Agree that no regulatory intervention needed

Transcription

1 20 May 2014 Peter Allport, Chair Retail Advisory Group C/- Electricity Authority PO Box WELLINGTON 11 Chews Lane PO Box The Terrace Wellington 6143 New Zealand Genesis Energy Limited Fax: By Dear Peter Agree that no regulatory intervention needed Genesis Energy Limited welcomes the opportunity to provide a submission to the Retailer Advisory Group (RAG) on your discussion paper Review of group switching and dated 7 April Genesis Energy agrees with the RAG recommendation that no direct regulatory intervention be pursued in relation to group switching or mass aggregation. In support of this view, we note: there is no evidence of any market problem. As identified by the paper, there are already a number of providers that provide mass aggregation or group switching to New Zealand electricity consumers; and there are no regulatory barriers that prevent the provision of group switching or services. We also agree with the RAGs conclusion that the Low User Fixed Charge Regulations are a barrier to flexibility and innovation in the retail market. The inefficiencies created by these regulations are market wide and are a barrier to innovation across the retail sector. However, we are concerned with the document s focus on hypothetical retailer business models for group switching or mass aggregation. This focus, in our LE-SU14-028

2 view, is at odds with the Electricity Authority s statutory purpose in promoting competition in the electricity market. Support RAG conclusions Genesis Energy supports the RAG s overall recommendation. Mass-market and group switching services are already offered in the New Zealand market. Furthermore, we agree that the market regulations are not a barrier of entry that prevents these services being offered. We suggest that, rather than employing regulatory barriers, the key to successful consumer aggregators or group switching is a strong value proposition for their target group. Such a value proposition may include negotiating for discounts but it may be providing other benefits such as billing convenience, aggregation of household costs, or simply providing a more tailored customer experience. Active aggregators and group switching As identified in the document, there is ample evidence of group switching in the New Zealand electricity retail market. We are aware of other schemes, in addition to those schemes identified in the discussion document 1, that offer group switching or aggregation. For example: Ashburton Trading Society; The Rural Farmlands CRT and ATS; All of Government procurement (in regards to housing requirements); Employers and Manufacturers Society; Bartercard (they are currently exploring this concept). But just as relevant is the presence of aggregators and group switching providers that focus on commercial customers. Aggregated commercial customers (such as the All of Government procurement schemes) also require significant group switching of a large number of ICPs. We suggest these schemes are further evidence of a healthy competitive retail market, where retailers and consumer groups seek to achieve mutually beneficial outcomes. 1 Discussion Document Table 3 Estimates of Switching Factors arising from a range of group switching schemes 2

3 No regulatory barriers We suggest that by their very existence, the schemes and companies identified by the report demonstrate that there are no specific regulatory barriers preventing these services. A number of the schemes or companies identified have been operating for a long period of time. For example, The Rural Farmlands CRT and ATS have been aggregating rural consumers for at least 10 years. But some of these schemes are also new. Grey Power s recent arrangement with Pulse Energy demonstrates a new group switching product targeting a particular part of the consumer market. Comments on potential limiting factors Table 4 of the discussion document summarises the limiting factors that the RAG considered as part of its discussions. We agree with the overall finding that there is no need for regulatory intervention. But we have the following comments on some of the specific limiting factors identified in Table 4: Insufficient information about consumption profiles is not a limitation. As raised with the Authority in the past, consumers are able to access their own load profile information. 2 In our view, there is no barrier to an aggregator or retailer asking for this information from the consumer for the purposes of informing the aggregation process. Determining or promoting the value proposition is not a proper role for the market regulator. As discussed below, it is inappropriate for the RAG to suggest the Authority should effectively pick winners by promoting one retail business model over another. Support the RAGs position on the Lower User Tariff Regulations. We agree that the current low user tariff regulations introduce unnecessary complexity into the retail market. This complexity reduces retailers (and aggregators ) ability to provide new and innovative products into the market. New business models are the domain of market participants Despite our agreement with the findings of the RAG, we are troubled by the nature of some of the issues considered by the document. For example, the report discusses the relative success and failure of different switching or aggregator business models. It also asserts that the market regulator, or its 2 Genesis Energy submission on Retail Data Project dated 11 March

