Australian Energy Market Commission

Australian Energy Market Commission Level 6, 201 Elizabeth Street Sydney NSW 2000 PO Box A2449, Sydney South NSW 1235 P 02 8296 7800 F 02 8296 7899 E aemc@aemc.gov.au ABN 49 236 270 144 www.aemc.gov.au Our ref: 15-12763 29 May 2015 COAG Energy Council Secretariat Energy Division Department of Industry and Science By email: energycouncil@industry.gov.au Dear Sir/Madam Consultation on Retail Reporting in the Energy Market The Australian Energy Market Commission (AEMC) welcomes the opportunity to make a submission to the COAG Energy Council consultation paper on Retail Reporting in the Energy Market. Retail reporting provides stakeholders with key information to enable competitive and transparent retail energy markets in which consumers can confidently participate. The AEMC currently prepares two key retail market reports each year as requested by the COAG Energy Council: Report on Residential Electricity Price Trends; Retail Competition Review. Approach to Retail Reporting Consultation on Retail Reporting in the Energy Market When considering the retail reporting framework it is important to form a view as to the overall objective for this reporting and the key stakeholders that would be interested in retail information. This is important because different stakeholders value different types of information. A key distinction in the information that is reported is whether it relates to observable data, such as information on existing retail offers or rate of consumer switching, or forward-looking information, such as likely movements in retail prices. Consumers are likely to value information based on observable data which helps them to choose the best offer they can get. Policymakers, on the other hand, would also be interested in forward-looking information which can help to understand whether there are elements of the supply chain that need regulatory or policy attention. AEMC Retail Reports The AEMC s Report on Residential Electricity Price Trends provides forward-looking reporting on retail price trends and has been undertaken annually by the AEMC since 2010. These reports provide information on possible future trends in residential electricity prices for each State and Territory across Australia. They focus on the drivers that may affect key supply chain cost components. These reports draw on AEMC experience modelling price outcomes and analysing 15F346

2 existing price data and are a key input into market development. They are therefore aligned with the AEMC s statutory market development functions. The AEMC s annual Retail Competition Reviews assess the effectiveness of competition for the purpose of jurisdictional decisions on the retention, removal or reintroduction of retail energy price controls. These reviews operate as a tool to understand issues and trends affecting retail competition in the NEM and how mature retail competition is in particular markets. Challenges of Retail Reporting Reporting retail information provides a number of challenges, particularly in respect of prices. Electricity offers are complex and able to be reported in a range of ways. This complexity is likely to increase with technological uptake and changes to retail business models, and new rules around pricing. It is important that any reporting be undertaken by bodies with experience in this area. Simplifying price reporting by approaches such as averaging potentially greatly reduces its usefulness, depending on its intended purpose. That is, while it would provide a new source of information, this may not necessarily be useful for some stakeholders and may in fact be misleading. We note that some stakeholders have suggested that reporting of retail prices should focus more on how much consumers are actually paying for electricity, rather than what offers are available. While this does provide some additional information, it mixes historic offers and unit prices (since some consumers will have been on their offers for some time) with prices currently paid. This means that it is less helpful for policymakers as an indicator of the state of the market. It also would not provide consumers with guidance as to the offers that are currently available. In addition, it would be significantly more burdensome collecting information on what consumers are actually paying compared to offers that are currently available and can be determined through price comparator websites. The remainder of the submission is structured as follows: Section 1: Approach to retail reporting and governance discusses the overall objectives of retail reporting, and approaches to reporting retail prices; and Section 2: AEMC retail reporting sets out the background to and possible incremental changes to retail reports the AEMC currently produces. If you have any questions or require further information please contact Chris Spangaro, Senior Director, on (02) 8296 7800. Yours sincerely Paul Smith Chief Executive

