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1 Smart Metering Programme Office Commission for Energy Regulation, The Exchange Belgard Square North Tallaght Dublin 24 Dear Smart Metering Programme Office, PrePayPower, as Ireland s largest prepay electricity provider, welcomes the opportunity to respond to the CER s National Smart Metering Programme (NSMP) Managing the Transition to Time-of-Use Tariffs consultation paper (CER/15/054). In summary our views are: The case for mandating time of use tariffs on a prepayment population remain unproven, and in our view has not been adequately considered by the CER: o Unproven benefits: We note that on average PrePayPower Lifestyle pay as you go (PAYG) customers already demonstrate significant energy savings far in excess of the results demonstrated in the NSMP trials, comparing the change in their consumption after having a budget controller installed. The efficacy of time-of-use tariffs to deliver the peak-shifting also demonstrated in the trials from such a population is unproven. o Unassessed impact on financial hardship customers: Secondly, many PAYG customers may be in financial hardship. The prohibition for such customers to return to a flat rate tariff must be evaluated from a customer hardship perspective. While promises are made to take account of such customers in the paper, no analysis is yet provided. We therefore request the CER to reaffirm, with rationale and evidence, whether mandated ToU for prepayment customers is still an appropriate for the programme. With the growing numbers of PAYG meters in Ireland, it is no longer sufficient or prudent to assume that ToU benefits will accrue from PAYG customers. Some of the examples in the paper stress the importance of customer choice in timing their transition into a time-of-use tariff. The paper, however, is light on the commercial implications for suppliers arising from an uncontrolled migration of customers to a new ToU product offering. PrePayPower stresses that should PAYG customers be required to take on a time-of-use tariff, it is done within the context of a wider wholesale market framework that supports prudent risk management around the new tariff structure. This includes a liquid forwards market and wholesale market reform to half-hourly settlement.

2 We believe that any regulation by the CER which mandates suppliers to enter into inherently risky contracts, at an unknown rate, without access to appropriate risk mitigations would be contrary to the CER s obligations under the 1999 Act to ensure Authorised Persons are able to fund their activities. We have responded in more detail on the specific questions, and our response is not confidential and may be published in full. If you wish to have further communication in relation to our submission, please don t hesitate to contact me. Yours faithfully, Cathal Fay

3 Transition to Time-of-Use Tariffs: example approaches Q1. The different examples provided focus on flexibility in timing and what can be offered. A. Early Standardised B. Window C. Backstop Trigger? When market technically ready When market technically ready When market technically ready How long after trigger? Next billing cycle Within a year Next billing cycle To what? Standard Tariff Standard Tariff Standard Tariff Any choice? Forced migration to Standard Forced migration to Standard or other tariff, uncertain on who chooses timing Customer choice on when to migrate to what Tariff until backstop, at that time forced migration Move back to flat rate? No No Yes, for a period of time until back-stop When is other choice available? At a later time From first offering From first offering Wholesale HH settlement Before migrating ToU Middle of year window Before migrating ToU We have two high level comments on how these options are presented, before discussing the detail of the various options.

4 The trigger to commence transition (either mandated or by customer choice) seems to be the technical capability to offer the new ToU tariffs. This is aligned in most cases with wholesale market reform to half-hourly data settlement. This does not take into account the other preconditions that should constitute the trigger: o Are there suitable forwards hedging arrangements for suppliers to hedge their retail position? It would create undue risk for suppliers if the CER mandated a time-of-use tariff when suppliers had no mechanisms to manage that imposed risk arising from the time-ofuse time-bands. o What are the pre-requirements for customer engagement before transitioning to the new tariff arrangements? Will it be subject to a political or regulatory go/no-go? o Customer readiness in general does not seem to be considered within the paper. For example, what commercial information (if any) should be given to customers regarding the impact of the ToU transition, and is that possible during the transition periods suggested in the examples? o Is there any interaction with the provision of the mandatory IHD? None of the options explicitly include the possibility of the supplier deciding when customers transition. This would be the most normal way of doing business where a new regulation is required by a particular time. The supplier would have the choice, based on its own commercial readiness, to transition customers to time-of-use in prudent stages, noting at all times regulatoryrequired deadlines.

