Submission to Ergon Energy on its future network tariffs

Transcription

1 Submission to Ergon Energy on its future network tariffs September 2015

2 About QCOSS The Queensland Council of Social Service (QCOSS) is the state-wide peak body for individuals and organisations working in the social and community service sector. For more than 50 years, QCOSS has been a leading force for social change to build social and economic wellbeing for all. With almost 600 members, QCOSS supports a strong community service sector. QCOSS, together with our members continues to play a crucial lobbying and advocacy role in a broad number of areas including: sector capacity building and support homelessness and housing issues early intervention and prevention cost of living pressures including low income energy concessions and improved consumer protections in the electricity, gas and water markets energy efficiency support for culturally and linguistically diverse people early childhood support for Aboriginal and Torres Strait Islander and culturally and linguistically diverse peoples. QCOSS is part of the national network of Councils of Social Service lending support and gaining essential insight to national and other state issues. QCOSS is supported by the vice-regal patronage of His Excellency the Honourable Paul de Jersey AC, Governor of Queensland. Lend your voice and your organisation s voice to this vision by joining QCOSS. To join visit 2 / September 2015 Future network tariffs

3 Table of Contents Acknowledgements... 4 Introduction... 5 Background... 5 Why this process is important to QCOSS... 5 QCOSS s engagement in the current process... 6 Summary of QCOSS s position and recommendations... 6 Comments on the consultation process to date Availability and scope of information provided Transparency and clarify of information provided Adequacy of responses to stakeholder concerns Clarity about the objectives and expected consumer benefits Comments on Ergon s proposed tariff Fixed Charges Seasonality of tariff Calculation of the demand charge Peak times Long run marginal cost calculations Meeting the Consumer Impact Principle Impact on Consumers Future trials Ease of understanding/simplicity of tariff Transitional Measures and Consumer Protections Bill Protection Communication/consumer education Addressing split incentives and establishing a fair access to technology initiative Wider reform on concessions and/or consumer protections Other areas for clarification in Ergon s TSS Metering: Costs and Access Demand Management and Distributed Energy Resources (DER) Load control and default tariffs The Uniform Tariff Policy (UTP) Appendix 1: / September 2015 Future network tariffs

4 Acknowledgements This submission was part funded by the Energy Consumers Australia (ECA) ( as part of its grants process for consumer advocacy and research for the benefit of consumers of electricity and natural gas. The views expressed in this submission do not necessarily reflect those of ECA or the Australian Energy Market Commission (AEMC). QCOSS would like to thank the ECA for making funds available for this important advocacy project in Queensland. QCOSS would like to acknowledge and sincerely thank all who participated in the development of this submission. This includes the many participants at its two workshops in Toowoomba and Cairns. These organisations are listed in Appendix 1. QCOSS would like to acknowledge and thank the staff of Ergon Energy for conducting a number of information sessions and making themselves available to answer queries and provide clarification where required. Finally, special thanks to Ms Linda Parmenter for her technical advice and drafting of this submission. Linda also prepared and facilitated the Toowoomba and Cairns workshops. 4 / September 2015 Future network tariffs

5 Introduction Background Under the new pricing rules outlined by the Australian Energy Market Commission (AEMC), Ergon Energy is currently preparing its Tariff Structure Statement (TSS) for submission to the Australian Energy Regulator (AER). The TSS must outline Ergon Energy s proposed tariffs from 2016, and must comply with the pricing principles outlined in the rules from Three of the important requirements that are relevant to this submission are to: 1. Meet the pricing objective that network charges reflect the efficient costs of providing those services; 2. Base each tariff on the distributors Long Run Marginal Cost (LRMC); and 3. Consider the consumer impact of changes from the previous regulatory year. 2 The purpose of this submission is to respond to Ergon Energy s consultation paper Our Network Tariff Reform Report and to provide specific comment on Ergon Energy's preferred tariff from 2016 for its Standard Asset Customers (SAC) Small 3 Residential Customers, particularly the extent to which the proposed tariff meets the customer impact principle. This submission also provides broader comments on Ergon Energy s consultation to date and QCOSS s views about what actions are required prior to, and during, the implementation of the new tariffs, including the preconditions from an industry and government policy perspective that QCOSS believes are necessary for the tariff to be effective in achieving its objectives. Why this process is important to QCOSS QCOSS welcomes the opportunity to provide input to Ergon Energy in response to its consultation paper on network tariff and its TSS for Developments in the electricity sector are of great interest to QCOSS because the supply of electricity is an essential service that is vitally important for the health and wellbeing of families and individuals. QCOSS believes it is important to provide a voice for residential consumers, and particularly low-income and disadvantaged households, in the tariff reform process. Network tariffs in Queensland are amongst the highest across the National Electricity Market (NEM) 4, and tariff structures can have a large impact on the prices that households pay, depending on their usage profile. QCOSS believes that any decisions made by Ergon Energy and the AER on future network tariffs must not result in worse outcomes for low income and vulnerable regional Queenslanders, 1 AEMC (2014), AEMC National Electricity Amendment (Distribution Network Pricing Arrangements) Rule 2014, Section AEMC (2014), AEMC National Electricity Amendment (Distribution Network Pricing Arrangements) Rule 2014, Section sets out the Principle on Consumer Impact. 3 SAC Small = Standard Asset Customers (SAC-Small) (<100 MWh pa) 4 Uniting Care Australia (2015), Network tariffs applicable to households in Australia: empirical evidence prepared by Carbon and Energy Markets. 5 / September 2015 Future network tariffs