1 Introduction This COAG Energy Council consultation deals with the mechanisms by which retail reporting occurs in the National Electricity Market (NEM), including both price and non-price elements. The COAG Energy Council seeks stakeholder views on the most appropriate retail energy reporting framework for the future. The retail reporting regime refers to the ways in which different bodies within the NEM report on various indicators which describe the retail market. There are a range of indicators that can be used, various ways in which those indicators can be reported on, and a number of bodies which can do the reporting. Critically, there is unlikely to be one consistent view from all stakeholders as to how retail reporting should occur. This reflects the different uses to which stakeholders put retail information, including price information. With this in mind it is appropriate to start by considering an overall objective for retail reporting. 1 Approach to Retail Reporting and Governance 1.1 Objective of Retail Reporting The National Energy Retail Law sets out an overall retail objective, which is to: promote efficient investment in, and efficient operation and use of, energy services for the long term interests of consumers of energy with respect to price, quality, safety, reliability and security of supply of energy. A key component in achieving this objective is the development of a well-functioning retail market. The more transparent the operation of this market, the more the participants in the market will have confidence in it. A market operating in this way offers the best potential for consumers needs to be met efficiently. Information that is reported should be as clear and simple as possible. There should also be a minimum of duplication in how it is provided, including across multiple bodies. We therefore consider that the overall objective of retail reporting is to provide stakeholders with key information in a clear and efficient way to enable competitive and transparent retail energy markets in which stakeholders can confidently participate. 1.2 Needs of different stakeholders In order to achieve this objective, it is necessary to understand what information is needed by different stakeholders. The key stakeholders participating in the market are consumers and retailers. Policymakers also have a critical role in the market in that they set the policy framework within which the market operates. 1.2.1 Consumers One of the defining features of consumers of electricity is the diversity amongst the way different consumers use electricity, and also in what they value in terms of their retail offer. Different variables in terms of usage include: Consumption how much electricity a consumer consumes. This may be relevant for example because some offers apply different tariffs to each block of consumption. Load profile when a consumer consumes electricity. For example, consumers with airconditioning may consume more at peak times. Consumers with solar panels may consume less at sunny times during the day. Both have a load profile that is more peaky overall than other consumers.

2 Circumstances this might include where they live, how affluent they are, whether they are eligible for a concession, and how easily they can shift consumption from one time of day to another. This diversity means that an offer that is very good for one consumer may not suit another. While research has shown that the most important feature of an offer for a consumer is the price that is to be paid 1, other features of offers are also significant. As a result, consumers are likely to value information which helps them to choose the best offer they can get to meet their particular needs and preferences. The most relevant information for consumers will be as representative as possible of a particular consumer s circumstances, and therefore reasonably granular. On the flipside, information at too high a level, or that represents an average across a range of offers or customer types, will be less useful. In addition, historic prices are of little value for consumers since they provide no indication of what offers are currently available to consumers. The most useful information for consumers reflects the current state of offers in the market, such as is found in price comparator websites such as the AER s Energy Made Easy site. Comparator websites simplify the comparison process, providing information that consumers value including tariffs, discounts and estimates of the total bill for every offer available. Comparator websites can also tailor the information provided to customers to present relevant offers depending on their preferences. 1.2.2 Retailers (including prospective retailers and other energy service providers) Greater competition will be promoted where retailers have information about consumer habits and preferences. Again, this would be at a level sufficiently granular to enable retailers to target their offers to different types of consumers, for example, rural versus metro consumers, business versus residential consumers. Information that is useful here would include consumer numbers, degree of take up of offers, rates of switching between retailers and details of consumer complaints. Recently, a greater diversity in energy service models has been observed. In particular, changes occurring in the growing solar segment of the retail market have the potential to impact consumer and retailer outcomes. Alternative energy business models, such as exempt solar suppliers currently hold a small proportion of the market and have not replaced all of the services offered by traditional retailers. Advances in energy storage or regulatory developments could result in these businesses having a greater impact on retail energy markets over time. Information about consumer preferences would also be of use to companies with these new energy service models. 1.2.3 Policymakers Policymakers seek information that could guide whether there are elements of the legislative or regulatory framework that need to be addressed. This could include information on: indications of how prices are likely to change in the future and the drivers behind such price movements; an authoritative source on how prices have tracked over time; the effectiveness of competition; and in respect of consumers, levels of complaints and hardship. 1 Newgate Research, Australian Energy Market Commission Consumer Research for Nationwide Review of Competition in Retail Energy Markets, June 2014, p6.