4 advisory group, needs to understand underlying cost structures of possible business models. This appears to outline a business case for a switching company, rather than focus on the question of whether there are unreasonable barriers to group switching. We agree that consideration of different business models for the retail market is interesting. However, we do not see a role for the RAG or the Authority in this space. This type of analysis suggests the Authority could favour any one business model over another in the retail market. Such a command and control approach to retail innovation is at odds with the principles of a competitive market, and the Authority s statutory objective to promote competition. We consider that the role of the market regulator is to remain neutral to the business models that operate within the competitive retail market, as long as those models comply with the Electricity Participation Code. Market participants are better placed to bring innovation in the retail sector. Participants are able to understand and manage the business risk associated with new ventures. They have the commercial incentive to succeed and to innovate. Collectively, participants can adapt to meet the changing demands of consumers. The New Zealand retail electricity market continues to demonstrate just this type of innovation. Genesis Energy s introduction of MyTime tariffs, Powershop, Grey Power s association with Pulse Energy, and the recent entry of Flick Energy are all examples of innovation being brought to customers. If you would like to discuss any of these matters further, please contact me on Yours sincerely Jeremy Stevenson-Wright Regulatory Affairs Manager 4

5 Appendix A: Responses to Consultation Questions QUESTION Q1: Are you aware of any current or defunct residential electricity buying groups in NZ? If so, what do you consider have been the main reasons for their success or failure? Q2: How does the success of electricity buying groups in NZ compare to that of buying groups in other services in NZ? Do you consider there are other services where buying groups have been particularly effective? If so, what are these areas? Q3: Do you consider that aggregation by small consumers has potential to enable these customers to access volume discounts in NZ s retail electricity market? If not, why not? Q4: Do you agree that differences in transaction costs between small and large consumers are a primary cause of the existence of volume discounts? COMMENT We note that the report itself provides an answer to this question at paragraphs to In particular, we note that the report s assessment of New Zealand aggregators indicates a comparatively high take-up rate compared to overseas models. We see no particular reason why customer aggregation will necessarily lead to volume discounts. But, if discounts are offered, such discounts will be the result of reduced costs created elsewhere by the retailer. This may include reduced marketing or customer service costs requiring certain payment methods to be utilised. It is worth noting that these reduced costs the value proposition for the retailer are likely to be determined by how long the aggregated customers are committed to the retailer. Volume discounts may reflect differences in transaction costs, for example, large consumers typically have lower (per MW) acquisition costs. However, of equal importance is the increased certainty that a large commercial consumer can bring to a retailers consumption profile. 5

6 QUESTION Q5: What are your views on the concepts and methodologies presented regarding estimation of potential numbers of customers engaging with group switching schemes? Q6: Do you consider the analysis of aggregation models and costs presented here is sufficient to inform the issue at hand? Q7: Do you consider that the analytical approaches developed in this section would be useful in quantifying the potential benefits available from mass-market aggregation? Q8: Are there any additional benefits (for retailers or consumers) that might arise as a result of group buying and mass-market aggregation? Q9: Do you consider that additional work should be completed in order to further inform the issue? Q10: Do you agree with the possible explanations for buying group performance to date? Q11: Do you consider there any additional limiting factors or regulatory barriers not discussed here? Q12: What are your views on the potential solutions identified? COMMENT The New Zealand aggregators, identified in Table 3, all demonstrate better performance than the international models. This is particularly interesting given that New Zealand s switching rate is already significantly higher than the countries where largescale switching or aggregation schemes have been established. The benefit of any group buying or will vary depending upon the value proposition of the service or scheme. No. See response to Q1 and Q8. No. 6

7 QUESTION Q13: Do you agree with the conclusions reached in this report? If not, why not? COMMENT 7