Payment requirements with combined billing

Payment requirements with combined billing FINAL REPORT 30.4.2013 Marika Bröckl, Laura Hakala, Erkka Ryynänen, Iivo Vehviläinen Gaia Consulting Oy

Index Executive Summary... 3 1 Introduction... 6 1.1 Background... 6 1.2 Description of Model 1 and Model 2... 7 1.3 Objectives and scope of the study... 8 1.4 Implementation of the study... 9 2 General considerations of the supplier centric model... 9 2.1 Standardized data exchange... 9 2.2 Customer service... 10 3 Model 1: Supplier responsible for the whole billing process... 11 3.1 Evaluation of different alternative solutions for Model 1... 11 3.2 Risks and solutions for handling risks... 19 4 Model 2: Supplier bills on behalf of DSO... 27 4.1 Evaluation of the proposed solutions for Model 2... 27 4.2 Risks and solutions for handling risks... 33 5 Analysis of the models... 35 5.1 Summary of the developed model principles... 35 5.2 NordREG criteria... 37 5.3 Customer friendliness... 37 5.4 Well functioning market... 38 5.5 Improved competition... 40 5.6 Improved efficiency... 41 5.7 Compliance with EU development... 45 5.8 Neutrality of DSOs... 47 6 Conclusions... 49 6.1 Performance of the models against NordREG criteria... 49 6.2 Conclusions... 51 6.3 Guidelines for further market development... 55 Appendix 1: Stakeholder feedback... 59 2 Payment requirements with combined billing

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

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

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

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 2005. 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, 2012. 2 Ernst & Young, Credit risk management in future billing regime, May 2012. 3 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 2012. 6 Payment requirements with combined billing

1.2 Description of Model 1 and Model 2 5 1.2.1 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. 1.2.2 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 2012 7 Payment requirements with combined billing

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.. 1.3 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 2012. 7 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

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 2013. 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 2012 9 Payment requirements with combined billing

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 11. 2.2 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 1/2012. 10 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

3 Model 1: Supplier responsible for the whole billing process 3.1 Evaluation of different alternative solutions for Model 1 3.1.1 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

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. 3.1.2 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. 15 13 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

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. 3.1.3 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

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 24 29 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 24 29 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 2012 14 Payment requirements with combined billing

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 24 29 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. 3.1.4 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 3.2. 15 Payment requirements with combined billing

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

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. 3.1.5 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

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. 3.1.6 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

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 3.2.1 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

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 3.1.3 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

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

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

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

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

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 2011. 29 PJM and Market Reform, PJM Credit and Clearing Analysis Project, Findings and Recommendations, 2008. 30 Danish Energy Agency, From combined billing to the wholesale model. New Danish regulation of the electricity market, June 2012. 25 Payment requirements with combined billing

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 15 000 40 000 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

4 Model 2: Supplier bills on behalf of DSO 4.1 Evaluation of the proposed solutions for Model 2 4.1.1 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. 4.1.2 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. 4.1.3 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

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

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

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

1. Both collect their own debt separately 2. The DSO outsources debt collection to the supplier in a contractual arrangement 3. The DSO sells the receivables to the supplier in a separate transaction Both DSO and the supplier collect their debt separately Normal practice is that the debt collection process is often outsourced to a third party, e.g. professional debt collection company. In this case both DSO and supplier need to handle outsourcing of their own debt. The end customer then usually receives separate debt collection notifications, if the DSO and supplier outsource debt collection to different professional collectors. Two notifications by external debt collectors is the normal practice in a case with an independent supplier. This can cause additional cost to those customers buying from independent suppliers and also then breaks the idea of a customer having only one counterparty. The DSO outsources debt collection to the supplier in a contractual arrangement A possible alternative for debt collection, which would simplify the model from the customer perspective, is outsourcing the debt collection of the DSO debt to the supplier. The DSO remains legally as the counterparty of the customer, but the supplier handles the debt collection process on behalf of the DSO. This arrangement could be made with a separate contractual arrangement. This is in practice what many incumbent suppliers do today with the local DSO. An analysis of the required contractual and legal arrangements is not within the scope of this study. The DSO sells the receivables to the supplier in a separate factoring transaction A supplier could also buy the DSOs receivables and after that treat them legally as their own receivables. In this case, notification about selling receivables must be sent to the customer, which can be confusing. Forcing debt collection by regulation on to the supplier would bring DSO s credit risks to the supplier. This is a situation that is meant to be avoided by introducing Model 2. Conclusion If the main benefit of Model 2 is that transfer of credit risks from DSO to supplier is avoided, it is recommended that both DSO and supplier are responsible for their own debt collection. To make this option more customer-friendly and less prone to mistakes, the alternative of outsourcing DSO s debt collection to a supplier needs to be further evaluated. Selling the receivables (invoices) to the suppliers would mean that suppliers could collect debt. This would also involve transferring the risks to the supplier. If transferring risks to the supplier is acceptable, then Model 1 would be recommended as the more customer friendly, efficient and neutral solution. 4.1.6 Payment tracking and corrections Efficient payment tracking is a key issue in Model 2. Payment tracking and settling in this model is complex because of the following common issues: 31 Payment requirements with combined billing

