Payment requirements with combined billing

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1 Payment requirements with combined billing FINAL REPORT Marika Bröckl, Laura Hakala, Erkka Ryynänen, Iivo Vehviläinen Gaia Consulting Oy

2 Index Executive Summary Introduction Background Description of Model 1 and Model Objectives and scope of the study Implementation of the study General considerations of the supplier centric model Standardized data exchange Customer service Model 1: Supplier responsible for the whole billing process Evaluation of different alternative solutions for Model Risks and solutions for handling risks Model 2: Supplier bills on behalf of DSO Evaluation of the proposed solutions for Model Risks and solutions for handling risks Analysis of the models Summary of the developed model principles NordREG criteria Customer friendliness Well functioning market Improved competition Improved efficiency Compliance with EU development Neutrality of DSOs Conclusions Performance of the models against NordREG criteria Conclusions Guidelines for further market development Appendix 1: Stakeholder feedback Payment requirements with combined billing

3 Executive Summary Background and goals The long term vision of Nordic Energy Regulators (NordREG) is to achieve a fully integrated common Nordic electricity market with a common framework. NordREG considers that the supplier centric model should be used in the Nordic electricity retail market and that customers should always receive only one bill, which should be sent by the supplier. Combined billing will affect the distribution of costs and risks between suppliers and distribution system operators (DSOs). NordREG has commissioned an analysis of two alternative models for combined billing to determine which model promotes the objectives of Nordic harmonization best. The two models which are subject to analysis in this study are: 1. Supplier invoices the total claim, including network charges. The end-user is in debt only to the supplier. 2. Supplier invoices the total claim, including DSO s claim in the name of and for the account of the DSO. However, the end-user is in debt both to the DSO and the supplier. These models have been further developed by Gaia Consulting Oy of Finland on the basis of desk study and feedback from stakeholders. Tentative solutions have been suggested regarding billing cycle, billing and debt collection process, tax collection and risk management. Model 1 fulfils the NordREG criteria better than Model 2 and is recommended to be further developed Based on the analysis of the developed models which was conducted according to NordREG criteria, Model 1 seems more efficient and customer friendly than Model 2. Model 1 is simple and straightforward and the responsibilities of different parties are reasonably clear. It does not involve many possibilities for errors in the billing process or in payment tracking, which could impact customer service and drive costs. Model 1 has clear division of roles between the DSO and supplier, which promotes DSO neutrality. Model 1 does not include duplicate processes for debt collection, which means that it may be possible to eliminate some IT systems and customer service and back office work for the DSO. With these assumptions, the potential cost savings are estimated to be higher for the DSO in Model 1 than in Model 2. In the developed Model 1 the supplier buys network services from the DSO as a commodity and carries the risks involved with the billing of network services. The customer gets services with one contact and debt collection can be performed by the supplier. The DSO bills the supplier for provided network services with an aggregated bill after delivery of the network services. Sufficient time is given to make it possible for the suppliers to collect receivables from customers before payment. To protect the DSOs, suppliers are required to provide collateral for the DSO receivables. This will create an additional barrier for market entry, but is required to protect DSOs and consumers. 3 Payment requirements with combined billing

4 Based on the analysis it is recommended that Model 1 is further developed and the processes should be described in further detail. Detailed plans and further analysis is needed on specific solutions such as possible market entry requirements for suppliers and best ways to handle DSO counterparty risks. Standardization and harmonization create cost benefits Parallel processes and process exceptions should be avoided when designing a supplier centric combined bill model. Unnecessary parallel processes will be inefficient and process exceptions will drive costs for IT development systems and customer service. The Nordic market will profit from some standardization and harmonization, especially regarding data exchange, common transactions, and tariff structures. Standardization of some main processes and data exchange bears the potential that IT system providers could design more standardized systems, possibly lowering IT investment costs on a longer term. Some type of HUB solution for data exchange seems necessary for guaranteeing an efficient processes and neutral market model. A HUB could be used as a regulatory tool to enforce good practices and standards. DSOs may need to harmonize tariff structures in any combined billing model. This is necessary if a HUB or a supplier calculates the DSO billing information. It is also beneficial to have harmonized tariff structures in order that the supplier, who will need to answer network service related billing and network tariff related questions, will be able to provide a good level of customer service. Market design needs to foster healthy competition also in IT and billing services Fostering competition in IT services is essential in order to keep IT and billing costs on a reasonable level and to ensure that good and cost effective solutions are provided for the suppliers and DSOs. Good solutions are needed so that suppliers can develop better customer service and innovate new services. Transitional period may be needed to enable optimising investments A transitional period is needed before adopting a supplier centric billing model. DSOs, suppliers and other stakeholders need to know what the chosen billing model is and will need to have access to relatively detailed plans on solutions and processes well in advance of an implementation. Being able to plan well in advance will increase the possibility for phasing in the necessary system changes and related IT investments in ordinary IT system updates or cycles for renewing systems. This increases the possibility that investment costs can be optimised. To be able to get full benefits from implementing a supplier centric model with combined billing, ideally, all Nordic countries should be in the same situation regarding hourly metering. This would enable designing processes, which would be similar in the different Nordic countries. This may be a prerequisite for being able to use the same IT systems in several countries. This is a key issue for lowering entry barriers and for promoting cross border sales. 4 Payment requirements with combined billing

5 Common rules and guidelines are needed Regulators will need to take an active role in enforcing common rules and guidelines. A detailed Nordic framework, which sets the rules for the functioning of the Nordic retail market with combined billing, is needed to avoid different application and interpretation of the rules in different countries. In addition standardized agreement terms between supplier and DSO need to be drafted to regulate the relationship between the supplier and the DSO. Detailed implementation plans and evaluation of those details can be made only after the basic principles are agreed on in all countries. 5 Payment requirements with combined billing