3 1.3 Backward-looking v forward-looking reporting In the description in section 1.2 above of the information that different stakeholders require, it can be seen that information provided as part of retail reporting can be either backward-looking (i.e. historic) or forward-looking (i.e. prospective). For example, information on how prices have tracked over time, or consumer switching data, is backward-looking. Information on the drivers of future price movements is forward-looking. This distinction between backward-looking and forward-looking information is an important one. It affects how the information is collected, who should collect the information, and what the information is used for. Backward-looking information is based on observable data, whereas forward-looking information requires an understanding and analysis of trends in the market and other influences such as policy settings. 1.3.1 Approach to backward-looking reporting The key exercise with backward-looking reporting is the collection and analysis of observable data. This does not require analysis of trends to determine what may occur in future. It does require a body with expertise in retail markets and offers, and that has a relationship with those bodies which may provide the relevant information, including retailers and AEMO. This role can best be performed by regulators for the purpose of their market monitoring and enforcement activities. In many cases a regulator will be collecting this information anyway, for the purposes of enforcement activities, or in order to provide this information in a manageable form to consumers, as with the AER s Energy Made Easy database. As the COAG Energy Council s Consultation Paper makes clear, there are a number of regulators that operate in energy, and most of these report some sort of retail information. There are two risks with multiple regulators reporting on retail information, particularly prices: First, there is the potential for inconsistency in terms of the information that is reported and the way it is reported, which can create confusion for stakeholders using that information. For example, the value used for consumption will affect both the annual bill (higher for higher consumption) reported for a consumer and the overall cents per kilowatt hour paid by the consumer (lower for higher consumption where there is a fixed charge). The choice of representative consumer will therefore affect what is reported in terms of prices. Second, this duplication may mean that there is a greater regulatory burden being imposed on stakeholders than needs to be the case. For example, retailers may be required to provide information to multiple regulators. 1.3.2 Approach to forward-looking reporting Forward-looking reporting means extrapolating from existing trends and underlying policy, and applying modelling techniques, to draw conclusions around how the retail market is likely to develop. One such conclusion can be the likely impacts on prices. While this does involve some analysis and understanding of existing data, it involves the further task of applying this to the future. This analysis can be a key input into market development and the formulation of broader policy. The AEMC s statutory functions include market development, with the aim of informing the COAG Energy Council so it is in a better position to make policy decisions and the market is adapted to meet future needs. This market development function is of necessity primarily forward-looking. This forward-looking focus means the AEMC is in the best position to provide forward-looking reports and analysis on the retail market. This is particularly the case in respect of retail pricing. Retail prices comprise components relating to: The competitive market sector, including wholesale purchase costs and the costs retailers face;

