SOUTHEAST EUROPE RETAIL MARKET COMPETITIVENESS ASSESSMENT METHODOLOGY REPORT
June 30, 2017 This publication was produced for review by the United States Agency for International Development. It was prepared by Raj Addepalli, Ph.D., CFA.
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SOUTHEAST EUROPE RETAIL MARKET COMPETITIVENESS ASSESSMENT METHODOLOGY REPORT Cooperative Agreement #: AID-OAA-A-16-00049 Recipient: National Association of Regulatory Utility Commissioners
(NARUC) Date of Publication: June 30, 2017 Author: Raj Addepalli, Ph.D., CFA
This publication was made possible through support provided by the Energy and Infrastructure Division of the Bureau for Europe and Eurasia under the terms of its Cooperative Agreement with the National Association of Regulatory Utility Commissioners, No. # AID-OAA-A-16-00049. The opinions expressed herein are those of the author and do not necessarily reflect the views of the US Agency for International Development or National Association of Regulatory Utility Commissioners.
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Table of Contents
1. Introduction ......................................................................................................................................................... 4
2. Definitions of Competitive Markets ............................................................................................................... 4
3. Product (or Service) Definition ....................................................................................................................... 5
4. Market Power ...................................................................................................................................................... 5
4.1 Methods for Exercising Market Power .......................................................................................................... 6
5. Competition Indicators ..................................................................................................................................... 7
5.1 Wholesale Market Price .................................................................................................................................... 7
5.2 Wholesale Price vs Public Supplier Price ...................................................................................................... 8
5.3 Concentration of Suppliers .............................................................................................................................. 9
RECOMMENDATIONS ........................................................................................................................ 10
5.4 Evaluation of Retail Market Profitability/Sustainability ............................................................................. 10
RECOMMENDATIONS ........................................................................................................................ 11
5.5 Market Entry Barriers ...................................................................................................................................... 12
RECOMMENDATIONS ........................................................................................................................ 12
5.6 Retail Infrastructure in Place .......................................................................................................................... 13
5.6.1 Consumer Protections ........................................................................................................................... 13
5.6.2 Data Exchange Protocols ...................................................................................................................... 14
5.6.3 Regulatory Oversight ....................................................................................................................................... 15
5.6.4 Customer Migration Level .................................................................................................................... 15
5.6.5 Customer Knowledge/Awareness/Information ............................................................................... 16
5.6.6 Availability of Empowerment Tools .................................................................................................... 17
6. ....... Minimum Criteria for When to Relax Price Regulation for Household and Small Commercial Customers .......................................................................................................................................................... 18
7. Next Steps .......................................................................................................................................................... 19
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1. Introduction Many countries in the Southeast Europe region are opening their electric markets, both wholesale and retail, to competitive forces1. While some larger consumers in some of these countries are already taking electric supply services from alternate providers (as opposed to from the incumbent utility) at prices that are not regulated by the regulators, household and small commercial customers are not doing so for a variety of reasons. The right to be supplied under regulated prices remains for households and small customers, who may choose to be supplied by a guaranteed supplier2. In practice, the country’s dominant electric utilities continue to supply households and small customers at prices that are regulated by the regulatory Commissions. Regulators will have to determine the conditions and criteria that are sufficient for retail electricity markets to transition from price regulation of households and small commercial customers to full competition. In light of the above, this report lays out the criteria that could be used to assess whether there is competition in place or expected to be in place to reduce or eliminate price oversight by regulators. This review starts with defining competitive markets, explains how market power can be exercised that calls for regulation, reviews the indicators to analyze, proposes criteria that should be used to conclude whether there is already a potential for workable competition, and recommends next steps. Price regulation can be loosened or abolished, depending on the competitiveness in the market.
2. Definitions of Competitive Markets
Market is defined in Webster’s dictionary as “a meeting place for trade by purchase and sale.” For this review, market is used to define a place where buyers and sellers interact in buying and selling their goods. This interaction between buyers and sellers in the market determines the market clearing price. Buyers and sellers put in bids for how much they want to buy or sell and at what price. Robust competitive markets typically have the following characteristics3: (1) sufficiently large enough number of buyers and sellers to prevent individuals or groups from exclusively
1 Energy Community Report, page 137: https://www.energy-community.org/portal/page/portal/3D790302C9FD5024E053C92FA8C0D492 2 Different terms may be used to describe the incumbent supplier- default supplier, public supplier etc. Public supplier will be used for the remainder of this paper. This term is also used widely in the report: Retail market entry requirements in the Energy Community Contracting Parties: Status Review: April, 2016: See https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/4296417/3BC3CE534E9E24D6E053C92FA8C00C48.pdf This is no way meant to endorse or comment on the validity of the continued use of public supplier. 3 NY PSC Notice issued December 2, 2016 in Case #12-M-0476.