6 1 Introduction 1.1 Background The long term vision of Nordic Energy Regulators (NordREG) is to achieve a fully integrated common Nordic electricity market with a common framework. NordREG has promoted the development of a common Nordic retail market for electricity since NordREG has suggested that the supplier centric model should be used in the Nordic electricity retail market. This has been defined so that a majority of the customer contacts will be handled by the supplier. However, the distribution service operator (DSO) would have ultimate responsibility towards customers regarding strictly network related issues. The suggestion by NordREG also includes that customers would always receive only one bill and it would be the responsibility of the supplier to send the combined bill. 1 If the supplier is responsible for customer billing in the future, there is a need to analyze how this will affect the risks of the distribution companies and suppliers, and how these risks should be dealt with. Currently both the distribution company and the supplier are usually paid directly by the customer and hence both bear some credit risk in case of non-payment. The division of credit risk may be divided between the supplier and the distribution company in different ways. An earlier study commissioned by NordREG analyzed six billing models 2. NordREG has decided to make a deeper analysis of two models, and determine which model that promotes the objectives of Nordic harmonization best. The two models are: 1. Supplier invoices the total claim, including network charges. The end-user is in debt only to the supplier. 2. Supplier invoices the total claim, including DSO s claim in the name of and for the account of the DSO. However, the end-user is in debt both to the DSO and the supplier. NordREG has based on previous studies found that Model 1 seems to be the most customer friendly approach and the most suitable solution in terms of roles and responsibilities determined by the supplier centric model 3. However, in Model 1 the suppliers need to bear also the credit risk for the network charges and the DSOs will face a risk of supplier bankruptcy. NordREG has therefore considered it important to thoroughly develop and analyse the billing model in order to find out if it is possible to implement it without adversely affecting competition in the market. 4 Model 2 is studied in order to make it possible to compare the Model 1 to a model which resembles the current way of combined billing and where the risk allocation between the DSO and supplier would be similar to what it is today. 1 NordREG, Road map towards a common harmonised Nordic end-user market, Ernst & Young, Credit risk management in future billing regime, May Denmark has already decided to implement a version of Model 1, which is based on a wholesale type of solution. Lessons to be learnt from the background studies and analysis related to the Danish model have been used as input for this study. However the analysis and proposals for solutions for the Nordic retail market have been made independently of the Danish solution. 4 NordREG, Payment Requirements with Combined Billing, Terms of reference, 30 Oct Payment requirements with combined billing

7 1.2 Description of Model 1 and Model Model 1 Model 1 is a supplier centric model where the supplier bills the end-customer. The supplier is responsible for the receivables from the customer, including debt collection in situations where the customer is late with payments or does not pay at all. The supplier pays the DSO for the network services. The point of contact will be the supplier in most customer service issues and in all billing related issues, including debt collection. Issues related to electricity quality and outages will mainly be handled directly with the DSO. Contractual agreements regulating monetary claim are set up between both the DSO and supplier and between the supplier and customer. The customer is in debt only to the supplier. The customer will receive one electricity invoice covering both network services and supply from the supplier. The supplier will receive one invoice covering network services from the DSO. There are two separate invoice streams: one between DSO and supplier and one between supplier and customer. The supplier is responsible for due date monitoring and debt collection for the total claim against the customer. The DSO is responsible for due date monitoring and debt collection for the distribution claim only against the supplier Model 2 Model 2 is a supplier centric model, where the supplier will be the primary point of contact similarly as in Model 1. The supplier will bill the end-customer regarding both the DSO and supplier receivables. In this model the customer will be in debt to the DSO and to the supplier separately. From a legal perspective the invoice sent by the supplier to the customer is actually two separate invoices on one piece of paper, including all information necessary to fulfil legal requirements of the invoice. The customer s payment is settled on a bank account owned by the supplier, and the supplier is responsible for passing forward the DSO s part of the payment. Contractual agreements regulating monetary claims are set up between both DSO and end-user and between supplier and customer. The customer is in debt both to the supplier and the DSO. DSO is responsible for providing accurate invoice data and fulfilling all legal requirements of an invoice to the supplier. The supplier is responsible for adding the DSO data, in the name of and for the account of the DSO, onto the invoice. 5 Ernst & Young, Credit risk management in future billing regime, May Payment requirements with combined billing

8 The supplier is responsible for printing and sending the combined invoice to the customer. The customer will receive one piece of paper with data that fulfils legal requirements to be treated as two separate invoices, covering the claim for power distribution as well as supply. The supplier is responsible for the monetary settlement with the customer and for accurately passing forward the DSO s claim against the customer. There are two separate monetary streams: one between DSO and supplier and one between supplier and customer. The supplier is responsible for due date monitoring of the total claim against the customer. Debt collection will be handled separately by DSO and supplier. These model descriptions have been the starting point for the analysis and further development of the models Objectives and scope of the study The study objectives were determined by the NordREG as follows 6 : Analyse how Model 1 could be implemented without reducing competition. Develop Model 1 further. Analyse how Model 2 could be implemented without confusing customers. Analyse risks and ways to reduce risks in the two models. Analyse how the models would affect the practical handling of receivables. Analyse how the developed models 1 and 2 perform in terms of NordREGs objectives for Nordic harmonisation. Compare the overall performance of the models and give guidance on which model should be used in the Nordic markets. The focus has been in market design questions that relate to energy regulation. Some areas affecting the detailed implementation of the billing model have not been included in the scope of this project: The legal analysis of contractual relationships is not within the scope of this study. However, the work has been coordinated with a separate NordREG study of contract models 7. Sharing of billing data requires a system solution for sharing the measurement and billing data. The design of these systems is not within the scope of this project. Some assumptions will be made to be able to propose a functioning combined billing model which would fulfil the NordREG criteria. Detailed cost-benefit analysis has not been included in the scope of this project. However some very rough estimates of related benefits are given. The procedures relating to the supplier of last resort handling have not been thoroughly analyzed. Supplier of last resort regulation is dependent also on other than energy regulation, at least in some countries. 6 NordREG, Payment Requirements with Combined Billing, Terms of reference, 30 Oct Bjørnebye, H. and Alvik, I., Legal analysis of contract models in a common Nordic electricity retail market, Draft report 31 October 2012 for consultation, A report commissioned by Nordic Energy Research and NordREG. 8 Payment requirements with combined billing

9 No thorough country specific analysis of the current plans to implement supplier centric combined billing model has been made. The analysis and its guidance focus within the legislative area of electricity regulators. 1.4 Implementation of the study Desk research has been used for background study to gather the initial factual basis for the analysis. Reviewed literature is referenced in Appendix 1. A total of 16 stakeholders were interviewed to get input into developing the billing models. The interviewees included independent smaller suppliers, large suppliers, DSOs, IT service providers and billing service providers. A list of interviewees is presented in Appendix 2. Model 1 and Model 2, as described in the previous NordREG study 8, have been further developed during the work. A developed version of Model 1 has been validated with some stakeholders in order to get feedback on a developed model draft. The study has been made between December 2012 April The work has been directed by a steering group consisting of the Nordic energy regulators. The members of the steering group were Jan H. Pedersen from the Danish Energy Regulatory Authority, Mari Salo from the Finnish Energy Market Authority, Karl Ellinggard from the Norwegian Water Resources and Energy Directorate, and Therese Lager and Daniel Norstedt from the Swedish Energy Markets Inspectorate. The work has been carried out by an independent Finnish expert organisation Gaia Consulting Oy who is responsible for the content of this report. Chapter 1 presents the initial Model 1 and Model 2, which is a basis for this study. In Chapter 2 some general aspects of the supplier centric model are considered. Chapters 3 and 4 cover the evaluation of solutions for Model 1 and Model 2. Chapter 5 presents a summary of the developed models and analyses the models with respect to the NordREG criteria for Nordic harmonization. Chapter 6 presents conclusions and guidelines for further development. 2 General considerations of the supplier centric model 2.1 Standardized data exchange Model 1 and Model 2 require that there is some type of standardised data exchange in order to be efficient and neutral. The solution can be either a Nordic solution or it can be based on national solutions. In practice this may mean some type of HUB solution for data exchange between the DSO and 8 Ernst & Young, Credit risk management in future billing regime, May Payment requirements with combined billing

