QCOSS Energy Consumer Advocacy Project QCOSS Submission to the QCA Interim Consultation Paper on Regulated Retail Electricity Prices for 2013-14 19 October 2012
Introduction The Queensland Council of Social Service (QCOSS) is the peak body for over 500 welfare and community sector organisations in Queensland. For over 50 years QCOSS has worked to promote social justice and exists to provide a voice for Queenslanders affected by poverty and inequality. We act as a State-wide Council that leads on issues of significance to the social, community and health sectors. We work for a Fair Queensland and develop and advocate socially, economically and environmentally responsible public policy and action by community, government and business. QCOSS is funded by the Department of Energy and Water Supply and Department of Justice and the Attorney-General for an energy consumer advocacy project in Queensland. The purpose of this project is to advocate on behalf of Queensland consumers and particularly vulnerable and low income households in relation to energy. This work is supported by an advisory group involving other key consumer groups in Queensland. Preliminary comments QCOSS welcomes the opportunity to provide a submission to the Queensland Competition Authority s (QCA) Interim Consultation Paper on regulated retail electricity prices for 2013-14. The 2013-14 determination is expected to be of great significance to Queensland consumers in view of rising energy costs and the extent of tariff reform expected following adoption of the N + R methodology and the unfreezing of notified prices for Tariff 11 from 1 July 2013. It is noted that the interim paper is not a comprehensive methodology paper and does not explicitly identify the key issues to be considered when calculating the tariffs and transitioning arrangements. QCOSS understands that this lack of detail may be due to the uncertainty created by the judicial review of the 2012-13 pricing determination and the possible implications this may have on the manner in which the QCA sets regulated electricity prices in the future. It is also expected there may be considerations arising from the outcomes of the Queensland Government s Interdepartmental Committee on Electricity Sector Reform and the Independent Review Panel on network costs. As a result, the following comments are based on assumptions about the QCA s possible approach using the tariff structure and retail prices from the 2012-13 pricing determination process and the direction provided in the Minister s Delegation and Terms of Reference for 2013-14. QCOSS looks forward to further detail being presented at a later date, and is committed to working productively with the QCA throughout the consultation process to ensure the best outcomes for Queensland consumers. 2
Minister s Delegation and Terms of Reference The un-freezing of notified prices for Tariff 11 from 1 July 2013 is likely to be accompanied by a reform of the tariff arrangements that could have significant impacts on particular Queensland consumers, including low-income households. QCOSS is therefore encouraged by the consumer-focused measures in the Minister for Energy and Water Supply s Delegation that require the QCA to: consider the impact of price increases on Queensland electricity customers; smooth any adverse impacts through transitional pricing arrangements over a number of years; provide a degree of certainty for consumers by moving from an annual price determination to a three year delegation period; undertake a rigorous consultation process with all relevant parties, including additional consultation on key issues; conduct a public workshop prior to the release of the draft determination on how the energy and retail cost components of regulated retail tariffs should be determined; fully explain its decisions including communicating the outcomes of its reports in a clear and concise manner, using consumer oriented factsheets, and providing easy access to this material on the QCA website. Given the complexity of the electricity industry and the significance of tariff reform likely to occur, QCOSS is strongly supportive of these efforts to consider consumer impacts, encourage broad consultation and communicate outcomes in a clear and transparent manner. The complexity of electricity pricing means that it is imperative that consumers are given every opportunity to understand the implications of likely changes to their bills so they can adjust their household energy use and make informed decisions about which retailer and contract is best for their circumstances. QCOSS would suggest consumer education will be critical in ensuring a smooth transition to new pricing arrangements. Transitional Arrangements QCOSS supports the implementation of transitional arrangements to gradually rebalance the fixed and variable components of Tariff 11 to cost-reflective pricing over a three year period. The move to cost-reflective pricing will have different impacts on various customer segments, and many will face significant price increases as a result. As with all tariff reform there will be those that can benefit from the new pricing arrangements and those that are disadvantaged. The transitional timeframe could provide an opportunity for consumer education to be rolled out to assist consumers understand and adjust to the new pricing structures. It will also allow time for the extent of the customer impact to be fully understood and social policy measures to be introduced and enhanced where required. It is widely acknowledged that low-income households already spend a greater proportion of their income on electricity bills. They also experience slower income growth over time and are therefore more likely to fall behind when prices increase 3
significantly over time. QCOSS urges the QCA to be mindful that consumers are not a homogenous group and that even in the low-income customer group there are households with very different usage levels and consumption patterns who will be impacted in different ways. While some low-income households have very low discretionary consumption, other low-income households have higher than average energy costs due to poorer quality housing and inefficient appliances. Tenants are particularly disadvantaged in terms of additional difficulties they face in improving the energy efficiency of their built environment, upgrading to more efficient fixed appliances or switching to cheaper off-peak tariff connections. Therefore, while the transitional arrangements will provide an opportunity for some households to adjust their consumption over time, others will always have limited ability to do so due to their specific circumstances including housing quality and tenure, household size and characteristics, or energy-intensive medical needs. Significant changes to tariff arrangements will therefore necessitate a review of the existing energy concessions and support arrangements to ensure they remain welltargeted and equitable for Queensland consumers. Uniform Tariff Policy QCOSS strongly supports the intent of the Queensland Government s Uniform Tariff Policy, which is to ensure that regional Queenslanders are not disadvantaged due to the higher costs associated with supplying electricity in remote and rural areas of Queensland. While the regulated retail tariffs do not provide enough revenue to recover the cost of supplying electricity across the whole Ergon Energy distribution area, there may be some less remote regional