Future Pricing Roadmap Update. 5 June 2018

Transcription

1 Future Pricing Roadmap Update 5 June 2018

2 1 Introduction The Electricity Authority (Authority) announced in October 2016 that, as a further step in its ongoing Distribution Pricing Review, it expected distributors, by 1 April 2017, to publish their plans for introducing more efficient pricing. Specifically, the Authority stated that it expected distributors to include in their plans: a clear outline of the process each distributor will adopt, including the nature of their planned consultation with retailers and consumers; a timeline with the key milestones; and resourcing implications, including how resources will be allocated to the process of moving towards efficient pricing structures. This Future Pricing Roadmap (Roadmap) is our response to the Authority s request. 2 Updates from prior version 2.1 Co-ordination with Customised Price-quality Path application We have signalled our intention to submit a Customised Price-quality Path (CPP) proposal to the Commerce Commission, so that our regulated price (revenue) path reflects the long-term investment requirements of the network. We expect to lodge our proposal in May 2020, in anticipation of commencement from 1 April Our CPP application will involve comprehensive consultation with stakeholders, including consumers, to provide them the opportunity to contribute to our asset planning. As this Roadmap also requires stakeholder consultation, notably with retailers and consumers, there is a risk that the two separate initiatives, which both relate to pricing, are confused for each other, diminishing the value of each consultation process. Once we have established a firm programme for the CPP project, particularly around stakeholder consultation, then scheduling of pricing development consultation will be reviewed to ensure it does not conflict with CPP consultation. CPP commencement also needs to be considered as part of the Roadmap. If pricing structures change at the same time as our CPP takes effect, the impact on consumers bills may erroneously be attributed to pricing development. Whilst the CPP will become effective in 2021, and pricing development is not expected to be fully completed until 2023, there is a risk, if either timeframe changes, that the two initiatives will occur in the same pricing year. We will ensure pricing development changes are not applied in the same year as the commencement of the CPP. 2.2 Initiation of pricing development Earlier versions of the Roadmap scheduled pricing development initiation activities (for example, identification of challenges to pricing development) for completion in the first half of The Electricity Networks Association (ENA) Distribution Pricing Working Group (DPWG) has tasked a new sub-group of members with developing an overall strategy for pricing development, and to assist individual member companies in developing their own implementation approach. We are planning to use the output from this workgroup to identify the critical steps required to initiate our pricing development. It is now likely that this will occur during the second half of ENA pricing development roadmap The ENA has updated their pricing roadmap to assist members to meet the Authority s expectations in a consistent fashion. We have used an extract from the latest ENA pricing roadmap, presented in Section 4, to provide an update on the ongoing industry collaboration. Future Pricing Roadmap H of 6

3 3 Distribution Pricing Development 3.1 Aurora Energy s intended process We have a commercial interest in ensuring prices are as cost reflective (i.e., efficient) as practicable. Cost reflective network pricing (when reflected in retail prices) provides appropriate commercial incentives for consumers to manage their electricity use, or use on-site generation / storage, during times of high network demand. Conversely, it will incentivise consumers to use electricity, or charge their storage facility, during times of low network demand. When electricity use changes in in this way, our network investments to cater for electricity demand growth can be reduced, resulting in lower and more stable prices. This is to the benefit of electricity consumers. As all New Zealand distributors are subject to similar commercial pressures, we have been an active participant in the ENA s working groups and forums. This is to understand the learnings of other distributors in relation to pricing development, and to contribute to pricing guidance issued by the ENA for all distributors. Further discussion of the industry collaboration occurring in pricing development is contained in Section 4. Our Roadmap is presented in Table 1. The Roadmap outlines the key stages of our pricing development, the activities that are required at each stage, and when these activities will take place. The Roadmap is expected to evolve as the project progresses. Our Roadmap for pricing development is in four main stages: Initiate development; Regulatory enablers; Plan changes in more detail; and Manage roll out of new pricing options. 3.2 Timeline & key milestones Retailer consultation During the initiation phase, we plan to communicate our strategy for pricing change to retailers. This is already underway through our periodic discussion with retailers, and our support for the ENA s New Pricing Options for Electricity Distributors paper that was developed in We plan to have further discussion with retailers over the next two years. Since the publication of our initial Roadmap in March 2017, we have undertaken informal engagement with several retailers outlining our intended process for pricing development, and have received their high-level thoughts on what types of prices are more likely to be passed through to consumers. Feedback received todate is valuable, and will be incorporated into our own consultation on pricing development, to be issued in mid Consumer consultation Following consultation with retailers, we will develop more detailed plans and strategies for pricing development. At that point, we will commence a broader consultation and education programme on the likely composition of our future pricing structures. Consultation with consumers will be valuable at this point, as the future strategy will be more refined. We remain concerned that premature consultation has the potential to confuse, rather than educate, given consumers general lack of awareness of distribution pricing and, as discussed in section 2.1, needs to ensure any consultation on pricing development is performed outside of the CPP consultation process Regulatory change Between the retailer and consumer consultation phases, the 2020 change in the form of control for distributors, under Part 4 of the Commerce Act 1986 (from a weighted average price cap to a revenue cap), becomes a key regulatory enabler for changes in pricing structures. The current weighted average price cap exposes us to the risk of regulatory non-compliance (price path Future Pricing Roadmap H of 6