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influencing the market price; (2) products that can be readily compared; (3) complete information about prices for both buyers and sellers; (4) sellers that face significant elasticity of demand around the market price such that, if a seller charges a higher price, demand will significantly drop because buyers will switch suppliers, and if a seller charges a lower price (below market cost), demand will increase; and (5) few barriers to entry to the market for both buyers and sellers. Presence of robust competition prevents sellers from price gouging buyers. However, perfect competitive markets are not possible for all goods or services in all places all the time. The next best thing to look for is whether there is ‘workable competition.’ JM Clark proposed the notion of ‘workable competition’ in the absence of perfect competition: “Workable Competition is a situation where high degree of monopolistic power exists but there is enough competition which protects consumers from being abused due to the existing monopoly. Hence this is a workable alternative to the theory of perfect competition.” In analyzing the level of competition in place or achievable, one needs to define the product or service in a very granular manner for which the measurement is taking place.
3. Product (or Service) Definition
The assessment that needs to take place is whether regulation continues to be needed or can be relaxed/abolished for setting prices for electricity for retail household and small commercial customers. Maintaining the reliability of the complex electric system remains a high priority as well as having affordable electric service, as electricity is a ‘public good.’ Customers are receiving electric as a commodity either from the public supplier at regulated prices or from a retail supply competitor at market, or unregulated prices. In addition to commodity value, customers may be receiving additional value added services as well from retail competitive suppliers as a bundled product. The product to be analyzed here is electric commodity and value-added services. Value added services could include services such as ‘energy efficiency’ advice, fixed long-term price certainty, green energy (renewable supply) etc. While commodity prices are quantifiable and measurable, the value of services can be sometimes difficult to measure or the value can be in the ‘eye of the customer.’
4. Market Power
There are many definitions used to describe market power. The following definition is useful for this review: “Market Power is the ability of a firm or a group of firms to unduly raise prices above the competitive level, inconsistent with a competitive market outcome, to improve profits.” The exercise of market power adversely affects efficiency, fairness and confidence in markets. It distorts the competitive price and level of output. It has an economic impact on customers in terms of potential wealth transfer from buyers to sellers. Also, given the essential and public
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nature of the good, affordability would be adversely affected if there is price gouging, especially for vulnerable customers.
4.1 Methods for Exercising Market Power Market Power (MP) can be described in terms of Vertical Market Power (VMP) or Horizontal Market Power (HMP).
Vertical Market Power:
Vertical market power is possible if one entity owns both generation assets and delivery (transmission/distribution) assets. This entity can artificially raise the price of the commodity by exploiting ownership of the delivery system. For example, the owner of delivery system could provide preferential pricing/service of delivery to those customers who also take its commodity, and there could be undue cross subsidies between competitive and monopoly functions.
Horizontal Market Power
Horizontal market power is exercised when there are not enough retail competitive suppliers to serve household customers or there is not enough diversity in retail competitive suppliers4. This provides room for retail competitive suppliers to increase prices artificially. If one or few firms have majority of the market share, they could dominate and exercise market power. A dominant player could raise prices (although sales may go down, increased prices would offset the revenue reduction to the retail supplier).
In terms of examining the number of sellers, the analysis should look at whether the sellers are completely independent of each other or affiliated in some fashion. Affiliated entities with cross interests among the affiliates may not be considered as independent.
Also, with retail market competition, sometimes even if there are many sellers, competition may not be effective if customers do not have the knowledge that they are paying more than necessary and that they have options to switch suppliers. Customer apathy and/or lack of sufficient information could also lead to abuse by sellers.
Some of the key measures that provide screening guidelines to assess market power and concentration of suppliers include:
• Herfindahl-Hirshman Index (HHI) • Lerner Index
Herfindahl-Hirshman Index measures concentration of suppliers. It is defined as the sum of squares of market shares of all firms in a defined market. For example, 4 In the case of several Southeast European countries, horizontal market power is the result of a single owner of all generation in the country.
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• If a firm has 100% market share, then HHI is 10,000 [1002 x1]; • If there are 10 firms each with 10% market share, then HHI is 1,000 [102x10]; • If there are 100 firms each with 1% market share, then HHI is 100 [12x100]
The higher the HHI, the higher the potential to exercise market power. Typically, HHI above 1,800 is considered as highly concentrated and below 1000 as unconcentrated.
Lerner Index measures how high price is relative to the marginal cost. It is defined as (P-MC)/P, where P is price and MC is marginal cost. If retail competitive suppliers are expected to purchase from a liquid wholesale market to meet their customer needs then a liquid wholesale market value can be used as a proxy. Lerner Index ranges between zero and 1. Closer to zero indicates perfect competition and closer to one implies a monopoly.
If there is market power potential, then market power mitigation measures need to be considered including not relaxing the price regulation. For example, a market power mitigation measure could be that the retailer price cannot exceed the wholesale price by more than x% (the x% would be informed by typical retailer costs to cover his legitimate retailing expenses).