6 many of whom have been under considerable pressure from price increases in the previous 10 years. It is vital that all households can understand the tariffs and can respond to them; that they can access the tariffs and any supporting technology if they wish to do so; and that there are adequate protections for vulnerable households. QCOSS s engagement in the current process QCOSS is a member of Ergon Energy s Customer Council and has actively participated throughout its tariff reform process. QCOSS has also undertaken its own desktop research, collaborated with other consumer groups throughout Australia, and participated in broader related topics including attending a Network Tariff Master class organised by the South Australian Council of Social Service (SACOSS) in Adelaide and a number of Energy Network Association (ENA)/CSIRO Roadmap Transformation events. QCOSS is also participating in Energex s consultation process and is engaging with the Queensland Department of Energy and Water Supply (DEWS) regarding the broader jurisdictional issues. To assist in responding to the tariff reform process, QCOSS obtained input on Ergon Energy s proposed tariffs and the future reform pathway from some of our members. Building on a successful workshop held in Brisbane in February this year, QCOSS held a further two workshops in Toowoomba and in Cairns. Twenty-four people participated from 15 organisations representing a range of different consumer interests (see Appendix 1). The purpose of these workshops was to gather direct feedback from participants about the likely impact of the tariffs on the various customer groups, as well as to understand their reactions to inform consumer engagement needs and to identify specific issues related to pricing, regulation and demand tariffs proposed. While the views in this submission are QCOSS s own, the responses from participants in the workshops have assisted to shape these views. Summary of QCOSS s position and recommendations QCOSS understands that Ergon Energy is required to put forward a tariff in its TSS that better reflects the LRMC of supplying electricity. QCOSS also understands that in principle, this approach is to signal to networks and customers the correct incentives to make efficient investment decisions. This will ameliorate the removal of cross-subsidies currently inherent in the electricity market. Under the current tariff structures low income households are particularly at risk of price instability due to falling overall demand alongside the requirement to recover the regulatory determined revenue. They have been adversely affected by the increasing network costs and have faced barriers to avoiding these costs through the take-up of new technologies such solar photovoltaic systems. QCOSS view is that the future pricing system must contribute to greater sustainability in the supply of energy by ensuring that the correct efficient decisions are made. Over time this may result in a reduction in the regulated asset base and/or one that will see efficient use of distributed energy 6 / September 2015 Future network tariffs

7 resources. Ultimately consumers are looking for greater productivity in the supply of energy that will translate into overall lower prices and bills per unit produced. For a cost reflective pricing to be effective customers will need to understand it and respond to price signals. This will require that consumers trust and support the new reforms and that Ergon Energy effectively communicate the rationale for the reforms. For those who are not able to respond (for whatever reason) QCOSS s view is that there must be an effective safety net that demonstrates a much wider concept of equity and fairness than simply removing the inherent cross-subsidies in the current pricing system. Affordability and access are also an essential component of equity in tariff design. This necessitates consideration of the impact of the tariffs on customers including identifying potential affordability issues and the ability of consumers to access technology and to take advantage of opportunities to reduce demand or use energy differently. QCOSS believes the consumer impact principle in the current rules recognises this broader notion of equity and that application of the principle is both important and central in the TSS process. The principle must not be addressed in a tokenistic way or given less prominence than the economic analysis. Demonstrating the consumer impact principle may well mean compromising on cost reflectivity and crosssubsidies, particularly in the initial phases. Assessing the customer impact also requires outlining the steps that will take place during the early implementation phases (and potentially a transition phase to what eventually will be mandatory tariffs). This includes efforts to better understand the impact of the tariffs as more data becomes available, and to trial and experiment with approaches that remove barriers to accessing the tariff and associated technologies. QCOSS is especially advocating that this includes vulnerable groups such as people with a disability, Aboriginal and Torres Strait Islander households, refugees, seniors and people from a cultural and linguistically diverse background (CALD). At this time QCOSS does not believe the consumer impact principle has been sufficiently addressed by Ergon Energy. There is a lack of information and/or clarity on issues relating to the customer impact, implementation of the tariff, and whether or not the proposed demand tariff will bring long-term benefits. QCOSS is also concerned that the specific design of the tariff presented by Ergon Energy is too complex to be understood by consumers, and in the absence of sufficient modelling using actual consumption data it is not clear that it will not carry a high risk of bill shock for some consumers especially in the summer months. We believe Ergon Energy still has not sufficiently addressed these issues although we raised them in our submission earlier this year. QCOSS view is that Ergon Energy should actively demonstrate in its TSS that its tariff proposals meet the consumer impact principle by giving sufficient weight to objectives such as bill stability, ease of understanding and simplicity for consumers. Not only is this necessary in order to facilitate consumer uptake and response, without this balance Ergon Energy s stated outcomes for tariff reform the lowering of prices for all consumers will not be achieved. We also believe Ergon Energy s 7 / September 2015 Future network tariffs