5 Example A early, standardised transition Q2. This question seeks comment against the six relevant criteria given in section 3.3 for Example A. These criteria are: A. Easy to understand for consumers B. Engaging for consumers C. Providing choice and protection for consumers D. Flexible in promoting choice and innovation E. Operational at low cost for all parties, and over time F. Providing tariffs that accurately reflect supply chain costs Example A performs poorly under criteria B through D. As per our previous statement, it is not only important to reflect supply chain costs (criteria F), but also to manage risk around those supply chain costs suddenly changing. This risk management for suppliers does not need to be a criterion. It simply needs to be a precondition before moving to the new tariffs. In general, we concur with the assessment regarding consumer costs in the paper. Example A, therefore, would not be PrePayPower s favoured approach. It assumes all suppliers reach a level of commercial readiness at the same time. This will place stress if there is any liquidity issue with hedging arrangements, with all parties seeking to enter into hedging arrangements at the same time for their pre-deployment population of smart meters. It is also highly confusing for customers not to be able to choose another supplier s published flat-rate on the basis of whether they have been transitioned onto a smart tariff with another supplier. How that communication occurs between suppliers during a change of supply process appears in the first instance, unworkable.

6 Example B a transition window Q3. This question seeks comment against the same six relevant criteria given in section 3.3 for Example B. Example B performs better under most criteria, with the potential exception of it being simpler to understand for consumers. The paper draws out the correct mitigating action appropriate approved comparison tools being available to customers, increasing the ability of customers to choose their appropriate tariff. We stress our previous comments regarding appropriate triggers to commence the transition. It is clear that to mitigate the issues of confusion, it is required that customers will need access to several months of their interval data, and that appropriate price comparison tools from third-party accredited sites should be available. The option is unclear whether it is the supplier s decision or the customer s decision as to when the customer migrates to the ToU tariff. While better than Example A, and with the welcome addition of a window of time in which to transition, the restriction on customer choice moving to a flat rate when transitioned (while the flat rate tariff from another supplier remains available to other customers) is a complex message. Indeed, the message becomes more complex and difficult to manage where a customer on a smart tariff moves to a smartenabled home that is currently on a flat rate tariff. Again, Example B would not be PrePayPower s preferred option for the reasons given above.

7 Example C transition as a back-stop Q4. This question seeks comment against the same six relevant criteria given in section 3.3 for Example C. Example C, in terms of mechanics, comes closest to an appropriate transition mechanism. There are two triggers associated with Example C: When migration to ToU must commence; and When migration to ToU must complete. The flexibility in moving between smart and flat rate tariffs between these two points is entirely appropriate, and simple for the customer to understand. We, however, would add to the description of Example C, with further criteria for when both triggers would occur. We would also establish principles regarding supplier control of the rate of take up of the tariff. As a prerequisite for offering ToU, the following would be prudent to occur: Regulatory and political buy-in for the transition to commence, informed in liaison with the Customer Engagement workstream; Customers should have at least [x] months of interval data available to them to make an appropriate choice of ToU tariff, from the choices made available by supplier; The new ISEM arrangements should be demonstrably and stably delivering pricing consistent with supply and demand for a year before ToU is offered; o There is no point offering a ToU tariff based on market prices if they are not reflective of the underlying physical operation (and cost of generation) in the wholesale production of energy. Some financial hedging aligned with the ToU decision for the standard tariff should be made available. During the window, it should be established that: Suppliers may restrict the level of sign-up to the new tariffs, in line with their commercial readiness and hedging strategy. To reach the back-stop trigger, final regulatory criteria that should be considered are: The hedging market should have developed a reasonably liquid suite of hedging products, allowing suppliers and generators to adequately manage the risk of at least the standard criteria for ToU, and ideally allow new innovations to occur in a prudent manner. Public acceptance of no more flat rate tariffs should be high. Example C is therefore our preferred option, along with the addition of entry and exit criteria through the transition phase.

8 We believe that any regulation by the CER which mandates suppliers to enter into inherently risky contracts, at an unknown rate, without access to appropriate risk mitigations would be contrary to the CER s obligations under the 1999 Act for authorised persons to be able to fund their activities.

9 Standard Smart Tariffs Q5. This question covers the level of regulation prescribing the standard smart tariff. To begin, PrePayPower is completely against any price promise in relation to the standard tariff. Outside of the obvious commercial risk to the supplier, this cost would have to be recovered from customers. All things being equal, this will raise the average retail price in the market, which will reduce the savings from those customers who have superior load shapes, or who have adjusted their consumption in line with the ToU tariff shape. The introductory smart tariffs would necessarily be more expensive than their concurrent non-smart tariffs in the market. This is not an appropriate message for early transition to the programme. Secondly, Regulation of detail cannot be performed until there is a stable reference market in ISEM on which to base the detail of parameters. Assuming one year s operation is prudent (the intraday market might not be in place for go-live) this work could only commence in late This will create a delay in defining these parameters for suppliers through a standard regulatory consultation process. It will also be a difficult and controversial process to ensure that this does not favour one supplier s trading strategy over another. Following that definition work, there will be a period while suppliers seek opportunities to hedge against the prescribed form before offering the tariff to customers. Overall, therefore, prescription is difficult, prone to accusations of favouritism and will delay the process in commencing the release of time-of-use tariffs. This is not PrePayPower s preferred option. The final option, Regulation through guiding principles makes the most sense to allow for normal commercial decisions to take effect, within the required regulatory framework. It will remove the CER from the ex ante decisions required to regulate the allowed tariffs, speeding up implementation. In line with previous comments, it is important that independent price comparison sites are capable of comparing the different tariffs proposed by suppliers as a criterion to commence transition.