5. Competition Indicators
Regulators should evaluate the existence of or potential for competition using the following indicators.5
5.1 Wholesale Market Price
First and foremost, the regulator needs to be confident that the wholesale market is resulting in efficient and competitive prices. This could be considered as a threshold criterion. Whether markets are functioning effectively and producing efficient outcomes is determined by the market monitors (competition regulators). Competitive markets are supposed to be devoid of the exercise of market power (or market power is mitigated as needed) and result in prices reflecting marginal costs of generators (or demand response). The markets should result in price signals to attract new investment in generation (demand response) resources. In evaluating the competitiveness of markets (and granularly for different sub products such as energy, installed capacity, various ancillary services such as operating reserves), market monitors evaluate numerous metrics such as the concentration of suppliers, how market clearing prices relate to marginal cost of resources, liquidity in the market, convergence between day-ahead and intra-day prices, bidding behavior of resources, economic or physical withholding of supplies, and the ability of price signals to attract new investment in new
5 The EU handbook guidelines to regulators for evaluating the competitiveness of the market, uses eight properties including some discussed here in this paper: See Ref: C 16-SC-52-03; 2017 Handbook for National Energy Regulators: how to assess retail market functioning: http://www.ceer.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/Customers/Tab4/C16-SC-52-03_Handbook%20final_as%20of%2014%20feb.pdf
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resources. Based on an evaluation of the metrics, market monitors conclude whether wholesale markets are competitive or not and what market power mitigation measures need to be implemented, if any. Retail competitive suppliers would likely buy from the wholesale market and pass those costs onto retail customers, perhaps with some markup. Unless the benchmark wholesale prices are competitive and reasonable, the regulator cannot be confident that retail prices would be reasonable. As the regulator has an obligation to ensure that the retail prices are reasonable, he cannot relax price regulation unless the wholesale prices are reasonable to begin with.
5.2 Wholesale Price vs Public Supplier Price Many countries still use a public supplier to supply electric commodity to household and small commercial customers at regulated prices. The regulators should select a benchmark wholesale price where retail competitive suppliers are expected to buy supplies from and compare them with public supplier prices. The benchmark price should be from a source where the market is competitive, with liquid and transparent price signals where the retail competitive suppliers are expected to purchase supplies from6. A deciding key factor is the relationship between wholesale market prices and the public supplier prices. Retail competitive suppliers would have to buy supply in the wholesale market in order to sell to retail customers. The public supplier price to consumer matters in deciding whether there is room for retail competition or not. If it is artificially low, there would be no incentive for retail competitive suppliers to buy high in the wholesale market and sell low to consumers and lose money or for retail customers to pay retail competitors significantly more than they would have to pay the public supplier. The regulators should periodically evaluate the difference between the benchmark wholesale price and the current public supplier price. Care should be taken to ensure the comparison is apples to apples, so there is proper price comparison. For example, if the wholesale price is purely supply related price whereas the public supplier price is a bundled supply and delivery price, then the public supplier price has to be stripped of the delivery costs to make it supply only price for comparison purpose. Also, the wholesale price has to be calculated to mirror the load shape of the household customer for proper price comparison. Miscalculations can occur if costs of the regulated public supplier are not allocated properly among its various functions. For example, if there are cross subsidies between delivery and supply components of the public supplier price, that could lead to misleading conclusions. If the public supplier price is well below the wholesale benchmark market price, there would be no opportunity for retail competition to take place. For example, recent ACER report states that “in some countries with regulated prices, average mark-ups for the monitored period (2008–2015 for electricity
6 If there is no liquid wholesale market price in a particular region, one can rely on a liquid price in a farther away zone but then would need to have a transparent predictable “basis” between the two regions (basis is the price differential between the two zones) that can be hedged.
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and 2012–2015 for gas) were negative because the energy component of the retail prices was set at a level that seems to be below wholesale energy costs7.” Most regulators in the region are aware that the public supplier cost should be cost reflective to include all costs of supplying with no artificial price caps. If there are artificial subsidies in the public supplier price that retail competitive suppliers do not have access to, it will distort the playing field. There should be no cross subsidies between the regulated delivery part of the business and the supply part of the business segments. Wholesale Market Benchmark Price and the public supplier price are comparable when on an annual basis what the customer would pay for supplies if they bought directly from the wholesale market (via a retail competitive supplier with his retail margin added) is similar to what they would pay for supplies from the public supplier. RECOMMENDATIONS
• Select an appropriate wholesale benchmark price.
• Ensure data is in a form that is apples-apples for comparison purpose with public supplier price
• Ensure there are no miscalculations or subsidies in the public supplier price
• Evaluate the difference between benchmark price and public supplier price
• Determine the reasons for the difference, if they are not comparable
• If the difference is not justified and is impeding retail competition, identify actions to take to ameliorate the difference.