8 proposal needs to acknowledge some of the barriers and challenges, particularly for vulnerable households, and focus much more strongly on the actions it will take to address these concerns through a transition phase. In summary, QCOSS recommends that Ergon Energy address the following in its first TSS: Provide a clearer rationale for tariff reform and in particular identify and evidence the long term benefits for consumers; Design a cost reflective tariff that is capable of being understood and responded to by consumers - this may involve identifying what is required to assist consumers achieve this by way of consumer education and technologies; Set out the likely impact on the default tariffs for those consumers who do not adopt the demand tariffs; Introduce a bill protection mechanism in order to avoid bill shock for those who cannot respond to new tariffs or are adversely impacted due to a changing default tariff; Demonstrate how customer impacts will be identified, including for low income and vulnerable customers, through the establishment of a real time tariff study. ; and Identify where wider consumer protections need to be strengthened to avoid bill shock. We outline our specific arguments and what is required in progressing tariff reform in the remainder of this submission. 8 / September 2015 Future network tariffs

9 Comments on the consultation process to date New pricing rules require distributors to consult with consumers on network tariff reform and the ENA has affirmed the importance of this consultation stating engagement with customers on tariff design will be critical to making the transition to more cost-reflective network tariffs, and ensuring the benefits are realised. 5 With reference to the spectrum of consumer engagement outlined in the AER s Consumer Engagement Guideline for distribution network service providers 6, QCOSS expects that Ergon Energy s consultation on tariff reform is meaningful and focused at the more advanced and challenging consult level of engagement. Ergon Energy commenced its tariff consultation process in 2013 and has since released several consultation papers with supporting documentation, has held a number of workshops and one webinar on tariff reform, and has developed a short video to assist consumers to understand the reforms. Opportunity to comment was provided on three occasions, and Ergon Energy has made efforts to reach different customer classes through the process. QCOSS appreciates the fact that Ergon Energy commenced consultation with consumer groups early in the development of the TSS and has been responsive to requests for further information when requested. However, QCOSS s experience of engaging with the process has given rise to a number of observations that we would like to comment on in order to assist Ergon Energy moving forward. These comments concern the: 1. Availability and scope of information provided to support the consultation 2. Transparency and clarity of information provided 3. Adequacy of the Ergon Energy s responses to stakeholder concerns 4. Clarity about the objectives and expected consumer benefits. 1. Availability and scope of information provided The first observation is that the information provided to stakeholders to support the case for demand tariffs has not been sufficient to assist QCOSS in understanding all the issues and impacts, in order to reach a clear position. QCOSS considers important information is either lacking, inaccessible or unclear in the way it has been presented. For example, QCOSS had noted in an earlier submission 7 that the modelling of the tariff options must take into account bill stability and simplicity, and that a customer impact assessment was required. Ergon Energy s analysis, undertaken by Energeia, did not model bill stability and simplicity, and this remains a fundamental flaw in Energeia s assessment of the tariffs. There is also only limited information related to the customer impacts of demand tariffs at this stage. A large 5 Energy Networks Association (2014). Towards a National Approach to Electricity Network Tariff Reform p 2 6 AER (2013), accessed at - Consumer engagement guideline for network service providers - November 2013.pdf 7 QCOSS (2015), available at Submission to Ergon Tariffs_Final_ pdf 9 / September 2015 Future network tariffs