10 the suppliers. A HUB is a type of centralized data storage. It may be just a form of simple data exchange. In a more advanced form it could produce the billing information required to produce a single bill. It could also support a number of standard processes, which involve bilateral transactions between different parties, such as supplier switching, moving etc. In the context of this study we use the word HUB to indicate some type of standardized data exchange, which needs to exist for both combined billing models to be cost efficient and neutral. A standardised data exchange could promote well functioning processes and ensure that all suppliers are treated equally. 9 To be able to produce a combined bill the supplier needs DSO billing information. Minimum data requirements include the point of delivery data, accurate and timely measurement data, and DSO tariff data. The realistic options are that either the DSO or the HUB produces the DSO billing information for the retail customers on which the combined billing is partly based. This billing information would be sent to the supplier electronically, in a standard format. 10 To ensure that all parties operate according to the agreed principles, monitoring and enforcement of data exchange has been called for Customer service In a supplier centric model, the principle is that the supplier is responsible for customer service in most cases. The supplier is responsible for all billing related questions. This includes answering DSO billing and tariff related questions. Ideally, the only issues in connection to which the customers should need to be in contact with the DSO are when a new connection is needed and where electricity quality or network outage related issues are concerned. Even in issues related to unplanned outages, the contact can be initiated with the supplier, who should be able to guide the consumer to the proper service channel. The service channel can for instance be a web site or a phone number where disturbance related service is provided by the DSO. In order to answer DSO billing related questions the supplier needs to have detailed information related to the network service bill. This is proposed to be provided for instance by using a HUB type of solution through which the information is transmitted to the supplier or by using a website, which provides the information. The supplier is responsible for services related to debt collection in Model 1. Depending on the design, Model 2 may involve direct contact between the DSO and the customer in debt collection related matters. In this model the DSO is the legal counterparty in debt collection. 9 See NordREG, High level suggestions for common Nordic processes for information exchange obstacles and possibilities, Report 1/ In principle the supplier could also do this if a high level of standardisation of the data and automation of data exchange etc. 11 Source: Stakeholder interviews. 10 Payment requirements with combined billing

11 3 Model 1: Supplier responsible for the whole billing process 3.1 Evaluation of different alternative solutions for Model Key model principles In Model 1 the supplier has the total responsibility for the customer billing. Two alternative ways to implement the transfer of DSO services have been considered in this study: 1. Supplier buys network services from the DSO as a commodity. 2. The DSO sells the receivables to the supplier (factoring model). Supplier buys network services from the DSO as a commodity In this model the supplier buys network services from the DSO as a commodity. The DSO is a subcontractor who provides network services. The supplier is responsible for the billing of the network services, and the risks and costs involved. The DSO is responsible for the network services in relation to the supplier. All contacts related to billing and debt collection are towards the supplier. The supplier prices risks and DSO related billing costs. The model is clear and straightforward for all the stakeholders. The DSO sells the receivables to the supplier factoring model One option for implementing Model 1 is that the DSO sells the receivables to the supplier. This is called a factoring type of solution. Selling the receivables (factoring) would make it possible for the supplier to produce one combined bill as well as to be legally responsible for the debt collection process from beginning to end. In a factoring transaction the end customer must according to law be notified of the sale of the receivable. The end customer needs also to be notified that the supplier will be billing the customer and will collect all receivables, including taking care of debt collection. Customers could find this confusing. This type of model has some drawbacks for the stakeholders. Every supplier would need to make a factoring transaction with each DSO as a separate counterparty. Suppliers and DSOs are not factoring experts and the administration of this type of solution could be complex and could require competence and resources for managing the solution. The smaller companies may not have this type of competence in-house. External service providers could be needed to support this type of process. In the factoring model it is possible that the supplier is considered to be a financial actor according to definitions by MiFID Directive 12. This could mean that the supplier would be required to be li- 12 Markets in Financial Instruments Directive (MiFID) 11 Payment requirements with combined billing

12 censed by the authorities to be able to perform this service and this could involve that the actor would be under the regulations of MiFID. 13 The factoring process could also involve additional costs in the form of personnel, transaction and system costs. The administrative burden to the supplier could create a barrier for competition, as suppliers might concentrate sales efforts to certain larger network areas to avoid having to make this type of transaction with numerous different DSOs. A factoring model involves issues related to the handling of the VAT. The possible factoring fees in direct factoring have in some countries been defined to be a service for which VAT needs to be paid. Conclusion The model where the supplier buys network services as a commodity is the recommended solution because of the simplicity and clarity and lighter administration involved. Selling DSO receivables to the supplier (factoring) is not recommended because of the complexity it involves and the additional administrative burden it would entail. It can also be more confusing to customers. It also makes it possible that the supplier could fall under MiFID regulation as a financial actor Contractual relationships In the supplier centric model two key contract interfaces need to be decided: 1. Contract(s) between the supplier and customer and DSO and customer. 2. Contract between the DSO and the supplier. These interfaces are briefly described below. Contract(s) between the supplier and customer and DSO and customer Previous legal analysis of the contract models between the supplier and the end- customer has recommended that the customer would have a contractual relationship with the supplier for both electricity supply and grid use services. In addition there would be a connection contract between the DSO and the customer. 14 The analysis of the contractual relationships is not within the scope of this study, but no reason to alter previous recommendations has been detected in this study The MiFID Directive requires the Member States to harmonise the rules governing investment services and activities. To that end, the Member States must set up an authorisation system enabling investment firms to operate throughout the EU. These firms must be registered and the register must be accessible to the public. Each authorisation is notified to the European Securities and Markets Authority (ESMA). 14 Bjørnebye, H. and Alvik, I., Legal analysis of contract models in a common Nordic electricity retail market, Draft report 31 October 2012 for consultation, A report commissioned by Nordic Energy Research and NordREG. 15 However, it is noted that in Norway changes to the consumer purchase act may be needed in addition to changes in the regulations under the energy act. 12 Payment requirements with combined billing