5.3 Concentration of Suppliers In order to measure concentration, first we need to define the product or service which is being analyzed. The product for analysis here is the provision of electric commodity and value -added services by competing suppliers. Value added services could include services such as ‘energy efficiency’ advice, fixed long-term price certainty, green energy (renewable supply) etc. While commodity prices are quantifiable and measurable, the value of services can be sometimes difficult to measure or the value can be in the ‘eye of the customer. Before price relaxation, regulators should monitor and assess how many suppliers are providing service and ensure there are sufficient genuine retail competitive suppliers available. The more qualified and competent the suppliers the better the chance to provide competitive offers. An evaluation of HHI and LI indices that were defined above should be conducted to measure
7 See page 11: http://www.acer.europa.eu/official_documents/acts_of_the_agency/publication/acer%20market%20monitoring%20report%202015%20-%20key%20insights%20and%20recommendations.pdf
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concentration and these metrics should meet the minimum threshold criterion as described below. HHI would measure the number of suppliers available8 whereas the LI would measure how close the retail price offerings are compared to the wholesale market prices. The regulators should evaluate the types of products/services retail competitive suppliers are offering. For example, if retail competitive suppliers simply offer variable market prices and nothing else, then the complete value of introducing retail competition is not being realized. To conduct the analysis, regulators need data from the market place. The regulators could require all the licensed retail competitive suppliers, as a criterion for licensing, to supply certain information on a periodic basis. The data could include types of supply offers, price terms, value added services offered, terms and conditions of service, etc.
RECOMMENDATIONS • Consider adding a licensing criterion to have data collected on an annual basis.
• Incorporate requests for data into existing reporting requirements to minimize reporting burden (quarterly, annual reports. etc.)
• Form working group with retail competitive suppliers and other relevant stakeholders such as the utility to identify specific data to be collected that would be useful in defining the products and services competitive suppliers are providing – examples of data to be collected include: i) supply offers, ii) price terms, iii) specific entry or exit costs, iv) value added services, and others.
• With other relevant government bodies as necessary, define an exact threshold at which the concentration is sufficient for price regulation to be relaxed.
• Conduct HHI and LI analysis on an annual basis
5.4 Evaluation of Retail Market Profitability/Sustainability Economies of scale are important in retail market competition. It would be helpful for the regulator to assess whether retail competition for households is sustainable from an economic perspective by analyzing the economics of suppliers. The retail competitive suppliers have certain fixed and operating costs that they would have to recover in addition to the cost of procuring supplies. Also, if the retail competitive suppliers offer fixed prices for a duration, then they would have to hedge their supplies and there would be associated hedging costs for risk management. The profit margins for household and small commercial customers is small given their low consumption levels. In order to be financially viable, yet charge only small retail margin premiums over the wholesale supply costs, the retail competitive suppliers would need
8 See page 10 for a more detailed discussion on the computation of HHI in the Council of European Energy Regulators Report: “ 2017 Handbook for National Energy Regulators: How to assess retail market functioning;” at http://www.ceer.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/Customers/Tab4/C16-SC-52-03_Handbook%20final_as%20of%2014%20feb.pdf
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a certain volume of customers to breakeven. By analyzing the number of customers a retailer would need to have to be financially viable, and knowing the number of eligible household and small commercial customers for retail competition, the regulators can assess the number of potential retail competitive suppliers that can actively participate in the market and that the market can support. As a simple example, if there are a million eligible customers, and if it requires a retail competitive supplier to have at least 250,000 customers to be profitable, there would be room for only four competitors in the market9. As the size of customer base matters for economies of scale, an examination of profitability on a regional level would be helpful, where retail competitive suppliers can supply to customers from many countries. Regulators in the region should develop common protocols as much as possible to facilitate retail supplier participation in many countries, with minimal seams, to reduce their transaction costs. Protocols include licensing requirements, financial creditworthiness requirements, marketing practices, customer enrollment practices, data exchange practices etc. This could be accomplished by the relevant stakeholders in the region forming working groups to develop the common protocols as opposed to each country deciding its own business rules10. Then there would be an opportunity for more suppliers to participate in the market as the eligible customer base is increased. Once the regulators conclude there could be sufficient number of financially viable retail competitive suppliers (e.g., at least five), it should give them increased confidence that public supplier price oversight can be relaxed.
RECOMMENDATIONS • Work with the retail competitive suppliers to determine reasonable retail margins they
would need to be financially viable. The required margin would vary based on many factors such as retail competitive supplier operating costs, profit margins needed, types of products offered, hedging costs, number of customers to be served, volatility in wholesale prices etc.11
• Determine the eligible customer population for retail competition
• Assess the number of retail competitive suppliers that can be viable. For example, say, the fixed costs that a retail competitive supplier would have to recover is $1 million annually, and he can only get $10 per household customer per year as margin, he would need at least 100,000 customers to be financial viable in the long run. If there are a million eligible customers, there would be room potentially for 10 retail competitive
9 Clearly there will be niche markets to cater to specific customer needs that can thrive even with fewer customers. 10 Obviously, to the extent there are legitimate national interests that trump the common protocol interest, the national interest would prevail. 11 See Competition and Markets Authority Report in UK on “Profitability of Energy Supply for discussion on retail margins,” for a discussion on computations of retail margins. https://assets.publishing.service.gov.uk/media/5507fc1aed915d141e000005/Profitability_of_retail_energy_supply_paper.pdf
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suppliers. If there are only 200,000 eligible customers, then there would be room potentially for only two retail competitive suppliers in this example.