10 focus of the Energeia s paper is on the extent to which the tariffs incentivise customers to invest in Distributed Energy Resources (DER), and the additional customer impact analysis undertaken by Energeia and presented at the most recent workshop in July 8 appears quite limited at this time for a number of reasons: It was modelled on charges set by the Queensland Competition Authority (QCA) for the 2015 Seasonal Time of Use Demand (STOUD) tariff, and not include the charges that Ergon Energy has proposed from It involves only approximately 720 residential National Metering Identifiers (NMIs) The data is not likely to be representative of the community at large as it is drawn from participants of the reward based tariff trial. The customer cohorts are determined only by household size and employment status, and not by any other demographic feature. We note that Ergon Energy has committed to gather additional load profile data from 5000 customers to help identify the customer impacts across different segments 9, however this commitment was not included in the accompanying consultation paper. Clearly a more significant impact assessment is required. This is discussed further below in the Section on Future Trials and Impact Assessment. 2. Transparency and clarify of information provided QCOSS has also found that simple but fundamental information has been missing or unclear through the process. This was apparent in the workshops QCOSS held in Toowoomba and Cairns when people had specific questions about the impact of the proposed tariffs that could not be answered without understanding the average or likely range of demand a customer might be charged for. QCOSS found it difficult to identify information about the level of demand that might be expected from different household types in the consultation paper (average, high, medium, low) based on the averaging approach proposed by Ergon Energy, and this made it difficult to assess the impact of the demand charges. The Case for Demand Tariffs paper 10 provided the anticipated pre and post demand tariff bill for some example households, however the assumptions relating to demand levels in the summer and winter period were not explicit 11. The tariff assessment work undertaken by Energeia was relatively inaccessible and overly technical in nature for general consumers to understand, and it did lack detail about the assumptions and methodology used. Similarly, there was a lack of transparency about the data that had been used for the work on the customer impacts presented at the July consultation workshop. For example, QCOSS could not find any written information on the customer impact assessment using the 8 QCOSS did not attend this workshop but has viewed the relevant slides. 9 Stakeholder Session Tariff Reform. Meeting Notes and Presentation, July 29. Available at: data/assets/pdf_file/0010/277516/meeting-notestariff-structure- Statement.pdf 10 Ergon Energy (March 2015), Consultation Paper, The Case for Demand Tariffs. 11 To establish the kilowatt (kw) peak charge, QCOSS had to work backwards by finding the dollar value of each of the demand charges and divide it by the proposed demand charge. 10 / September 2015 Future network tariffs

11 approximately 720 residential NMIs, and we do not know exactly how the assessment was completed, for example how many half hourly periods were assessed, over what period, etc. These presentation issues need attention so there is a genuine opportunity for engagement by consumers. Clearer explanations and examples, particularly of the impact of demand tariffs and the impact of shifting load, will also be crucial to any consumer education that will be rolled out in the future. 3. Adequacy of responses to stakeholder concerns QCOSS would also like to comment on the quality of the feedback from Ergon Energy on the consumer input. Ergon Energy has responded to a number of issues positively in response to consumer feedback notably, the decision to average the demand readings over four days in the month, and the decision to maintain a demand charge during winter so the message about demand is more easily understood. However, Ergon Energy has yet to address concerns about the ability of consumers to control or shift their demand, and concerns about the impact on particular customers. QCOSS expects that these consumer issues will be acknowledged and addressed in the TSS and that the rationale for decisions not to address these issues will be clearly stated. QCOSS does not believe that pointing to the long-term benefits or the voluntary nature of the tariff is an adequate response to the concerns that have been raised because: 1. Regardless of whether there are longer term benefits for consumers, this does not negate the need to protect vulnerable consumers from adverse impacts caused by the introduction of demand tariffs. Even if assumptions indicate a majority of low income or vulnerable households are better off in the short term, those who are worse off and cannot change behaviour to avoid paying higher costs must still be identified and acknowledged. QCOSS does not consider that dealing with these problems is necessarily Ergon Energy s responsibility, however Ergon Energy has a responsibility to understand the consumer impacts of their pricing this is part of the new rules. QCOSS especially points to vulnerable customers such as those with medical cooling or heating needs, Aboriginal and Torres Strait Islander customers, refugees and CALD households who may be adversely impacted. 2. While we accept that the proposed tariff is a voluntary tariff, we do not know what the future of the tariff will be and whether or when it would become mandatory in the future, nor do we know that the voluntary nature of it would prevent people from adopting the tariff even though it might not be suitable for them (for example, due to misunderstanding, misinformation or deceptive marketing). Therefore, we would expect Ergon Energy to outline more specifically how vulnerable people could be protected, even if some of the measures require the cooperation or action of other parties such as retailers or government. 4. Clarity about the objectives and expected consumer benefits Finally, QCOSS believes there is a need for clear and transparent information about the objectives of Ergon s proposed residential tariff and the longer-term consumer 11 / September 2015 Future network tariffs

