid costs of apartments and second homes are not fully recovered neither via the annual fixed component (which only covers part of the grid cost incurred) nor the variable costs (by definition, these homes are not occupied full time, so that the variable grid cost recovery per point of connection is less than in a permanent home). In countries with many second residences such as Spain, these structures penalize those consumers with lower rents who subsidize the network costs of others.

Sometimes institutions could contribute to customers get confused with certain short but empty of significance messages (“despite the economic downturn, consumer prices for electricity and gas have increased in the majority of Member States”[1]). Or with the publication of economic charts whose data are not comparable as there is not a proper breakdown (e.g. Eurostat European retail energy prices, when some countries include energy policy or other costs as a tax and other as a TPA cost)

Additionally, it should be kept in mind that excessive regulation may hamper competition if it limits the ability of suppliers to provide a range of different offers adapted to the different segments of customers (and so to better satisfy their needs). To this extent, regulation should be limited to ensure consumer protection rather than to define marketing or product design. Protection measures should cover cancellation of contracting procedures, as well as information provided during the deal agreement, but should not impede, for instance, distance selling (via phone or web).

• C2. Can you suggest ways in which we could enhance the voice of consumers in the development of Europe’s energy market?

The voice of consumers should be treated at the same level playing field than all the other agents participating in the market. Customers associations are already well represented in many European Forum and customer oriented initiatives, which let the energy sector know their voice. We would welcome they can contribute with more specific solutions to some problems., as well as consumers organizations should be encouraged to participate actively in public consults on behalf of consumers must.We would like they are also encouraged to spread information of those initiatives to customers, and that they could bring information about the responsiveness of those to their campaigns.

In case of collective auctions are organized by consumer Associations, transparency should be required in order to consumers are aware ofthe real costs. These initiatives should not be costlyneither to consumersnor to suppliers for the private benefit of the associations. The regulatory information that is passed on to consumers must be transparent and objective by these organizations

The Future Regulation of Distribution Networks

• What are the main questions that you consider the proposed CEER review should address with regard to the future role of DSOs and also to ensure that the regulation of distribution networks remains fit for purpose in 2025?

DSOs are market facilitators without intervening in the market. In few words, DSOs are in charge of security of supply and quality of service. To do this, they provide transparent and not discriminatory access to the energy networks, they are also in charge of metering, as well as they are responsible of the provision of all the necessary info for billing and balancing to suppliers and other agents. In fact, their relationships with other market actors are transparent and regular as the regulatory overview is exhaustive. For instance, the database of gas and electricity DSO’s supply points are at the disposal to the Spanish office supervising supplier switching (OCSUM) and to any supplier.

Expansion of the grid: Growing role of natural gas in many countries:

The Spanish gas market still has a very low rate of penetration compared to other countries (30% of the households have natural gas). The steadily development of the network brings benefits to the new customers since natural gas is around 30% cheaper than other current fuels used for thermal purposes. On the other hand natural gas is much more efficient in combustion process and has the lowest CO2 emission among the fossil fuels.

Suppliers don’t tend to spend time and/or money to get new customers connected to the grid. They may not be interested as they have not guarantees ofsufficient customer loyaltyto recover the costs of commercial campaigns for generating new points of supply. They prefer to act over the existing gas customers already connected, with massive marketing tools.Nevertheless, the regulated revenue models for DSOs are based on a long run relationship with final customers: They will always be the DSO, regardless of the switching of suppliers decided by the customers.That’s why DSOs are actually involved in the extension of the grid, promoting the benefits of using of natural gas, contacting and convincing potential consumers using other fuels.Once they are connected to the grid, suppliers are the responsible parties to deal a contract with end customers.DSOs can also advice/help the potential consumer to overcome the initial problem that represents the cost of ‘fuel switching’ (such as installations, appliances, procedures, etc). This role has to be clearly recognized in growing markets as the Spanish.

Smart Metering – Smart Meters:

Because of their importance for keeping security of supply and quality of service, in Spain, DSOs own electricity smart meters (SMs) and data, in the same way the have been managing data from regular meters with good results. Changing this would have high transition costs (DSOs have already deployed a big amount of advanced meters and they are responsible for 80% of smartgrid investments) so it should be clearly justified.As information of SMs is crucial for control and supervision of distribution networks and, to give the responsibility to independent metering operators would not have much sense.

To be precise, although Spanish customers are allowed toown the meter, they mostly outsource it to the DSOs. In fact, the introduction of many new features into the devices could raise a problem for customers. For instance, updating and revision of functionalities, firmwares, versions, etc could be problematic for final costumer. DSOs are permanently aware and required to accomplish technical legislation as well as they are in close contact with manufacturers to guarantee the interoperability and interchangeability of the devices in their networks. This kind of work can be easily done as part of the DSO‘s network management activities and, however, it could be a hard burden for final costumers.In any case, according to current gas and electricity switching rates in Spain, the ownership of meters linked to DSOs was without prejudice against agents and market-based offers.