• To increase the footprint for the retail competitive suppliers, minimize seams between countries in implementing retail competition. In working groups of relevant stakeholders with neighboring countries, determine what protocols can be made uniform to minimize transaction costs for retail competitive suppliers. Sample protocols to harmonize include licensing requirements, financial creditworthiness requirements, marketing practices, customer enrollment practices, data exchange practices, and others.
• Work to implement the common protocols
5.5 Market Entry Barriers12 It is assumed that entry and exit into the retail market for retail competitive suppliers is easy; if not, regulators should identify any barriers. While getting a license to become a retail supplier and accessing the wholesale market appear generally not to be difficult given the evidence of suppliers for larger customers, the barriers may be more for household and small commercial customers if the public supplier has a lower price compared to the wholesale market price. In addition, the customer acquisition costs typically would be higher for household and small commercial customers compared to industrial customers and large commercial customers, and customer awareness and interest is also low among household customers given the potential low savings. Once these barriers are overcome, regulators should be vigilant about other potential barriers such as retail competitive suppliers getting customer usage information, switching customers in a timely fashion, data transfer issues, billing issues, dominant affiliate supplier etc.; these are addressed further in the retail infrastructure discussion below.
RECOMMENDATIONS • Convene collaborative discussions with retail competitive suppliers to identify entry
barriers. In addition to low public supplier price, other barriers could include
• Customer Acquisition Costs13 as discussed above; the more public education that could be done on a mass scale, the less the retail competitive suppliers have to spend money educating customers.
• Customer Apathy; customers need to be convinced of the benefits of retail competition and why they should be engaged
12 Also, see the report: “CEER Report on commercial barriers to supplier switching in EU retail energy markets” http://www.eemg-mediators.eu/downloads/Commercial-barriers-switching_07July2016.pdf 13 They could range between 45-135 euros per customer, according to a Capgemini study: European multi-client retail mass market benchmark; page 9: https://www.capgemini-consulting.com/resource-file-access/resource/pdf/tl_European_multi-client_retail_mass_market_benchmark.pdf
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• Retail Margins are typically low for household and small commercial customers. Value added products should be provided to make it attractive for them to be interested in retail competition.
• Long Customer Switching Process; it is supposed to be completed in three weeks14 (determine if it is due to administrative burden.) Identify reasons for delays and address the problems.
• Presence of a Dominant Affiliate Supplier - if the incumbent utility with high name recognition among customers has an affiliate competitive retail supplier using a similar name as the utility, that gives the dominant affiliate supplier a competitive advantage; if this is the case, branding requirements for retail competitive suppliers need to be revisited including potentially banning affiliates from competing.
• Conduct focus group meetings with consumers, customer advocacy groups, and NGOs to understand their interests (such as low price, value-added services such as fixed prices or renewable energy, ease of paying bills etc), and what would make them participate in retail competition
• Based on these discussions, identify action steps that regulators can take to facilitate retail competition
5.6 Retail Infrastructure in Place15 Implementing retail competition requires many pieces of retail competition infrastructure to be put in place including retail supplier licensing, customer switching rules, consumer protections, data exchange protocols, regulatory oversight etc. Regulators should ensure that the following are in place to facilitate retail competition:
5.6.1 Consumer Protections Regulators should put in place consumer protections16. Customer confidence in the markets is very important to the success of competitive markets. Should customers have bad experiences in the initial stages, the bad publicity could sink the competitive market initiative. For example, some important elements to consider:
14 See page 40: CER/CEER Annual Report on the Results of Monitoring the Internal Electricity and Gas Markets in 2015 Consumer Protection and Empowerment November 2016: http://www.acer.europa.eu/official_documents/acts_of_the_agency/publication/acer%20market%20monitoring%20report%202015%20-%20consumer%20protection%20and%20empowerment.pdf
15 See for example, New York Uniform Business Practices for guidelines. http://www3.dps.ny.gov/W/PSCWeb.nsf/96f0fec0b45a3c6485257688006a701a/8dd2b96e91d7447e85257687006f3922/$FILE/UBP%20Manual%20Feb%202015%20Final.pdf 16 To the extent consumer protection responsibility is the purview of another agency, not the electric regulatory commission, then that agency should put these in place.