12 benefit. There appears to be multiple stated objectives, some of which relate to the new pricing rules, and some of which are clearly broader network priorities. These objectives include improving cost reflectivity, lowering peak demand, removing of cross subsidies, preventing investment in DER, and promoting revenue stability. While it is reasonable to have multiple objectives, it is important that this does not lead to confusion and mistrust of the process by stakeholders. For example, if the objective is to reduce peak demand in order to prevent augmentation and prevent further price rises, then we would expect Ergon to pay more attention to concerns that the tariff needs to be simple enough to allow a behavioural response, and to be more concerned that some customers, regardless of understanding, will not be able to respond. We would also expect Ergon to have a greater focus on load control tariffs and demand management strategies and how these will enhance or complement new pricing strategies. Instead, the focus is on productive, dynamic and allocative efficiency in the Energeia assessment of tariffs, which suggests the stronger motivation for demand tariffs is removing crosssubsidies and securing network revenue. In fact, the Energeia analysis suggests that the demand tariff does not appear to perform well in terms of either reducing the peak or reducing network costs. 12 Given this, we question how the long term positive impact for consumers will be achieved. If a key objective of demand tariffs is improved revenue stability, then we believe it is important for Ergon to identify this upfront and state how this will benefit customers for example by stabilising demand and there preventing further price increases to cover the regulated revenue requirement. However, we would also expect Ergon to outline its strategy for dealing with the inevitability of increased solar generation and battery energy storage and associated declining demand. This is a future we would expect Ergon to be embracing and responding to. Similarly, if the real benefit for consumers is simply the removal of the cross subsidies, then it would be more accurate to say that some consumers will benefit, but others will inevitably have higher bills. Being unclear about the outcomes and benefits of demand tariffs carries a high risk of consumers getting mixed messages. This may translate to confusion about the appropriate behavioural response and which could result in more customers going off grid or customers reducing rather than shifting load and demand falling further. This would be counter- productive to what Ergon is trying to achieve. At this point in the consultation process it is not yet clear by what mechanism a broader long-term benefit for all consumers (through the assumption that the revenue requirement will decrease) will transpire, and QCOSS questions whether it is reasonable to claim this as a benefit based on the information provided. We are particularly unclear about how long it will take for these benefits to emerge given the voluntary nature of the tariff and the time it will take to fully implement. At the same time we are concerned about the range of possible impacts of the transition to demand tariffs on individual customers for both those who adopt the new tariff and those who remain on the default tariff. Given this, and in the absence of a clear understanding provided by Ergon, it is our view that long term and meaningful 12 Energeia, (April 2015), Maximum Demand: Tariff Analysis Report, Prepared by Energeia for Ergon Energy, Figure 6, Page, / September 2015 Future network tariffs

13 benefits for consumers are more likely to be achieved by broader reform which results in network assets being written down over time in order that consumers will, as a whole, experience price relief. Comments on Ergon s proposed tariff Ergon's preferred tariff from 2016 for its SAC Small customers is a seasonal time-of use demand (STOUD) tariff. This section outlines QCOSS s views on the specific detail of this tariff as they have been described in Ergon s consultation paper. QCOSS is aware that the different components of the STOUD are finely balanced, and that changes in the parameters of one of the tariff components will have a corresponding impact on the other components. However, as set out below, it is QCOSS view that the current design of STOUD is too complex and that the summer peak demand charge is set too high at $81.52 per KW. It is advisable that Ergon rethink their proposed demand tariff and consider reducing the summer peak charge; making the structure the same throughout the year; and only at weekdays and not weekends and public holidays. We would ask Ergon to demonstrate in its TSS, using indicative load profiles and in different zones, that it has identified an appropriate balance between fixed charges, peak and off peak demand charges, and flat charges. As mentioned below the proposed tariffs have to trade off simplicity and bill stability against cost reflectivity, and this is especially important in the first TSS period as people get used to demand tariffs and learn over time to modify their behaviour and use. Fixed Charges One feature of the proposed tariff is the absence of any distribution fixed charge. In principle, QCOSS supports lower fixed charges as our view is that low-income households are more likely to be disadvantaged by fixed charges as they tend to have lower usage. Lowering the fixed component of household electricity bills is therefore our preference. We understand from Ergon s consultation paper (P39) that the daily fixed charge customers will see on their final retail bill is likely to be less than half of the charge that is being applied currently, and this may provide incentive for some customers to at least consider, if not take up, the tariff. However, we also understand that Ergon proposes to collect the remaining residual costs through a minimum demand charge in the non-summer peak months, so in reality there is likely to be no net gain for customers. We understand there may be other benefits to recovering the charges in this manner (for example reinforcing the demand signal that consumers see), and while we prefer a demand charge to be applied consistently through summer and non-summer months for the sake of simplicity we do not support the imposition of a minimum charge set at 3kW. We caution that the minimum off-peak demand charge set at a very high 3kW will undermine the price signal for consumers because, similar to a fixed charge, it may appear to consumers that their actions to adjust energy use behaviour make no difference to the final bill. 13 / September 2015 Future network tariffs