4 breach) when the structure of prices are changed, particularly where the customer responses to changes are unknown Roll-out & transition Following consumer consultation, we will start to manage the final roll-out and transition to new pricing structures. This stage will look at how to incentivise retailers / consumers to take up new pricing structures, monitor how consumers change their behaviour once they have adopted new pricing, and will manage the reputational and political risk of the transition to new pricing structures. 3.3 Resources required We will primarily use internal resources for pricing development, and will complement this with specialist expert advice as and when required. 4 Industry collaboration We will continue to contribute and participate in the ENA s pricing development working groups and forums. Most notably this includes the ENA DPWG. 4.1 Distribution pricing work group The DPWG meets regularly to progress greater standardisation and consistency across members pricing arrangements. It is also the champion of pricing reform and leads this process across all the ENA members networks. 4.2 Guidance on pricing reform for members Following publication of the pricing reform guidance report in August 2017, a subgroup of the DPWG was set up to progress the ENA implementation strategy for pricing reform. This group is developing tools and processes to provide members with practical guidance on how to progress pricing reform, and on the complex issues relating to implementation of reform that need to be dealt with over an extended transition timeline. 4.3 October 2017 workshop A workshop of ENA members was held in October to develop ideas for implementation and transitioning pricing reform. It was well attended by ENA members as well as two pricing reform experts from Australia. Among other outcomes, the workshop agreed that work was needed to consider how the diversity of members approach to reform could be managed to provide a consistent result that benefited both consumers and network businesses. The pricing strategy subgroup was allocated this task. 4.4 Next steps with pricing reform The following are the initiatives that are underway in 2018 as ENA members move forward with pricing reform Implementation strategy As noted, a new workgroup of ENA members was formed in late 2017 to focus on developing an overall strategy for implementing pricing reform and then working with individual members to develop their own implementation approach. This group has since initiated a work stream to analyse the candidate pricing options at individual consumer level using energy consumption data from a sample of end customers. These analytics will help the group, and members, understand the bill impacts from pricing changes and from there to develop options for further analysis and to consider the important issues around implementation and transition. The first two stages of results from this analysis are due by mid-2018 and the need for further analytical work and the stakeholder consultation processes, will be assessed at that time. Future Pricing Roadmap H of 6

5 The other important aspects of the implementation of pricing reform are technical information handling and processing, systems capability and the like. These are being addressed by a joint EDB/retailer Technical Implementation Working Group that is making great early progress. The substantive work of this group is shaped by the output of the strategy group to date, as well as from the groups own research and analysis. Once these two work-groups have progressed their work to have substantive outputs (expected mid 2018) we intend to hold retailer and stakeholder workshops to get feedback on our progress ENA coordination The ENA has been tasked by its members to ensure that the process of reform is not only efficient across the membership but that individual reform efforts are coordinated and consistent. 4.5 Overall timeline In their October 2017 roadmaps, some ENA members noted that reform of distribution pricing was conditional on changes and progress in other parts of the energy sector. Reform of the LFC was prominent in this regard as was the Electricity Authority work programme. Timing of these matters remains unclear. Since that time, other major industry initiatives have been announced that may impact on pricing reform in the longer term, however we intend to press on with the reform programme that we have in train. ENA members are committed to timely release of their pricing reform roadmaps. Future Pricing Roadmap H of 6

6 5 Aurora Energy Future Pricing Roadmap checklist Table 1: Aurora Energy Future Pricing Roadmap Future Pricing Roadmap Checklist EDB : Aurora Energy Limited Roadmap Stages Activities Timeline H1 H2 H1 H2 H1 H2 1. Initiate pricing development Communicate Prepare and publish future pricing roadmap, include reasoning and and why it's important X Problem Identification & Discovery Justification and early modelling X Define overall objectives for pricing development Set overall goals including target dates or date ranges X Develop strategy to deliver pricing development Develop ideas on how to go ahead (including long list of future pricing options if available) X eg, resourcing implications, billing systems, EIEP1 file formats, AMI penetration and Identify challenges technology, accessing data X Establish high level plan Gain commitment for pricing development, agree plan, allocate resources X Consult retailers Socialise ideas & plans with retailers X What do we need to know to progress pricing development? (eg. AMI penetration? Gather basic data for analytics Moving from GXP to ICP billing? Survey customers X Define pathway Prepare final strategic pricing plan (including target dates) X Alignment across EDBs Compare plan with other EDB's, form coalitions X 2. Regulatory enablers Form of price control Change in form of price control from Weighted Average Price Cap to Revenue Cap X 3. Plan changes in more detail Develop detailed plans, including: Identify issues/prepare detailed pricing development plans - regulatory compliance Check plan meets regulatory expectations X - data analysis to assess customer impacts Narrow down preferred options and test market impacts X - implementation and transition arrangements Identify what will drive success X Develop processes to account for stakeholder views and review against target dates. - feedback loops and issues resolution Participate in ENA processes to provide stakeholders with single point of contact X - communication Educate customers and retailers about change X 4. Manage roll out of new pricing options Develop transition strategies Incentivise and manage take-up over time for retailers and customers X Adopt risk management approach Identify and manage risks to markets, customers, EDBs (eg political and financial risks) X Review progress and make adjustments Actively consider progress towards outcomes over time X Ongoing customer interactions Monitor customer responses and manage as required X Future Pricing Roadmap H of 6