10 Permitted Alternative Tariffs Q6. This question seeks opinion on the level of appropriate regulation for alternative tariffs. We believe that the most important criterion for permitted alternative tariffs is that they are readily comparable with standard tariffs, through access to historical data. The Narrow structure seems unduly restrictive, and it appears difficult to see how this might differentiate against simple discounts on the standard tariff. The Broad Structure is better, offering more flexibility. Nevertheless, the Unconstrained if static approach with a criteria that the tariff is readily comparable to others using a harmonised download file of meter data appears to be all the regulation that is required. Indeed, the same set of guiding principles used for the standard tariff appears to be the remaining necessary and sufficient principle to regulate such tariffing activity.

11 Test Bed Tariffs Q7. The comments made in our submission to the test bed concept in January 2014 remain germaine, and are quoted here: We understand the rationale for the implementation of a test bed environment for new tariffs. Effectively it allows suppliers to implement non-mass marketed tariffs which have characteristics outside the CER s regulated prescribed form of tariffs. Subject to certain as-yet undefined criteria being met, these tariffs can be subsequently massmarketed. For this to be meaningful, it is important that innovative tariffs can progress through this testing phase in a timely manner. On initial inspection, from conception of a new tariff through to its development, CER approval to implement the tariff in the confines of the test bed (implicit or explicit), direct recruitment of customers, running the tariff, analysing and surveying outcomes, and seeking CER approval for a relaxation of the prescribed form, along with any consultations that entails, a supplier may experience a delay of two or more years before mass-marketing a new tariff. Furthermore, as the change to the CER s prescribed form would need consultation, all other suppliers would be notified of the tariff s form and of the intent to potentially mass-market it. Any first mover advantage would be undermined for the innovative supplier. While we welcome the principle of being allowed to innovate outside of CER s prescribed form with limitations, the CER should consider whether the inherent time and required openness in relaxing the prescribed form will erode the benefits to the innovating supplier to such an extent that the innovation offers no commercial advantage. We believe an alternative system whereby customers can opt-out on an informed basis of the prescribed form to a less prescribed form that allows for greater innovation and the potential for greater risk/reward in the customer experience would be a better mechanism. There would be no limits on the numbers of customers that could opt-out, these tariffs could be mass marketed, and participation in such tariffs could be accompanied with a standardised regulatory rider providing customers with information on the risk/reward to what they are signing up. For these reasons, we support none of the presented options. We support a loosened set of principles to develop further tariffs dynamic or static along with a requirement by the supplier to report on the outcome of the tariff against agreed metrics to the CER. The CER could, if the outcome of those metrics were negative, request that the tariff is no longer offered to new customers.

12 Tariff Comparison Tools Complementary to the form of regulation proposed above around tariff design, it is important that customers can make an informed decision on which tariff and /or supplier is appropriate for them. PrePayPower believe it is ppropriate for the CER to set out the requirement on how tariffs should be compared as they do currently. Given that the CER is also setting the principles/rules to which a tariff must comply, it makes most sense that the CER as an intrinsic part of that design process delivers the comparison metrics at the same time as part of an overall package. PrePayPower therefore supports CER-defined measures and metrics, as part of the wider package of ToU regulation proposed above. We note, however, that if the CER goes with more strict definitions of allowed tariffs, then the necessity for defined measures and metrics no longer holds, as customers will be more readily able to compare with the support of comparison sites their tariff offerings. Strict regulation of all aspects of the ToU environment (form of tariff and their presentation) will stifle competition on form, and lead to a uniformity of offering from suppliers on presentation that will drive that lack of competition home to endusers. Regulation of uniformity of offering during the smart metering roll-out will not be consistent with the NSMP objectives, and raise the reasonable question as to why such an investment has been made if its effect is to restrict choice in an obvious manner to consumers.