14 Seasonality of tariff In our previous submission, QCOSS raised the concern that customers might experience bill shock in the summer months as a result of the proposed seasonality of the tariffs being considered. We were also concerned that consumers would forget the price signal in the nine off-peak months each year. The proposed tariff manages this risk to a small degree through the inclusion of a much lower non-summer demand charge, however it still appears that summer bills will be much higher. Though we understand that Ergon s network only experiences a peak in summer, the risk of bill shock due to unmanageable summer bills in our view outweighs the benefits of sending a more cost reflective signal and would argue that a slower transition to cost reflective pricing is therefore required. QCOSS believes a more consistent approach across the seasons is required not only in order to achieve greater bill smoothing but also so that customers can more easily understand the demand charge. Ergon could still charge a higher summer peak price signal, but not to the extent currently proposed. It should also be noted that without this smoothing for the entire customer base, there could be an additional risk that the cohort of customers who have debt that is recovered through repayment plans, or for customers that make payments through bill smoothing arrangements, such as Centrepay, could miss out on the information provided by price signals which would allow them to alter their behaviour and avoid additional charges in the future. Calculation of the demand charge After presenting a variety of options for calculating the demand charge in its earlier consultation, Ergon now proposes to calculate the demand charge in the summer months by averaging all the 52 half hour periods within the peak period (3:00-9:30pm) on the four maximum peak days in each month. Ergon states it has done this in response to concerns that consumers could experience significant bill shock as a result of applying a maximum demand charge where a single (extreme) maximum demand could result in an abnormally high bill. QCOSS support Ergon s decision to apply a method of calculation that minimises the potential for bill shock. We also understand that this position adopts a compromise between measuring maximum demand, which is more cost reflective, and averaging demand across the entire billing period, which is less cost reflective but simpler for consumers to understand. We also understand that Energeia found there were benefits in terms of preventing uneconomic bypass when calculating the summer charge in this manner. However we find the approach to calculating the demand charge over the four peak days (and then averaging over the 52 half hour periods) particularly complicated, and while this trade-off is acceptable to the degree that it is preferable to using a simple maximum demand charge, we have some doubt that consumers will be able to understand it. Our view is that Ergon continue to investigate an alternative that achieves a similar outcome but minimises the complexity, and we suggest Ergon test a charge based on a simple average of the top four days in the month throughout the entire year. 14 / September 2015 Future network tariffs

15 We believe the complexity of the demand charge calculation is exacerbated by the fact that Ergon propose to use an entirely different method of calculating the demand charge in the non-summer months. The proposal in these months is to use a maximum demand calculation based not only on the peak times but at anytime and with an imposed minimum demand floor. QCOSS believes Ergon should reconsider using different approaches to the measurement of the summer and non-summer demand charge to assist with ease of understanding for customers. This would also allow Ergon to rebalance their summer and winter charges so they are spread more evenly, while also address our concerns about an acceptably high summer bills and the likelihood of bill shock. QCOSS would also support the introduction of a bill protection mechanism such as that recently proposed in Energex s consultation on their TSS. A bill protection mechanism would go some way in alleviating concerns about customers experiencing bill shock, and it could be applied in such a way that it is phased out gradually as consumers come to understand the tariff structure and how they can respond to it. A bill protection mechanism could also be applied by pre-qualification criterion to some especially vulnerable households for a longer period or even indefinitely. This would go a long way to assist vulnerable households to adjust, and to protect these households while we learn more about the impact of demand tariffs and how particular cohorts will be impacted. Such a mechanism would be somewhat similar in effect to the safety net tariff that QCOSS proposed in our earlier submission to this process. Peak times QCOSS has concerns that the peak period proposed by Ergon for its demand tariff is too wide. Creating such a wide peak will make it close to impossible for customers to respond and, even if this is not the aim of the tariff, it is unfair to charge consumers for peak usage outside of the actual peak period. QCOSS believes a more reasonable window for the peak period is between 4 and 8pm on weekdays. It is our understanding that these times would correspond more generally with the peak that the network experiences, and it would allow customers a better opportunity to identify times to which they could defer energy use. We do not agree with charging customers for peak periods on weekends and public holidays. In our view this is: inconsistent with LRMC; unfair to most consumers; sends perverse signals to most consumers; is confusing; and could be met with strong public opposition. Weekend and public holiday peak charges are inconsistent with LRMC based pricing. In our view, including weekends in the peak period would be justified on an LRMC basis if perhaps 20 per cent of homes within Ergon s network were supplied by a local network or sub transmission system that peaks on weekend evenings. Recently Victorian consumer representatives put this same proposition to Victorian network 15 / September 2015 Future network tariffs