13 Contract between the DSO and the supplier Contracting between suppliers and DSOs needs to be regulated by standard agreements in Model 1 to ensure market access for all suppliers and to ensure DSO neutrality. The regulation should include clear rules that determine the service level requirements, including data exchange rules, payment terms, rules for tax collection, and sanctions in case of breach of contract, or failure to deliver services at the agreed level and quality. The service level provided by the DSO may reflect on the supplier. Poor service provided by the DSO may lead to reclamations to the supplier, lost customers, and costs for additional customer service work. If the DSO delivers measurement data late, the supplier may be unable to bill customers leading to cash flow problems. Bills can be incorrect because of mistakes made by the DSO. In these types of cases the supplier should get compensation for the damages and added costs involved with correcting the errors. Likewise, the agreement should outline what services are expected to be provided by the supplier regarding billing and customer service. It should describe the responsibilities of the supplier in case of network outages or other specific situations related to network services. The case of supplier nonpayments to the DSO or possibly also to tax authorities should also be clearly defined and regulated. Nordic level framework agreement is needed It is also necessary to have Nordic level framework agreement to regulate that the rules in the market are the same regarding essential processes. The framework agreement would regulate the relationship between the DSO and the supplier, define responsibilities and rights, and the rules regarding basic processes. Establishment of a common framework agreement requires good cooperation between the countries and between the stakeholders. Conclusion The earlier recommendation of having one contract for both supply and network services between the customer and the supplier is supported. Standardized agreement terms regulating the relationship between the DSO and the supplier are needed. A Nordic lever framework agreement is needed to regulate that the rules are the same in the Nordic market regarding some essential processes Billing and billing cycle There are two different billing streams that need to be considered: 1. Billing of customers by the supplier. 2. Billing of suppliers by the DSO. These billing streams are described below. 13 Payment requirements with combined billing

14 Billing of customers by the supplier The supplier is responsible for billing the customers. To enable supplier differentiation and to promote competition in the market, the supplier should be able to decide the billing cycle and some other details of the bills. It is not necessarily cost efficient to bill all customers monthly or more frequently because the billing costs for the smallest customers can become too high in relation to the monetary value of the billed services. If the supplier sees that a longer billing period either gives a competitive advantage in the form of better customer satisfaction or improved efficiency in the form of lower billing costs, the supplier should have the possibility to choose a longer billing period. A longer billing period towards the customer will mean increased capital requirements and increased risk for the supplier. Offering a longer billing period would be voluntary for the supplier, who can evaluate if it is willing to take the risk. Some limitations on the end user billing arise from other energy and consumer related legislation. In particular, the EU Energy Efficiency Directive mandates billing at least once a year and the billing needs to be based on actual consumption data 16. Additionally to be considered is that recommendations by CEER propose that customer should be provided at least two billing cycle options of which one needs to be free of charge. Billing of suppliers by the DSO In Model 1, the DSO invoices suppliers delivering to customers in its grid area for the network services provided. The suppliers would be billed monthly after delivery. In practical terms, the supplier should be allowed for around days to pay for the network services. This is based on the following assumptions: The data needed for producing the combined invoice is received at the latest 6 to 9 days after the end of the delivery month. 17 The supplier will need 2 3 days to produce and send the invoices to customers. The supplier will have 14 days to receive payment from its customers after sending the invoices. A margin of 2 3 days is left for handling errors during the process or for late paying customers etc. A monthly billing cycle with days to pay the DSO bill is in line with proposals which are discussed in Denmark, i.e. payment times of over 25 days 18. In Sweden normal practice is that consum- 16 Directive 2012/27/EU on energy efficiency. 17 The number of days required at the time of writing this report has been proposed to be 9 days. However this may change as detailed plans for how this is to be done in the Nordic countries are made. If possible this should be earlier. 18 Danish Energy Agency, From combined billing to the wholesale model. New Danish regulation of the electricity market, June Payment requirements with combined billing

15 ers need to pay their electricity bill at the very end of the month, later than this proposal. 19 The number of days required will be dependent on when the supplier receives the measurement and billing data from the supplier. A monthly billing cycle would make the processes between suppliers and DSOs simple and unambiguous, which would promote overall system efficiency. Monthly billing cycle also balances the risks between suppliers and DSO, as discussed in Chapter 3.2. The solution proposed here mainly applies to billing of DSO receivables regarding consumers and smaller business customers. A faster billing cycle could be motivated for larger energy users, and slower cycle for smaller customers. Further study is needed to evaluate if different billing cycles should be possible for large business customers or for the smallest consumers. The feasibility and cost efficiency of having more than one billing cycle depends partly on the flexibility of IT solutions. Suppliers will benefit from the proposed billing arrangements. Customers pay the receivables of the DSOs, taxes, and other similar payments to the supplier before they need to pay them forward to the DSOs or the authorities. This cash will either generate interest or reduce the other financing costs of suppliers 20. Sending all invoices to customers within a span of a few days may work for smaller suppliers, who do not have a large customer base. Suppliers with a large customer base may in practice need to do billing in batches in order to use customer service resources more efficiently. The sending of bills is usually followed by questions and contacts to the customer service. Some suppliers send invoices on different days to be able to distribute the customer service contacts more evenly. However, it is likely that billing based on actual consumption will reduce customer contacts regarding billing issues to the suppliers customer service. Conclusion No unnecessary regulation should be applied in the billing of end users by the suppliers, unless required by the energy efficiency or other general billing and consumer protection related considerations. A mandatory monthly billing cycle between the DSO and the supplier, with days payment time is recommended, at least for consumers and smaller businesses. This will make it possible for the supplier to manage cash flow risks and will promote a relatively fast cash turnover Producing the billing information The normal billing process in Model 1 involves that the DSO or a service provider such as a HUB does the rating of DSO services for the supplier. The DSO will need to produce monthly invoices with the aggregated sales for all suppliers, who sell to the DSOs network area. Three basic options for producing billing information have been evaluated: 19 The billing cycle is based on typical salary payments in the end of the month. Interview, Bo Hesselgren, Konsumenternas elmarknadsförbund. 20 See also discussion on supplier risk and cash management in Chapter Payment requirements with combined billing