80% of gas volumes in Spain already are remote controlled (industrial customers), which is proof of the diligent work of gas distributors. These investments should be conveniently paid. However, regarding to the massive deployment of advanced gas meters for lower consumptions, it should be taken into account that the Spanish NRA’s CBA was negative, and thereforeitwas discarded. As the gas price is constant within day, the expected benefits would be low as the customer would not obtain savings from moving his consumption from the peak hours to the base hours. Additionally, the specific consumption of Spanish customers is low in relation to the cost of smart meters. And moreover, the electricity smart meters have direct access to the power supply they need for functioning, but we should bear in mind that gas smart meters have a battery-related additional cost that implies an increase in O&M costs as well as it can limit the number of possible readings (a problem that we are currently facing in Italy, where our subsidiary has been obliged to the deploying gas smart meters).

Unbundling:

We believe that our legal framework together with the concept of the Office Supervising Supplier Switching (OCSUM) should be seen as model. In fact, under current DSO unbundling provisions, Spain has one of the greatest switching rates in both gas and power markets, as ACER/CEER have recently identified in their annual report on the results of monitoring the internal electricity and natural gas markets in 2012. Conditions for retail competition[2] are noticeably improving year on year under current schemes. And this considering that we still have artificially low regulated energy prices hampering the entrance of small entrants in the household sector–maybe the main barrier to achieve an effective retail competition.

Otherwise, and again, gas and electricity distribution systems should be clearly differentiated. The hypothetic potential conflicts could be either very limited or nonexistent in the gas system, as the use of smart meters and related services is significantly smaller and the market dynamic is broadly different.

Flexibility Services (load shedding, distributed energy and flexible capacity tariffs):

From a high level perspective, system services could be needed, and these are based on the national regulatory frameworks. For instance, load shedding is one of these services which may be generally done with in-house Energy Management Systems activated by the commercial player that provides them (the energy supplier acting as aggregator). Those market players are the ones who have the contract with DSOs and TSOs, maybe arranged trough a kind of ‘flexibility pool’. In any case, the relative weight of pure energy costs in the bill should become more reducedin the future due to the increase of fixed costs (mainly due to TPA and energy policies cost). Therefore we encourage ACER to dig into the real interest of most of the domestic customers to obtain load-shedding discounts once they would assess the scarce impact of this on the bill. ACER should assess if maybe only most economically vulnerable customers could be inclined to use these services.

Otherwise, the suggested use of flexible capacity tariffs may result in discrimination to customer depending where they are located and may be contradictory with many national laws. Flexibility services can help DSOs to plan and operate the network in the most efficient way without this discrimination. DSO coordinates and procures system services, but it is not in competition with other actors interested in other things (e.g. portfolio optimization). It would be as current ancillary services in transmission level, where TSO does not compete with market players, it procures services from them.

Cooperation between TSO and DSOs is very important: if bottlenecks or any other problem appear, both have to be coordinated, considering that the same system service can be used by both sides. TSO is responsible of its network and the coordination of system users connected to transmission. DSOs are also responsible of their networks and the coordination of system users connected to distribution. The flexibility pool could be the place for coordination because the action of one of the operators can go against the responsibility of the other one. The current setting of such a platform may provide visibility and coordination tools to prevent that.

In gas, at present, distributed energy resources are not considered in principle a major issue, and in the short term biogas and power-to-gas are not expected to impact significantly on the market functioning. Nevertheless, considering the differences in the specifications of gases and the potential impact on grid pressures, DSOs should be in charge of the installation of security and control devices and of the connection to the grid. As DSOs are also in charge of security of supply and quality of service of gas distribution networks, they will require the control of the injections of those facilities ifdeemed necessary (accepting or denying injections depending on grid parameters such as pressures, concentrations, etc). Clear operation rules should be drawn and operators should be required to comply with their commands.

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[1]Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets (ACER&CEER, November 2013)

[2]Electricity market: 241 buyers and 1070 sellers/producers in the market-coupled Iberian spot market, HHI (1329-1344) for market shares in electricity generation in Spain (2012), 31 retailers (June 2013), 27,59 M of customers (26,74M of domestic customers), 2012 domestic switching rate 11,63%, bi-monthly billing by the supplier based on real reading (monthly billing with smart meters)

Gas Market: 1 ownership unbundled TSO (>95% of national transport pipelines), 5 functionally unbundled DSOs; 41 active traders in OTC electronic platform (47% market share of 3 main traders), positive market evolution (in volumes of energy HHI2006 (3145) vs. HHI2012 (2207))