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• It is assumed that there will be bilateral contracts between customers and retail competitive
suppliers. As most household and small commercial customers may not be sophisticated in understanding the terminology of energy and contracts, regulators should review ‘standard contracts’ of suppliers to make sure they are reasonable. Several terms, such as duration of contracts, penalties for contract termination, supplier switching provisions, minimum payment of bill, dispute resolution process, customer data privacy, customers’ data access to retail customers etc., would have to be scrutinized, again in the initial stages to make sure there is no abuse by suppliers. These can be included in the supplier licensing criteria.
• Regulators should examine if the suppliers are qualified to do business, especially evaluating their reputation to do business. For example, are there complaints against the suppliers in other jurisdictions? Are there any charges the suppliers may be facing from internal law and order authorities? Do they have the financial bandwidth to withstand any perturbations in the wholesale market where they may be buying power from? Will they honor their supply contracts with customers?
• There should be guidelines on how suppliers can market to customers to prevent abuse. False advertisement and false promises can leave a bad taste in customers’ experience with retail competition.
RECOMMENDATIONS • Review various consumer protections discussed in this report, and the references
provided in additional resources, such as the General and Web-Based Communications Best Practices Guide (Annex I).
• Identify which of them are already implemented and which ones need to be implemented.
• Develop a game plan to implement the remaining consumer protections.
5.6.2 Data Exchange Protocols Different types of data would have to be shared among retail supplier, customers, distribution company, system/market operator, public supplier etc., depending on the structure in a given country. The exact data needs of each of the stakeholders needs to be identified and means for data transfer need to be put in place. Privacy issues associated with data dissemination need to be addressed as well. This process of data needs identification and development of protocols and tools can happen through a collaborative process among stakeholders, perhaps led by the regulators.
RECOMMENDATIONS • Work collaboratively with stakeholders to identify data needs of different entities
• Develop electronic platforms to exchange data
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• If the work is done collaboratively with neighboring countries, then there could be sharing of costs of systems development as well reduction in cross border seams that would help reduce transaction costs for retail competitive suppliers
• Privacy and data confidentiality concerns need to be addressed as the data exchange protocols are developed and implemented.
5.6.3 Regulatory Oversight Regulators should prepare and develop the tools and resources needed to detect abuse of customers to ensure consumer confidence. While wholesale market prices generally are transparent to regulators and the industry, unless there is a system in place to monitor retail prices of various suppliers, there may not be sufficient transparency. The more transparent the prices are, the easier it would be to detect price abuse by suppliers. A monitoring mechanism for regulators is important, at least during the initial stages of transition. They need to put in place a system to collect sufficient data from customers and suppliers to ensure market is working as intended. Should regulators detect abuse by suppliers, there should be mechanisms to rectify the identified abuse, ranging from making affected customers financially whole to imposing sanctions on abusing suppliers including terminating their license to do business. Frequent communication with retail competitive suppliers in the initial stages could help reduce misunderstanding and lead to better cooperation with regulators.
RECOMMENDATIONS • Develop in-house systems to perform systematic monitoring and analysis of retail
competition parameters
• Identify any price excursions of competitive suppliers and follow up on the reasons
• Provide a dispute resolution form for both consumers and retail competitive suppliers
• Continue to be vigilant and adapt and make changes as lessons are learned
• Take prompt action against erring retail competitive suppliers. Developing a process to put in place penalties or sanctions, which can be used by staff when issues arise, is one possible example of how to accomplish this. Such penalties or sanctions could be developed through stakeholder development or a working group with the market operator or TSO in order to develop reasonable options.
• Ensure consumers continue to be well served with retail competition
5.6.4 Customer Migration Level Once there is price parity between wholesale market and public supplier, migration of customers from public supplier to retail competitive suppliers is expected to begin. The regulators should monitor customer migration level to retail competitive suppliers. The data could be collected on a monthly basis for monitoring purposes. The regulators should collect data monthly from retail competitive suppliers that includes number and type of customers/load
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they have, customers/load added during the period, customers/load lost during the period and number of customers switching from one supplier to another. Ideally, there could be a common template that can be used to collect data and electronic means for dissemination of information. Once there is a sufficient migration level of (e.g., 20% of number of customers)17 from the public supplier to retail competitive suppliers, then the regulators could consider relaxing the price regulation of the public supplier. Of course, constant vigilance is needed by the regulators to ensure that there is no abuse of customers by retail competitive suppliers, as discussed before in market monitoring section.
RECOMMENDATIONS • Per discussion in section 3 on data collection, collect relevant data to determine
migration levels by customer class, by region and by usage strata.
• Determine where customer migration to retail competitive suppliers is strong and where it is weak.
• Assess reasons for why it is strong or weak
• Address problems associated with the groups where the response is weak.