16 1. Billing information produced by HUB solution 2. Billing information produced by the DSO 3. Supplier produces the DSO billing information In any solution, the dynamic pricing of network services should be made possible to be able to provide demand flexibility services. Also supplier has to be guaranteed access to billing details on a sufficient level of detail in order to be able to provide customer service related to billing. Billing information produced by a HUB type solution In a solution where the billing information is produced in some type of HUB type solution 21, the DSO would not need to know which suppliers are selling to its individual customers. The DSO would potentially receive aggregated billing information by supplier produced by a HUB type of solution. A HUB solution would promote DSO neutrality towards suppliers. The solution, however, involves challenges with checking the billing between the supplier and the DSO. To ensure correct payments between all parties involved, some party needs to be in charge of making sure that the sums of network charges which are billed from customers match the sums which are to be paid by suppliers to the DSO on an aggregated level. In a solution based on a HUB which produces DSO billing information it would be natural that this checking should be done automatically by the HUB. 22 There is no need for the DSO to track or check what the supplier actually bills the customers since only the supplier will be responsible for customer billing and debt collection. Data processing in producing the billing information can become a technical constraint in a centralized HUB solution. The amount of data from hourly measurements from millions of customers creates challenges for efficient use of data processing. To limit the data processing capacity, the billing information could be produced more often, for example daily, although the invoices are sent in a monthly cycle 23. Daily settlement could also benefit both suppliers and DSOs in planning and optimizing their processes and services to the customers. Billing information produced by the DSO In a solution where the DSO customer billing information is produced by a DSO, the checking of the billing information and how it matches the aggregated billing information related to supplier billing may be simpler/more transparent for the DSO. In this solution it would be especially important to make sure that all suppliers are treated equally. It is also important that DSO billing information is correct and errors will not be transmitted to the suppliers. Errors can make billing and providing customer service difficult for the supplier and could result in cash flow problems. In this case the supplier also needs to be provided with the detailed tariff information on which the billing is based. 21 This could be one or several Nordic or national data exchanges. 22 The same problems need to be resolved in the Danish solution where the rating is done in the HUB for both the DSO and the supplier billing. 23 These considerations have been analyzed in the Norwegian data HUB planning. 16 Payment requirements with combined billing

17 However, even this solution would profit from a HUB type of solution for transmitting the billing information in electronic format to the respective supplier responsible for each point of delivery. This would facilitate that all suppliers are treated equally. Supplier produces the DSO billing information The option that the supplier produces the billing information for the network services provided by the DSO is also possible. However someone would also need to produce the aggregated billing information for billing the supplier and to check that billing information matches what customers are billed. It is not probable that the supplier could be responsible for performing this function on behalf of the DSOs. In practice, the same rating calculation would have to be performed twice, leading to higher cost and potential errors. Conclusion It is recommended that either a HUB type of solution or the DSO produces the DSO billing information. A solution where a HUB would produce billing information may be more neutral towards suppliers. Dynamic pricing of DSO services is possible and the supplier has access to billing details on a sufficient level of detail Invoicing, payment tracking and corrections Figure 3.1 illustrates the invoicing and debt collection process of Model 1 in a simplified manner. In Model 1 the supplier is in charge of reminders as well as debt collection. Debt collection is in this case simple and involves one set of reminders and one debt collection process for the combined services. Also the DSO supplier relationship is simple. The DSO does not need to check whether the end customer has paid. 17 Payment requirements with combined billing

18 Figure 3.1. Illustrates the billing and debt collection in Model 1. The DSO will not have problems predicting cash flow in this solution. This model makes this simple and in principle eliminates end-customer related credit risks for the DSO, if all suppliers pay as agreed. Provided that suppliers pay according to the agreed schedule, it also eliminates delayed payments. Debt collection from end customers is no longer needed, which leads to cost savings for the DSO Taxes and other payments Two alternative solutions for who will be obligated to pay energy taxes and similar other energy related fees to the authorities have been studied: 1. The supplier collects taxes from customers and pays the taxes to the authorities 2. Supplier collects taxes from the customers, pays them to the DSO who then pays the taxes to the authorities In both solutions the supplier pays VAT and the DSO pays VAT. The supplier collects the taxes from the customer and pays taxes and energy fees to authorities The benefits of this solution include that cash flow is more effective as the cash does not need to be transmitted to the DSO. This involves less risk for the DSO, for instance in the case of late payments by supplier or supplier insolvency. Taxes are handled by the party who is in contact with the customer and who may potentially better be able to classify customers in tax categories. It eliminates the need for the customer to be in contact with the DSO in tax related issues. 18 Payment requirements with combined billing

19 Providing this service may be an additional burden to the supplier who needs to know tax rules and establish tax payment processes, which can be a barrier to entry. However, to be able to provide tax related customer service and to ensure that tax collection is handled properly, suppliers need to familiarize themselves with tax rules in any case. Supplier collects taxes from the customers on behalf of the DSO who pays the taxes to the authorities In this solution suppliers collect taxes and energy related fees from customers and pay them to DSOs. DSOs pay taxes and energy related fees to the authorities. The benefit of this solution is that the DSO is already under the legislation of each country. The solution that the DSO pays taxes would increase the DSO risks in case of supplier insolvency. Cash turnover would be less efficient in this solution. The DSO may need to be in contact with the customers, which may be a drawback in this solution. The supplier would possibly not need to be established in each country unless mandated by some other purpose, which could be an advantage for the supplier. Not needing to handle tax issues could ease the burden on billing and customer service functions. This may lower barriers for market entry for suppliers. Conclusion Both the DSO and the supplier can be made responsible for paying the taxes to the authorities. It is proposed that the Suppliers take care of the tax payments. This will eliminate the need for the DSO to be in contact with the customer in tax related matters, decrease the risk for the DSO and lead to a simpler process. 3.2 Risks and solutions for handling risks Supplier cash flow and risk management In Model 1, suppliers bill the customers and are in debt to the DSO for the network services. Risks associated with non-payments by customer increase as the suppliers bill both their own and the DSO receivables. Suppliers also need to be able to manage the cash-flow for the DSO payments. Solutions for handling supplier risk and cash-flow management that have been studied are the following: 1. Billing cycle between the DSO and the supplier 2. Pricing of invoicing services and credit risk 3. Deduction of DSO receivables in case of non-payment by a customer 4. Prepayment from customers as a means to handle risks 5. Customer contract termination as a means to handle risk 6. Other types of voluntary solutions for handling risks and cash-flow problems 19 Payment requirements with combined billing