16 businesses following a proposal to extend the peak charges to weekends, and following analysis by the networks it was agreed that a vastly smaller portion of Victoria s electricity networks peaked on weekends. The proposal for weekend based peak charges was therefore removed. If the situation is different in Ergon s network, we would expect Ergon to provide the evidence to support this position. While there may be weekend-peaking homes in weekday-peaking areas, it would be unfair for these consumers to pay more or modify their usage when their weekend load has no impact on the local network. Analysis by ATA in Victoria indicated that cohorts that would be charged more than they should as a result of weekend peak charging include: weekend workers and some shift workers; consumers hosting a party or event on any weekend in a given month; pensioner households with weekend family visits and/or babysitting once or more per month; CALD households with culturally-specific weekend activities once or more per month; and part-time sole parents with weekend visitation. 13 More detailed analysis by ATA will be made available in October. Weekend and public holiday peak charges send perverse signals to households, to curtail or move loads away from those times when there is no benefit from doing so. They also restrict the opportunities available for weekday-peaking consumers to shift loads, reducing the effectiveness of any price signals. Weekend peak charges may be highly confusing for consumers, who have been told for some time now that weekday evenings are the peak time for households. These consumers are likely to be confused by the introduction of weekend evening peak charges. Given all of the above, weekend and public holiday peak charges are likely to be very unpopular with the public, and negatively impact acceptance of the introduction of cost reflective pricing. Long run marginal cost calculations Ergon has applied the average incremental cost (AIC) method to calculating its long margin cost of supply. As set out in its paper, Supporting Document: Long Run Marginal Cost: Considerations in Developing Network Tariffs, Ergon sets out a number of different methods including its current approach, the Benchmark Cost of Supply (BCS) which results in a much lower long run marginal cost. The calculations of the long run marginal cost are very technical and the AER will assess the validity of Ergon s approach. In its TSS, QCOSS considers it is relevant for Ergon to explain why its LRMC of supply is relatively very large to other networks, especially Energex. It is understood that all the LRMC of supply is to be recovered in the summer peak charge of $81.52 per kw. This is a seemingly very large amount and on the optics alone will cause some disquiet amongst consumers. At the recent QCOSS workshops, community organisations reaction was negative when this charge was revealed. The main risk for Ergon is that people will not understand their peak usage 13 ATA et al, Letter to ENA regarding Weekend Peak Charges, 19 August / September 2015 Future network tariffs

17 level to which this seemingly very high charge is applied. The general public cannot be expected to understand the complex averaging which Ergon is proposing to arrive at a household peak usage. It is likely that people will distrust this rather high charge and may be discouraged from adopting demand tariffs. Meeting the Consumer Impact Principle The AEMC rule change requires the TSS to comply with the consumer impact principle which is described by the AEMC as consisting of two parts: The first part requires distribution businesses to consider the impact on consumers of changes in network prices. the second part of this principle requires network prices to be reasonably capable of being understood by consumers. Consumers will not be able to respond to price signals if they cannot relate price structures to their usage decisions. In its final rule change determination the AEMC also acknowledges that managing the customer impacts may require a period of transition to more cost reflective pricing. In this section QCOSS comments on the two parts to the consumer impact principle and the transitional measures we believe are required. In QCOSS s previous submission, we expressed the view that not enough was yet known about the impact of demand tariffs on consumers, and particularly low income and vulnerable consumers, and that significant further work was required. QCOSS also expressed the view, supported by the feedback obtained through our own consultation, that the demand tariff under consideration lacked the simplicity that would allow it to be easily understood by consumers especially those that have an existing low level of energy literacy. In our view, Ergon s response to these concerns has been fairly limited. Ergon has: Made some adjustments to its tariff, for example the decision to use the average of the four peak days rather than maximum demand (though we note that this was not simply motivated by bill smoothing, and may have been motiviated by the findings in the Energeia report that this tariff performed better in preventing uneconomic bypass ) Focussed on the voluntary nature of the demand tariff suggesting that customers who are not sure or who might not benefit can stay on the default tariff Had Energeia look at the impacts on the bill of approximately 720 residential customers Committed to ongoing consumer education and a live or real-time trial based on early adopters, though little detail has been provided at this time Committed (in the notes of its most recent consultation meeting, but not in its most recent consultation paper) to examining the data from 5000 NMIs to better understand the impacts on particular customer segments. 17 / September 2015 Future network tariffs

18 We do not consider that Ergon s response has adequately addressed our earlier concerns and therefore our position remains unchanged. The detail of our views on the two parts of the consumer impact principle and the transitional response required are detailed below. Impact on Consumers QCOSS remains concerned about the potential impacts that the demand tariff proposed by Ergon will have on households, and the capacity of households to understand and respond to the tariff. In our previous submission to Ergon we noted that other assessment work on tariffs had already highlighted that demand type tariffs do not perform as well against consumer impact principles as other tariff types. For example, the DEWS Expert Panel study found that Time of Use, Critical Peak Pricing and Declining Block Tariffs all performed better than demand tariffs in relation to bill stability and simplicity. 14 Our view is that the assessment of the different tariff options by Energeia has been too narrowly focused on economic efficiency and to the extent it considers consumer impact this is limited to the investment decisions consumers might make as a result of the adoption of one particular tariff type. It was disappointing that Energeia did not include an assessment of the various tariffs against the elements of the consumer impact principle as described by the AEMC. For example, for the potential to result in price volatility to consumers, in terms of how easy or difficult the tariff is for consumers to understand, and the extent to which consumers will be able to respond to the inherent price signal the tariff contains... There is considerable negativity surrounding energy prices generally, increasing fixed charges, and the perception/experience that efforts to change behaviour through energy efficiency seem to have very little result on bills which continue to increase. This experience is particularly acute for those who have been struggling to keep up with payments on energy bills. For these reasons Ergon must communicate the potential benefits, and give practical examples with real households to demonstrate that low-income people could benefit. While Energeia has done some work for Ergon using data from the Rewards Based Tariff Trial to assess the impact on the bills of applying a demand tariff on various household types, this information has not been particularly enlightening because it is not sufficiently granular. The study to date is very limited by both numbers and the defining household characteristics that were considered. QCOSS notes there were no clear winners or losers within the groupings that were considered. Our view is that this type of analysis needs to delve deeper so that we can identify the features or reasons particular households within each cohort gain or lose on the tariff. Such studies need to focus on greater customer segmentation in order to see if there are clearer patterns for specific demographics, such as people with low incomes, carers, large families and people with medical heating or cooling needs. Without a better 14 Department of Energy and Water Supply (December 2014), Network Stabilisation Review: Project 1: Network Tariff Design for Residential Consumers. 18 / September 2015 Future network tariffs