5.6.5 Customer Knowledge/Awareness/Information A key for success in retail competition is knowledgeable customers who can participate in the market place with awareness of competitive choice options, have information on comparable prices and can make informed and rational choices. Consumer awareness and knowledge about retail choice is important for markets to function effectively and for consumers to benefit from retail competition. Regulators should ensure adequate consumer education will be carried out. Customer education should be done at the right time so customers can take advantage of the information. Sometimes this can be difficult. In the initial stages of competition, this is a vital metric that regulators should benchmark to assess consumer readiness in the progression of retail competition. One way to do that would be through consumer surveys to assess the consumer awareness and knowledge on retail competition and how to make informed choices. The mechanics of the survey need to be worked out to meet the needs of a country. For example, under regulator guidance, a sample of customers could be surveyed by the distribution company or the public supplier. To illustrate, the surveys in Ireland have elicited response to the following issues: Attitudes to supply services and general awareness of competition; Customer engagement including switching, experience of the switching process and other forms of engagement e.g. through phone, door step, advertisements etc.; Electricity and gas spend and payment channels and options; Willingness/ability to alter consumption in response to price; Interest in having an in home display of energy consumption, or via app etc.;
17 The migration levels are typically not high for residential customers even in countries with a history of retail competition for a long time.
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Pay as You Go; Customer knowledge of provisions that are in place for vulnerable customers; Advertising; Dual fuel options; Smart Metering, and Bill transparency18. A baseline survey should be used to establish a benchmark for customer awareness and knowledge followed by periodic updates to measure and analyze the acceptance and adaptation of retail competition amongst customers. Over time, consumers may become very familiar with choices and this may be less of an issue.
RECOMMENDATIONS • Conduct customer surveys as discussed above, a baseline survey and periodic updates
to gauge increase in awareness and knowledge
• Analyze the results and identify messages/communication channels, frequency and duration of communication that would enhance consumer awareness.
• Work with retail competitive suppliers as well as other relevant government entities, utilities and consumer groups to determine the right approaches to enhance consumer awareness and trust in retail competition.
• Identify the right timing to conduct the outreach and education, so it maximizes opportunities and minimizes confusion or frustration to consumers.
5.6.6 Availability of Empowerment Tools Retail competitor price comparison tools exist in countries where there is active retail choice. Just as in the travel industry where consumers can find many websites where comparable fares on airlines are provided, in the electric industry consumers can find comparison of retail competitive supplier prices and offerings in one location on a website. The prices could be separated by class of customers (residential, commercial etc), by region of offering, by type of price offering (fixed price, indexed prices, variable prices etc), and by value added products or services (renewable energy mix etc). Any specific entry or exit fees and minimum contract periods should be disclosed. In addition to price comparison, the empowerment website should have other helpful elements such as Customer Bill of Rights, customer education material (how to switch, how to read the electric bill, etc), and a way to file direct complaints with the regulator. Having an objective source of comparable information to customers is very important19. Regulators should identify means for facilitating such comparison tools. Regulators should also measure progress on additional metrics such as % of consumers having access to at
18 See consumer survey question on page 21 at https://irl.eu-supply.com/app/rfq/publicpurchase_docs.asp?PID=111082&LID=120036 19 See for example Ohio Commission website tool, and Bosnia Commission tool for price comparison among retail competitive suppliers: http://www.energychoice.ohio.gov/ApplesToApplesComparision.aspx?Category=Electric&TerritoryId=2&RateCode=1 ; Another price comparison tool from the country of Bosnia is found at: http://uporedistruju.ba/
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least one independent price comparison tool; access to historical consumption information; and standardized supplier switching process.
RECOMMENDATIONS • Review existing websites that have the comparison tools in operation.
• Identify the features that are applicable to the specific country or region.
• Work collaboratively with neighboring countries to see if a common template can be developed and deployed.
• Work with retail competitive suppliers and consumers to understand what consumer needs are what the retail competitive suppliers can provide for meaningful information that would be useful.
• In developing the comparison tools, ensure that data processing costs are minimized by deploying automated processes for populating and updating the data monthly.
• Implement the website tools as a pilot first and address any bugs before going full scale.
• Once deployed, monitor how the tools are being used by consumers.
6. Minimum Criteria for When to Relax Price Regulation for Household and Small Commercial Customers
The following criteria should be considered by the regulators before they relax price regulation for household customers. The first three criteria in the table below are threshold conditions, while the remainder should be considered collectively by the regulators in reaching a conclusion on price relaxation.
Metric Criterion 1 Wholesale Market Price Competitive 2 Wholesale Market Price vs Public Supplier Price Comparable 3 Retail Competition Infrastructure Consumer Protections Fully in place Data Exchange Protocols Fully in place Regulatory Oversight Fully in place 4 Number of Retail competitive
suppliers/Concentration HHI LI
<1800 <0.2
5 Number of Suppliers >5 6 Customer Migration Level 20%
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7 Consumer Awareness/Knowledge Medium to High
7. Next Steps
As regulators grapple with whether and when to relax price regulation for household and small commercial electric customers, they should consider undertaking the following next steps.
1. Determine the benchmark wholesale electric price that could be used to compare public supplier prices. Monitor these benchmark prices monthly.