20 Suppliers will need to price their own credit risk towards customers. The supplier will in choosing its customers need to take into account the credit risk and in certain cases do a credit check of its customers. If increased supplier risks are not taken into account, this could create barriers for entry and even force some current suppliers to exit the market. It can be argued that the supplier is in a position to choose the customers to which it sells and has a possibility to handle risks in a normal fashion by credit checks of individual customers or pricing of credit risks for different customer segments with similar credit profiles. Billing cycle between the DSO and the supplier Correct timing of billing cycles between customers and a supplier and the supplier and the DSO can help to mitigate supplier cash management issues. Supplier cash needs are minimized with a back to back solution, where the DSO bills the supplier approximately with the same cycle as the supplier bills the customer. This type of setup would reduce the risk that supplier would have problems with cash flow because of not being able to collect receivables from customers before having to pay the DSO for the network services. To make sure that the supplier is able to collect the receivables from the customers before needing to pay the DSO for the network services, the billing cycle between the supplier and the DSO can be adjusted so that the supplier is given some extra days to pay the DSO (see for details). This billing cycle should limit the potential cash flow problems of the supplier to a manageable level. The main principle is that the supplier pays for DSO services after the supplier has had reasonable time to collect payments from the customer. With a monthly billing of customers risks for cash flow problems would be limited. Most customers are likely to consider monthly billing based on actual consumption an improvement to old practices based on estimated consumption. However, it may not be cost efficient for the supplier to bill the smallest consumers once a month. Some customers could consider a monthly billing cycle poor service. Recommendations by CEER also indicate that customers should be provided a choice of billing cycles. If customers are billed with some other billing cycle than monthly, this could require the supplier to keep more cash funds and be a challenge for cash management. Pricing of invoicing services and credit risk Both a model where network services are bought as a commodity and selling the receivables of the DSO to the supplier make it possible to price the risks and services provided and obligate the DSO to pay for the services. In the model where network services are bought as a commodity, this could be implemented by lowering the prices for the DSO tariffs that the suppliers pay. Similarly, a fixed rate of lowering the cost of receivables could be agreed on in case the model involving selling of the receivables is selected. Pricing of the services and risk between the supplier and the DSO should be subject to regulatory oversight, and be based on transparent and robust analysis. The risk profile of the customers is likely to vary between the DSO areas, and between the types of customers. Fair pricing of the real costs between the suppliers and the DSOs would likely lead to a complicated system. An argument could be made that if suppliers are compensated for the risks, this could lead to cherrypicking of customers with low risk within DSO areas. However, it should be noted that suppliers will 20 Payment requirements with combined billing

21 in any case consider customer risk profiles and attempt to choose customers which are attractive to them. Deduction of DSO receivables in case of non-payment by a customer One option for reducing supplier credit risk could be that the realized credit risks are divided between the supplier and the DSO in the same proportion as in the original invoice. This type of solution would be a fair way to distribute credit risk between the DSO and the supplier. This type of solution can be considered as somewhat incompatible with the proposed model. It would involve transactions between the DSO and the supplier which could complicate processes and require administration and possibly bilateral contact regarding the credit losses. The transactions between the DSOs and the supplier would in most cases regard minor sums. Administrative burden created by such a system could outweigh the potential benefits from the system. Prepayment from customers as a means to handle risks Prepayment from customers has been identified as one solution, which could be used by the supplier to solve cash flow problems related to Model 1. A prepayment solution could be seen as incompatible with the EU requirement of settlement based on actual consumption. It could also be demanding for billing and customer service, as it will involve more complex billing and settlement than billing according to actual consumption. Some customers, especially households with electricity heating, will have substantially larger monthly electricity bills in the wintertime. For some of these customers billing according to actual consumption may be a challenge, if they are not prepared for higher costs in the winter months. These customers could see some benefits in more even billing throughout the year. However, it can be assumed that when consumers get used to billing based on actual consumption current problems with wintertime bills will be reduced. Commercial terms for business customers could include prepayment as one tool for handling credit risks for the suppliers. It is therefore suggested that this option should not be limited by regulation. Billing based on actual consumption (hourly metering and settlement) will reduce customer contacts to supplier customer service regarding billing issues and hopefully lead to lower cost for customer service. Today, many questions relate to the billing estimates and the reconciliation bill. 24 Customer contract termination as a means to handle risk In case a customer defaults on payments, suppliers can terminate the customer contract. The possibility to terminate the customer contract or to transfer them to a supplier of last resort could limit the supplier risk to 2 to 3 months receivables. Regarding business customers the contract termination process can be faster. 24 Source interviews 21 Payment requirements with combined billing

22 In case the customer doesn t pay the supplier there need to be clear rules for how the responsibility for the customer is terminated or transferred to a supplier of last resort. The process which the supplier will need to go through to be able to disconnect a customer is subject to national legislation, and outside the energy regulatory focus of this study. Voluntary factoring solutions The suppliers may encounter situations where, despite the proposed billing cycle and extra days to pay, cash flow problems are encountered due to late payments. Larger business customers may in some cases want longer payment terms. It is also usual that some consumers will want to have longer payment terms or extend their due date. Such cases can result in cash flow problems for the supplier. For these types of cases factoring type services can be used by the supplier. Buying a recourse service (a specific type of factoring service) makes it possible for the supplier to get access to at least part of the receivables as soon as the invoice is sent, which can ease cash flow problems. There are numerous service providers who provide different types of factoring/recourse services. It is however deemed that these types of services are not normally a good solution for handling risks related to consumers. The electricity product is homogenous and not prone to reclamations, at least not because of quality, which could lead to long payment delays. Reclamations can be assumed to decrease further as more customers are billed based on actual consumption and not estimates. The billing cycle which has been proposed in this model is relatively fast and consumers are quite good at paying their bills in the Nordic countries. These aspects lower the related risks significantly and may make the benefits from using recourse services in some cases marginal. 25 Conclusion The proposed billing cycle between the supplier and the DSO is suggested as the main instrument for managing supplier risks (cash flow). The supplier can bill customers with either a monthly cycle or a cycle agreed with the customer. The supplier can terminate customer contract in case of non payment. The other risk management options should be balanced with the benefits that can be obtained. Deduction of DSO receivables in case of non-payment by a customer could be a feasible solution, if the cost of implementation can be kept reasonable. Pricing of the invoicing services and risks could be used as a tool to cover additional costs to suppliers and to attract more suppliers to enter the market. The development of a fair pricing model would require more analysis. Partially the suppliers are compensated through the interest from DSO receivables. 25 Interview, Nordea Finance 22 Payment requirements with combined billing

23 3.2.2 DSO cash flow and risk management In Model 1 the DSO will have a different type of counterparty risk than today. Today the DSO has a counterparty risk in relation to end-customers. The risks are distributed among many different sizes and types of customers. However, the bankruptcy of large business customers in the current market model can potentially have a more substantial impact on a single small DSO. In Model 1 credit risks of the DSO will be distributed amongst a few suppliers. If the suppliers pay as agreed, the DSO s credit risks from sales to end-customers are completely eliminated. Most present suppliers would not be considered a substantial credit risk to DSOs 26. The insolvency of a single supplier in the current situation should not pose a very large risk for a DSO, because there will most likely be many suppliers delivering to a DSO area. DSOs cannot influence the choice of suppliers that are allowed to sell in their network area in order to protect DSO neutrality towards all market participants. Any supplier that is eligible to participate in the market can enter any DSO area. In case of a supplier default, the potential lost receivables would burden DSOs and ultimately the customers of the DSOs. In order to protect the DSOs and consumers, regulatory measures need to be in place to mitigate the effects of supplier defaults. If no measures are put in place, this can lead to suppliers taking disproportionately large risks or even rogue behaviour. The following tools for managing DSO counterparty risk have been analyzed in this study: 1. Billing and supplier default arrangements 2. Credit check of suppliers 3. Collateral requirements for suppliers 4. Credit insurance 5. Change of DSO regulation models to include supplier defaults It should be noted that some proposed alternatives for effective DSO risk management have the potential to create barriers for entry for the suppliers because of more complex administration or additional cost for establishing operations. Billing and supplier default arrangements The proposed billing cycle between the supplier and the DSO is a month, with payment of the network service to the DSO after delivery. The risks to the DSOs inherent in the supplier payment will in practice be limited to a few months sales. The exact timing depends on what the rules will be in cases where the supplier does not pay the DSO bill, i.e. how the customers of the defaulting supplier will be transferred to some other supplier or to the supplier of last resort. The DSO will be aware of the payment problem at due date at the end of the month following delivery. After reminders, the DSO can start the debt collection process for the debt of the supplier. A key issue in limiting counterparty risks is also how rapidly the customers will be transferred to another supplier or a supplier of last resort after a failed debt collection process. An insolvent supplier does 26 Source: Nordea Finance interview and some other stakeholder views 23 Payment requirements with combined billing