4 Regulated network sector, meaning prices for transmission and distribution networks; and Environmental policies. It is necessary to understand how each one of these components is likely to develop in future in order to provide meaningful reports on likely movements in retail prices. While much information regarding the regulated network sector can be derived from decisions of regulators, it is necessary to apply a range of assumptions and sophisticated modelling techniques to understand likely developments in wholesale, retail and environmental costs. This forward-looking reporting on retail price trends has been undertaken annually by the AEMC since 2010. These reports provide information on possible future trends in residential electricity prices for each State and Territory across Australia. They focus on the drivers that may affect each of the three supply chain cost components described above. These reports operate as a diagnostic tool which uses an analysis of these components of retail prices to understand the source of drivers in these prices and therefore the parts of the supply chain that require regulatory or policy attention. 1.4 Challenges in reporting on prices Reporting on prices is a key component of the overall retail reporting framework, and as described above, the AEMC produces an annual report on possible future price trends. In considering the retail reporting framework it is important to understand the challenges involved in reporting on prices. Part of the difficulty is that there is no consistent definition of what an electricity price is. References to prices can mean the following types of information, all of which can be colloquially called prices: Retail offers this includes a tariff, which may be split been fixed and variable prices or structured in other ways, but also such matters as discounts, late fees, and magazine subscriptions. Unit price of electricity often a cents per kilowatt hour of electricity used, for example, this could be the variable charge component of the offer, or a cents per kilowatt hour price which is determined by dividing a consumer s annual bill by their consumption. Standing offer charge this is a price set by regulators or governments if there is a regulated retail price, or where prices have been deregulated, by electricity retailers. Bills sometimes bills, being the amount paid by a consumer over a period of time such as a year, are referred to as prices. In many cases the price reported will depend on the structure of what is reported, or assumptions that are made. For example, where tariffs contain variable and fixed components it is possible to report these separately or as a blended rate. Where they are reported in a blended way, as described in section 1.3.1 above, an assumption about the level of consumption for a representative consumer will be required. The consumption level assumed will affect the price reported. A number of factors mean that prices are likely to become more complex over time. Recent changes to the National Electricity Rules mean network charges should become more costreflective, and increasing uptake of smart meters may help to facilitate this. This could lead to increasing diversity in the structures of tariffs by network businesses and retailers. For example, it is more likely time of use tariffs, where tariffs vary depending on when during a period electricity is consumed, will become more prevalent. Simplifying price reporting by approaches such as averaging greatly reduces the precision involved, meaning that while it would provide a new source of information, this may not necessarily be useful for some stakeholders. While averages may be the best way to analyse trends in prices over time (as used in the AEMC s Price Trends Report), they may in fact be misleading for

5 customers seeking to make a choice between offers. It is important therefore that reporting on prices be undertaken by bodies with relevant expertise in this area. We note that some stakeholders have suggested that reporting of retail prices should focus more on how much consumers are actually paying for electricity, rather than what offers are available. While this does provide some additional information, it mixes historic offers and unit prices (since some consumers will have been on their offers for some time) with prices currently paid. This means that it is less helpful for policymakers as an indicator of the state of the market. It also would not provide consumers with guidance as to the offers that are currently available. In addition, it would be significantly more burdensome collecting information on what consumers are actually paying compared to offers that are currently available. Offers that are currently available can be determined through price comparator websites. Information on what consumers are currently paying would have to be determined by accessing retailer data (which may be confidential or insufficiently granular) or by surveying consumers. 2 AEMC Retail Reporting As described in the Consultation Paper, the AEMC currently produces two key retail reports: the annual Residential Price Trends Report (which only covers electricity), and the annual Retail Competition Review (which covers both electricity and gas). These reports provide valuable information on a number of different aspects of the retail market. 2.1 Residential Price Trends Report 2.1.1 Background to Report The AEMC s Price Trends Report is prepared in response to a Terms of Reference from the Standing Council on Energy and Resources (now the COAG Energy Council). This was received in December 2012 and applies until the AEMC is otherwise directed. It applies only in respect of residential electricity prices. It presents prices for a base year and then the three years following the year in which the report is prepared. The report presents average prices for representative consumers. It does not provide a forecast of future prices that consumers may see on their bills. By analysing the movement of average prices over time, trends can be identified. To prepare its report, the AEMC analyses existing trends in the cost components that make up retail prices, undertaking modelling where relevant, in order to form a view as to how prices are likely to move going forward. Understanding the source of drivers in these prices provides insight into the parts of the supply chain that require regulatory or policy attention. 2.1.2 Improving the Price Trends Report The Terms of Reference for the Price Trends Report applies until the AEMC is otherwise directed. Despite this ongoing application, it is somewhat inflexible. It is prescriptive as to some elements of the methodology the AEMC must adopt, as described below. The energy market is in a period of change, including in respect of the increasing complexity of prices and pricing structures. The Terms of Reference should be flexible enough to allow the AEMC to adapt its manner of reporting price trends as the market evolves. One prescriptive element of the current Terms of Reference is the requirement that all pricing information should be expressed in cents per kilowatt hour. Almost all retail prices have two components. One is a variable component that depends on the amount of electricity consumed over a period by the consumer, and is usually charged in cents per kilowatt hour. There is also a fixed component, also called a daily supply charge, which applies regardless of the amount of electricity consumed.