19 understanding of the specific characteristics of households that have more peaky usage it will be difficult to make targeted efforts to mitigate impacts for these households or cohorts. We note that Ergon previously committed to undertaking further assessment of the impacts using data from an additional 5000 NMIs, however this was not discussed in the most recent consultation paper. QCOSS would appreciate clarification of Ergon s intention here, for example when this data might be obtained and analysed, what customer segments might be included, and how this impact analysis will complement and/or inform the live customer trials. QCOSS appreciates that Ergon has made efforts to develop a tariff calculator to help households determine whether or not they might benefit from moving to a demand tariff, however we understand that a final product is not yet available. We appreciate the complexity inherent in creating such a tool, but would encourage Ergon to continue to develop this product and to ensure it usefully takes account of individual circumstances. Future trials In the absence to date of a comprehensive social impact assessment of demand tariffs, QCOSS believes that the collection of information through trials is critical in the next voluntary phase of the tariff implementation. In addition to the impact assessment mentioned above, Ergon has indicated in its consultation paper its intention to undertake a live trial using data from the early adopters of the demand tariff. While information from such a trial will undoubtedly be valuable, QCOSS believes that this trial must be extended to include a broader group than the early adopters or it will be necessarily biased. Early adopters are likely to be households who have a high level of understanding of the trial and who are either aware that their energy use profile is flat and that the tariff will benefit them, or that they are able to make the required behaviour changes in order to reduce their demand on the network. QCOSS and other consumer representatives would like to assist Ergon in identifying and obtaining the relevant customer segments that should be included in its future trial, for example low income, aged, disability, indigenous, and CALD communities. Trials should address consumer specific criteria such as bill stability, and simplicity/ease of understanding. Consumer representatives with specialised knowledge should have an opportunity to be involved. A full social impact study will assist distributors to propose tariffs that balance the interests of all consumers against those of distributors, and will assist with developing solutions to address adverse impacts. These solutions are likely to require involvement by different parties within the electricity supply chain and by government and policy makers, and may involve both tariff and non-tariff options. 19 / September 2015 Future network tariffs

20 Ease of understanding/simplicity of tariff Energeia specifically note they have not included simplicity or ease of understanding as part of their criteria, despite acknowledging that this was an important tariff design principle. In its current form the proposed demand tariff does not meet the consumer impact principle that consumers should be able to easily understand and hence respond to the tariff. The concept of charging for demand rather than energy use will be a significant shift in itself for many consumers, and we believe that in order to manage this shift customers should not have to deal with the additional complexity in how the tariffs are calculated and in the application of different methods of calculation between summer and non-summer months. QCOSS s experience of communicating the demand tariff to community sector workers in the three workshops we held suggest it will be difficult for many consumers to initially understand how the demand tariff is structured and how it would impact on their bills. Workshop participants believed it would be very difficult for some of their clients to understand the tariff without considerable tailored communication material, and they believed some clients would never understand it. Even if the tariff structure is understood, most people do not have a clear understanding of their usage patterns, much less ideas about how they might be able to alter them to achieve a better price on their bill. One negative impact from the current proposal that is clear to QCOSS, and was also clear to those attending the workshops, is that summer bills will be significantly higher than non-summer month bills. This is simply unacceptable for many households, and we believe Ergon has to make attempts to mitigate this problem. Another concern is that consumers may simply reduce demand or shift to alternatives such as gas in order to deal with high bills. This may in turn result in some consumers using less energy than they need for a quality of life, and demand and revenue falling further and pushing prices higher. There is also the risk that consumers who do reduce energy use in response to high bills, but do not significantly alter their demand, will not see a corresponding change in their bill and that this will lead to distrust and hostility to the new tariffs. Transitional Measures and Consumer Protections Ergon s TSS should acknowledge the measures it will put in place to assist consumers to transition to more cost reflective tariffs. In QCOSS s view this should include describing the need for measures to protect consumers from adverse impacts that are predictable, even where these measures are not the primary responsibility of Ergon. In designing the tariffs, Ergon is best placed to understand and to describe the relevant impacts and issues of these tariffs on their customers for all stakeholders. This information is important so that others such as retailers, regulators and government can respond and adjust their policies and activities appropriately. 20 / September 2015 Future network tariffs