24 not have incentive to pay the DSO or terminate the customer contract. On the contrary, the supplier has an incentive to try to invoice customers for as long as possible and delay payments to DSOs. The contractual relationship between the supplier and the DSO needs to be regulated and to take into account how supplier insolvency situations are handled. Credit check of suppliers To attempt to limit the risks to the DSO as well as to end users there could be requirement of fulfilling some minimum requirements that a supplier who wants to operate in the market should meet. These could be technical requirements as well as some requirements of financial solidity for new entrants. In practice the supplier credit checking could be done by the TSO or a HUB. Many suppliers are already in contact with the TSO for the purposes of balance management, although they can also purchase balance management as a service from third parties. If a HUB is established, suppliers need to be in contact with the HUB for market access. Credit checking would need to be under regulatory oversight to ensure the neutrality of the process. To be effective in the long-run, credit checks should be conducted on regular basis, for example once a year for all suppliers. If an existing supplier does not meet the credit criteria check, it would possibly be forced to exit the market. This would most likely lead to supplier bankruptcy and realization of the credit risk. Suitable criteria for credit checks could include 27 : Negative results for 2 years in a row Poor credit rating Repeated payment reminder situations In addition, the suppliers should demonstrate that they can technically handle the market requirements and DSO billing process. Collateral requirements for suppliers A collateral requirement placed on a supplier limits the risks for the DSO. Centralized collateral requirement could be arranged by the TSO or a HUB. Collateral requirements could be set for all suppliers equally, on the basis of the creditworthiness of the supplier, or in the cases where the supplier has problems meeting credit check requirements. Collateral handling by DSOs would require that the collateral is handled and administered by both the DSOs and the suppliers. In this type of scenario, where each DSO requires collateral from an individual supplier, some suppliers may decide to limit sales only to larger networks in order to eliminate the need for setting up collateral for each new network. This could be a risk in those cases where the number of customers which can be won from a specific network area is seen as limited. 27 Ideas from discussion with Dansk Energi, Henrik Hornum 24 Payment requirements with combined billing

25 Collateral can in practice be provided by for example cash deposits or bank guarantees. Bank guarantees have been widely used for example in financial electricity markets. There is a cost associated with the bank guarantee which will depend on the overall situation in the financial markets and the creditworthiness of the entity requiring the guarantee. Bank guarantees will mean that the credit risk is transferred from the supplier to the provider of the bank guarantee. Acceptable criteria for the providers of bank guarantees should be regulated, i.e. high enough credit rating. Collaterals can be collected either directly by the DSOs from the suppliers or in a centralized manner. The latter alternative seems to be more efficient, as single DSO can potentially have tens or hundreds of suppliers operating in its market area, making the collateral requirements operatively more challenging. Also, centralized collateral process ensures DSO neutrality towards all suppliers. In the centralized alternative, either the HUB or the TSO could be responsible for the collateral management. In case of a supplier default, the HUB or the TSO would then compensate DSOs for the default of the supplier. Requiring collaterals for full amount of the receivables from all suppliers can be seen as inefficient, as the total risk of actual defaults is smaller. An alternative is to reduce the collateral requirements on the basis of some criteria, such as the credit ratings of the suppliers. If a supplier does not have a credit rating or the credit rating is poor, they will have to deposit full collateral. Suppliers with better credit rating would be required to deposit smaller collaterals. 28 Collateral requirement could become an entry barrier for new entrant suppliers and a barrier for smaller suppliers to operate on the market. Collateral will tie cash and increase financing costs of the suppliers. Electricity supply in today s environment with high volatility and electricity price risk places high demands on managing cash flow. The additional burden of reserving collateral could limit especially small independent suppliers. On the other hand, the high risks are the reason why DSOs may need to be protected against supplier payment problems. Full collateralization can be seen as creating a level playfield in a sense that all entities can participate to the market with equal terms regardless of their financial strength 29. The detailed implementation of the credit suitable credit requirement system will require further analysis. Credit insurance It has been suggested that the suppliers should be required to acquire credit insurance for its receivables to protect the DSOs. In Denmark, for instance, credit insurance has been proposed for suppliers which would cover taxes and energy fees. These make up almost 50 % of the total energy bill 30. The DSO could also, in principle, buy credit insurance for its receivables, if this is deemed necessary by a DSO. If credit insurance can t be obtained from a credit insurer for a certain supplier it will be 28 Credit ratings are used to limit collateral requirements in other regions, see e.g. Northern Territory of Australia, Electricity Retail Supply Code, 3 Aug PJM and Market Reform, PJM Credit and Clearing Analysis Project, Findings and Recommendations, Danish Energy Agency, From combined billing to the wholesale model. New Danish regulation of the electricity market, June Payment requirements with combined billing

26 quite a strong signal regarding the reliability of this supplier. As a voluntary solution credit insurance acquired by the DSO does not solve the credit issues unless DSOs are given the right to refuse suppliers. This would in turn be in conflict with the DSO neutrality requirement and would require credit checking expertise and resources by the DSOs. Alternatively credit insurance could be imposed as a requirement for all suppliers. The arrangement would be similar to the collateral requirements, but using different financial instrument. Similarly to the collateral with bank guarantees, credit insurance would transfer the risk from the supplier to the provider of credit insurance. Compared to the collateral requirements, credit insurance would have some downsides. The arrangement is more complex and requires that a third party insurance provider is willing to rate a company seeking credit insurance. The cost for credit insurance services could today in a low risk scenario involve paying a premium of 0,15% 0,40%. With such a margin, for an invoice for the amount of 10 million euro, the premium for credit insurance would be euro. 31 In normal business setting the payer for credit insurance would be the party that has receivables from the other party. However, if DSOs have to accept all suppliers, then the payer of the insurance cost should be the supplier. Change of DSO regulation models to include supplier defaults The DSO counterparty risks could be considered in the regulatory model for DSOs. The regulatory models make it possible/could make it possible to compensate the losses incurred by DSOs by insolvent suppliers. In practice this would mean that the DSO would be able to charge customers more in the following years to compensate for losses. Thus the DSOs would not carry risk on a longer term. In this type of case it will be the DSOs customers who will suffer because they will need to pay for the losses which are the result of customers having signed a contract with an external supplier who has become insolvent. Conclusions It is recommended that a HUB or the TSO or the regulators should monitor the suppliers and should check that suppliers meet technical requirements for being active in the market. In addition, it is recommended that suppliers provide collateral to the DSOs to cover DSOs receivables. Collateral requirements should be non-discriminatory and collateral should be handled in a centralized manner. These measures will increase market entry barriers for the suppliers, but are required to protect the DSOs. 31 Source Nordea Finance 26 Payment requirements with combined billing