6 In order to calculate an overall cents per kilowatt hour charge for a particular consumer, it is necessary to establish a level of consumption for the consumer. This determines the total variable component for the period. The fixed component is then added to this to establish the total bill, which is then divided by the consumption to establish the overall cents per kilowatt hour price. There are two problems with this. First, the overall price in cents per kilowatt hour is dependent on the consumption value used. For low consumption values the fixed component is a much higher proportion of the final bill, and for high consumption values it is a lower proportion. The figure below shows an example of how the overall price in cents per kilowatt hour may move relative to consumption. 70 c/kwh 60 50 40 Low fixed, high variable Moderate fixed, moderate variable High fixed, low variable 30 20 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Annual consumption (kwh) This approach also requires establishing what a representative consumer is, and determining the representative consumption for that consumer. This differs between jurisdictions and can be misleading. The second problem is that most consumers do not receive a price in cents per kilowatt hour which encompasses both the fixed and variable components. Reporting the prices in this way is not representative of actual practice. Another prescriptive element of the Terms of Reference is that the financial year immediately preceding the forward estimation period must be used as the basis for estimating the prices going forward. This base year is the latest year for which there is actual data available. This means that each price trends report must combine backward-looking prices (the base year) with forward-looking prices (the three subsequent years). As described in section 1.3 above these different types of retail information are used for different purposes. Mixing the two approaches in one report reduces the clarity of the report. Overall, it would be better if the Terms of Reference were less prescriptive, including in respect of these two examples. This would both enhance the clarity of the reports now, and allow the AEMC to develop its approach as the market changes and tariff complexity potentially increases. 2.2 Retail Competition Review The Terms of Reference for the AEMC s Retail Competition Reviews was provided by the Council of Australian Governments (COAG) Energy Council to the AEMC on 9 January 2014. It is a standing Terms of Reference that applies on an ongoing basis. The scope of these reviews is also described in the amended Australian Energy Market Agreement.

7 The Retail Competition Review analyses retail competition in a consistent way across jurisdictions. It typically looks at the following competitive market indicators. Multiple indicators are required to form a more complete picture of the state of competition: the level of customer activity in the market; barriers to retailers entering, expanding or exiting the market; the degree of independent rivalry; customer satisfaction with market outcomes; and whether retail energy prices are consistent with a competitive market. To conduct its reviews, the AEMC undertakes extensive data gathering, survey work and analysis. These reviews operate as a tool to understand issues and trends affecting retail competition in the NEM and how mature retail competition is in particular markets. They provide recommendations to promote competition and improve customer outcomes. 2.3 Other Opportunities for Retail Reporting Developments in the energy market provide other opportunities for retail reporting. The AEMC supports further consideration being given to retail reporting in respect of the following areas: Smart meters increasing take up of smart meters will impact the retail landscape. Consumers may have greater access to information and greater tariff options. There are opportunities for reporting on the take up of smart meters as well as tariffs that can only be made available to those with smart meters. To some extent this is already possible; in 2015 the Price Trends report will include an analysis of time of use tariffs. Solar PV similarly, retail reporting could encompass tariffs made available to customers with solar PV, and the range of feed-in tariffs on offer. New energy service models retail reporting could also include reporting on the prevalence of different energy service models, including models of solar and battery storage. Gas price trends if there is interest in retail reporting in a gas context, there may be a case for the AEMC to undertake both an electricity price trends and a gas price trends report, noting the very different features of these markets and availability of information.