2. Assess whether the wholesale market price is competitive. Consultation with the competition commission would be a necessary step in understanding whether the wholesale prices are competitive.
3. Determine whether the public supplier price and the wholesale benchmark price are apples-apples. Analyze the differences between the two and identify the reasons for the differences. Fix any problems identified. For example, if the public supplier price includes cross subsidies from delivery business, then proper unbundling should be done.
4. Meet with retail competitive suppliers to find out their concerns in serving retail customers and chart a road map on how to address the genuine barriers identified.
5. Conduct a baseline survey of customer awareness/knowledge as discussed above. The initial survey results will form the base line. Then future similar surveys will show progress in this metric.
6. Initiate designing a web page that can show comparison of retailer prices. It could be populated initially with choices for large customers as there are some retailers supplying them today.
7. Review retail infrastructure elements (discussed above) that still need to be in place and develop a road map for how they can be implemented over the next five years.
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ANNEX I
The following section is an excerpt from the 2017 Competitive Retail Electricity Markets: General and Web-Based Communications Best Practices, Section 4.11 Developing Necessary Customer Protection Regulations and Rules for Suppliers in Advance (pg. 33-34):
Ohio PUC Customer Protection Regulations and Rules
The Ohio PUC established several administrative rules to protect customers and has reviewed them regularly following approval. These rules include:
• Rules on disclosure of customer information by utilities, such as account numbers, other identifying information – OAC 4901:1-10-24)20
• Minimum standards for Competitive Retail Electric Suppliers - OAC 4901:1-21. These minimum standards cover:
- Marketing materials to ensure that they are not misleading or deceptive; - Required Supplier Offer Terms to specify the exact terms and items that must be
included in offers so that customers can make a reasonable comparison against other offers;
- Third party verification for enrollment - 7-day rescission period after enrollment - Requirements for door to door solicitors to follow local ordinances and show
identification
• Processes and Procedures for Investigations of Suppliers – the Ohio PUC reviewed its investigation process in light of competitive retail market opening, including how it would track issues and complaints (e.g., supplier contract expiration date, fixed versus variable rate confusion, etc.)
• A clearly established and effective informal (and formal) dispute resolution process, including a regulatory call center to help administer complaints
Pennsylvania PUC Customer Protection Regulations and Rules
In his presentation in Jahorina, Mr. Eric Matheson listed the following rules and customer protections Pennsylvania regulators established with respect to competitive retail electricity markets:
• Slamming and Billing Protections
Slamming – zero tolerance: 52 Pa. Code § 57.177 (customer dispute procedures)
Strict billing and payment standards – 52 Pa. Code § 56.11
Bill format for residential and small business customers: 52 Pa. Code § 54.4
• Marketing/Sales Activities
Door-to-door, telemarketing, and other marketing regulations - 52 Pa. Code Chapter 111. This regulation clearly details that suppliers must be true to the offers they
20 Note: the Rules include notice that customers are allowed to remove their name from eligible customer list that suppliers have access to for marketing purposes
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make – i.e., advertised prices = disclosure prices = billed prices. In other words, licensees shall provide consumers with accurate information using plain language and common terms.
These rules—or versions of these rules—are important to have in place before the market opens. Whether in US states, such as Ohio, Pennsylvania, and Maryland, or in EU countries, regulators have learned the hard way that door-to-door marketers or suppliers can take advantage of unsuspecting or uneducated customers. In Maryland, a few door-to-door marketers were reported to have worn apparel carrying the brand of the local DSO. Likewise, in Croatia, marketers took advantage of customers’ lack of knowledge about the distinction between supply and distribution in their final bill, advertising that they had offers well below customers’ monthly payments (leading customers to believe that the supply offers represented both the supply and distribution portions of their bill). In any market, there will occasionally be bad actors, and so, regulators must establish as many customer protections and rules for suppliers to safeguard consumers from deceptive marketing practices and to ensure confidence in the market. As mentioned in the introduction to this section, retail markets evolve, and so, rules and customer protections will have to change, too. Consequently, it is important for regulators to monitor customer complaints and trends in the market to be as responsive as possible. Following the 2014 Polar Vortex, for example, Pennsylvania and Ohio regulators introduced accelerated switching regulations to shorten the timeframe for customers to switch (e.g., in Pennsylvania, the timeframe was reduced 16-45 days to less than 3 business days), and the Ohio PUC required suppliers to offer contract summaries – condensed, high-level summaries of important terms and conditions in supply contracts – as well as contract renewal and changes in terms notices.
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National Association of Regulatory Utility Commissioners (NARUC)
1101 Vermont Ave, NW, Suite 200 Washington, DC 20005 USA
Tel: +1-202-898-2210 Fax: +1-202-898-2213
www.naruc.org
For questions regarding this publication, please contact Erin Hammel ([email protected]) or Crissy Godfrey ([email protected]).