27 4 Model 2: Supplier bills on behalf of DSO 4.1 Evaluation of the proposed solutions for Model Model Principle Model 2 is a supplier centric solution where the supplier will be the primary point of contact similarly as in Model 1. Contractual agreements regulating monetary claim are set up between both the DSO and the customer and between supplier and customer. The supplier will bill the customer regarding both the DSO and supplier receivables. In this model the customer will be in debt to the DSO and to the supplier separately. From a legal perspective the invoice sent by the supplier to the customer is actually two separate invoices on one piece of paper, including all information necessary to fulfil legal requirements of the invoice. The customer s payment is settled on bank account owned by the supplier and the supplier is responsible for passing forward the DSO s part of the payment Contracts Supplier and DSO both have a legal contract with the customer. Due to this contract the customer is in debt to both the supplier and the DSO. The supplier and DSO both have a contract stating that DSO is responsible for delivering billing information to the supplier and supplier is responsible for making a combined bill, sending it to end customer and for forwarding end customer s payments to the DSO. The contract between DSO and supplier is standardized and therefore it is ensured that the DSO remains impartial and has the same terms towards all suppliers. Similarly to Model 1, the contract between the DSO and supplier may also include sanctions if either neglects their obligations Billing cycles and payment forwarding The main principle in Model 2 is that the supplier forwards DSO s part of the payment after the enduser s payment is settled on the supplier s bank account. This means that the billing cycles need to be back-to-back, with adequate time in between for the supplier to handle payment forwarding. The motivation for this is that the risk distribution between the supplier and the DSO would remain close to what it is today. Alternatives billing cycles studied here are as follows: 1. Fixed monthly payment cycle 2. Free billing cycle decided by the suppliers 3. A set of regulated billing cycles 27 Payment requirements with combined billing

28 Fixed monthly payment cycle In the fixed monthly payment cycle, supplier adjusts its billing cycle to fit DSOs monthly billing cycle and forwards payments from customers to the DSO as it receives them. In practice some suppliers send invoices to the smallest end customers only three or four times a year. If a supplier adjusts its billing cycle to DSO s monthly cycle, this may increase the number of invoices for some customers. Free billing cycle decided by the suppliers In this version of the billing cycle, the supplier is free to invoice customers with a billing cycle of choice as long as legal requirements for the number of yearly bills are met and DSO accepts forwarded payments from the supplier according to suppliers billing cycle. Forcing the DSO to adjust its cycle according to a supplier s cycle is not optimal, since this means that DSO s need to wait longer for their receivables in some cases. Having several suppliers with different billing cycles would make efficient cash management challenging for the DSOs. A set of regulated billing cycles A viable alternative to keep the number of bills reasonable and to maintain clear processes for the DSO could be the introduction of a few standard billing cycles that are related to the number of end customer s invoices for different size customers. A set of possible standard billing cycles could be set by regulation for different types of customers. The supplier or the customer could choose from the set of billing cycles and DSO would accept payments according to supplier s choice of these billing cycles. The regulated billing cycles will limit supplier s possibilities for innovation in the billing process. Conclusion A back-to-back billing cycle is the only option for Model 2 where the supplier does not need to carry DSO s credit risk. Introducing a few optional billing cycles by a regulator could be a good solution as currently both DSO and supplier have in some cases fewer billing cycles for smaller consumers. This could however limit supplier product development and potentially lead to slower cash turnover. 28 Payment requirements with combined billing

29 4.1.4 Producing billing information Figure 4.1. Producing billing information and the invoice in Model 2. In Model 2, the DSO or a HUB does the rating, i.e. produces the billing information, for the DSO services per point of delivery. DSO retail billing information includes detailed information on tariff, taxes and energy. This information is made available to the supplier, possibly through a data exchange HUB. The DSO is responsible for providing accurate invoice data and fulfilling all legal requirements of an invoice to the supplier. The supplier does the rating and produces retail billing information of energy supply services. The supplier combines the network and energy supply billing information and produces an invoice, which includes both network and energy charges, but remains legally as two separate invoices. The supplier is responsible for adding the DSO data onto the invoice, in the name of and on behalf of the DSO. The supplier is responsible for printing and sending the combined invoice to the customer. The customer will receive one piece of paper with data that fulfils legal requirements to be treated as two separate invoices, covering the claim for power distribution as well as for energy supply. The supplier is responsible for the monetary settlement with the customer and for accurately passing forward the DSO s claim against the customer. There are two separate monetary streams: one between DSO and supplier and one between supplier and customer. 29 Payment requirements with combined billing

30 4.1.5 Debt collection Figure 4.2. Debt collection process in Model 2. In Model 2, the supplier is responsible for due date monitoring of the total claim against the enduser. Debt collection will be handled separately by the DSO and the supplier. Reminders may be sent by the supplier. Figure 4.2 illustrates a simplified process for the debt collection. Debt collection alternatives In the case of late payments by customer, the supplier can send reminders to the end customers. In the debt collection phase, the DSO is introduced into the relationship. Figure 4.2 illustrates the way in which the process is split in the debt collection phase. A main issue from a customer perspective is that the debt collection process is legally split to debt collection by the supplier and the DSO. This makes for a model which can be confusing from the customer perspective and can involve additional debt collection costs for those buying from independent suppliers in this model compared with Model 1. There are legal requirements which mandate that the supplier can t collect debt on behalf of the DSO because the DSO is the legal counterparty in Model 2. Exceptions to the rule are integrated companies where the supplier and DSO are part of the same company. In such cases it is possible for the supplier to collect debt on behalf of the DSO on one bill. Given this, the model may lead to a situation where the independent suppliers are not in an equal position with integrated suppliers. Resolving debt collection in a customer friendly manner is a challenge in this model, if risks are to remain distributed between the DSO and the supplier close to how they are currently. Two options have been identified and analyzed in this study. If the supplier may take the risk for the DSO receivables, then there is also a third option. 30 Payment requirements with combined billing