areas where supplying electricity could be cost effective for competitive retailers. It has also been acknowledged previously by the QCA that the government could allow for full retail competition across the state by applying the Community Service Obligation (CSO) payment at the distribution level. While QCOSS would be open to supporting such an outcome, it must be noted that providing customers with access to retail competition does not guarantee that the competition will be effective, particularly in regional and remote areas. Ongoing monitoring of the effectiveness of competition in delivering benefits to consumers will be important to ensure a smooth transition to a fully competitive market. Consumer protections and concession arrangements are also important in ensuring an adequate safety net where competition may not be effective. Affordability and Equity in Tariff Reform QCOSS maintains that access to electricity is crucial to enable consumers to maintain an adequate standard of living, support health and wellbeing, and participate in social and economic life. For this reason, we believe issues such as affordability and equity are relevant to the regulation of electricity prices. The Minister for Energy and Water Supply s Delegation requires that the QCA consider the impacts of price increases on Queensland electricity consumers. QCOSS therefore believes the QCA should undertake an assessment to identify the expected impacts 4
of tariff arrangements on a range of consumer groups with varying consumption patterns, including pensioners, large working families, low-income tenants and other vulnerable households. QCOSS would suggest the QCA refer to the NSW Independent Pricing and Regulatory Tribunal (IPART) Final Report on Changes in Regulated Electricity Retail Prices from 1 July 2012 1, which not only explains their final decision regarding regulated electricity prices for NSW customers, but also provides analysis of the impact of price increases on customers. This includes specific analysis of the impact on low-income customers as well as recommendations for changes to government policy and customer assistance measures to limit electricity price increases in the longer term and alleviate their impact on vulnerable consumers in the short term. QCOSS is aware of the issues driving the need for tariff reform, including the inadequacy of the previous Benchmark Retail Cost Index (BRCI) methodology and the need to reduce infrastructure costs associated with peak demand. We therefore understand that some changes in the cost structure of electricity pricing are inevitable and we support efforts to take a longer term view of electricity prices to reduce the long term price trajectory. Nonetheless, our focus continues to be on consumers, particularly low income and vulnerable consumers, and we continue to have some concerns about the implementation of specific changes that may be detrimental to some low-income consumers. These changes include steep increases in the fixed charge component of the price, the introduction of an inclining block structure or timeof-use pricing without appropriate reform to concessions and support arrangements, and the potential for significant increases in the charges for off-peak residential tariffs. Therefore, while we support measures to reduce long-term energy costs by targeting the key drivers of price increases, such as reducing peak demand pressures and network infrastructure costs, it is important that these are implemented alongside appropriate concessions and support arrangements for disadvantaged and vulnerable consumers. While we appreciate that the QCA has no jurisdiction over some elements of pricing, such as the setting of network charges to be passed through to consumers, we believe the QCA should still consider the impact of regulated retail tariffs as a whole when considering the impact on consumers. Methodology While the QCA has not provided detailed information about the proposed methodology for determining regulated prices in the Interim Consultation Paper, QCOSS would like to reiterate our previous comments to the QCA that it is critically important that electricity price increases are both fully justifiable and minimised to the greatest extent possible. The methodology used to determine regulated prices must be defensible and based on the most accurate market data. 1 http://www.ipart.nsw.gov.au/files/a73eff3a-91ba-4150-b90d-a06f00a603a2/final_report_- _Changes_in_regulated_electricity_retail_prices_from_1_July_2012.pdf 5
We retain the views that we have expressed to the QCA in previous submissions to the 2012-13 methodology paper and draft determination 2, including the view that the allowance for Customer Acquisition and Retention Costs (CARC) in the retail component of the electricity prices should be removed or reduced in Queensland. The CARC implicitly recognises that there is effective competition in the Energex area because an effective retailer would only expend funds on CARC if that were the case. However due to the Uniform Tariff Policy, Ergon Energy customers also pay for CARC even where there is no effective competition and therefore no expenditure on CARC activities. It is our view that the CARC should be removed (or if retained should be much lower in Queensland than in other states) in recognition of this fact. QCOSS also questions the inclusion of an allowance for headroom in addition to the retail margin and CARC to calculate the retail component of regulated prices. The allowance for additional headroom effectively sets regulated prices higher than the cost of supply to encourage retailers to enter the market and create greater competition to ultimately put downward pressure on non-regulated prices. This suggests effective competition cannot be achieved if regulated prices are set at cost-reflective prices that include a reasonable profit margin. This does not appear to be economically efficient or consistent with the overall transition to more costreflective price signals. In our view, the overall effects of including an allowance for headroom include: no additional longer term benefits in improving customer service or lower prices than would have been achieved without headroom; short term additional costs incurred by all consumers until competition drives prices down (and then only to the level at which they would have been without headroom); and longer term ongoing additional costs for those customers who remain on price-regulated tariffs either because they have no other option (including Ergon Energy customers who do not have access to competitive offers) or because they lack awareness or understanding of the other options available to them. QCOSS appreciates the opportunity to provide comments on the QCA Interim Consultation Paper. We look forward to participating in the public workshops to be held by the QCA in December/January and continuing to work productively with the QCA to represent the interests of Queensland consumers throughout the determination process. For further information, or to clarify any aspect of this submission, please contact Carly Allen, Team Leader Low Income Consumer Advocacy on 07 3004 6909 or email carlya@qcoss.org.au. 2 2012-13 submissions were prepared by Etrog Consulting Pty Ltd on behalf of QCOSS Ground Floor, 20 Pidgeon Close West End Q 4101 (PO Box 3786 South Brisbane Q 4101) ABN 11 781 477 447 Tel (07) 3004 6900 Fax (07) 3004 6999 Toll Free 1800 651 255 Email: qcoss@qcoss.org.au www.qcoss.org.au 6