Late payments Interest payments Partial payments Over payment of bill Paying same bill twice Tax payments Payment of previous bill after debt collection has been initiated Wrong reference numbers, no reference number An illustration of the potential complications is given by the following example: If the customer pays only part of his debt to the supplier, the supplier needs to allocate the payments and divide them between the DSO and the supplier. A fair way to do this is to do it in the same proportion as the debt. Payment tracking and settling requires a highly reliable, precise tracking system of each transaction especially by suppliers and but also on DSOs part to ensure that payments are forwarded correctly. This is primarily the suppliers responsibility, and current suppliers ledger systems are not necessarily designed for this level of precision. One basic requirement for payment tracking is also roll back options, meaning that billing information can be rolled back to a previous state, if mistakes (by DSO or supplier) are made. This is challenging in situations where payments have been forwarded and have been registered in both supplier and DSO ledgers. Automating this type of process would be challenging, if not impossible, with multiple DSOs and suppliers involved. Conclusion In order for the Model 2 to work, efficient payment tracking system is needed for the supplier. This may require substantial changes to suppliers current systems. Also, payment correction in cases of errors due to the DSO or customer requires a lot of non-standard work for the supplier. Transaction based payment tracking may require cooperation between the DSO and the supplier and can become complex. Recommendation is to carefully examine payment tracking system possibilities before planning implementation of Model 2. 4.1.7 Taxes and other payments Taxes and energy related payments can be collected and paid to authorities either by the DSO or the supplier in this model. The DSO will be in a contractual relationship with the customer and the customer will be in debt to the DSO. Obligating the DSO to pay the taxes and energy related fees means that the suppliers risk is reduced. The DSO is already established in the country and is aware of tax practices. Similarly to Model 1, the supplier can also be made responsible for the tax collection with the same argumentation. Suppliers need to know the tax rules in any case to be able to offer customer service and ensure that tax collection is reliable. The DSO does not need to be in contact with the customer 32 Payment requirements with combined billing

in tax related issues. This could be a barrier to market entry for some suppliers as systems for handling taxes would need to be set up and the tax collection practices in each country would need to be studied. 4.2 Risks and solutions for handling risks 4.2.1 Supplier cash flow and risk management In this model suppliers do not carry risks on behalf of the DSO. They should ideally be able to forward DSO s part of the payments only after they have received the payment from end customer. This requires billing cycles that are back-to-back. In practice, supplier s and DSO s billing cycles need to be harmonized. If billing cycles are not harmonized and the supplier pays the DSO before receiving payments from the customer, supplier bears also the credit risk of the DSO, which is against the basic motivation for Model 2. The DSO s ability to produce correct and timely billing information causes some operative risks to the supplier. The main risk management tool is the standardized contract terms, which should include sanctions for the DSO and compensation to the supplier in case the DSO neglects its responsibilities. Alternatively, a HUB solution could to some extent mitigate these operative risks. Conclusion A back to back billing cycle is recommended. The supplier transfers the customer receivables to the DSO after receiving payment from the customer. 4.2.2 DSO cash flow and risk management In Model 2, the risk distribution between the supplier and DSO could remain close to what it is in the current situation. The DSO and the supplier bear their own credit risk towards the end customer. However, a credit risk will be introduced for the DSO as the supplier will be in charge of collecting DSO payments. In Model 2, one of the new risks for the DSOs is the suppliers ability to handle billing and payment correctly. The DSO will rely on how effective the supplier is in collecting receivables. The supplier capability to collect receivables and to forward them to the DSO will have an effect on how effective the cash turnover will be. These risks are, at least, partly managed by standardized contracts between the DSO and the supplier, which should include sanctions for substandard performance by the supplier. The same suggestions are made regarding the handling of DSO counterparty risk as in Model 1 market entry requirements and collateral requirements by a HUB, TSO or regulator. In this model the DSO should in principle be able to predict cash flow as the billing cycles are known, provided that the supplier performs invoicing and receivables collection as agreed. 33 Payment requirements with combined billing

Third party client accounts One solution which could promote a fair and reliable handling and division of receivables between the DSO and the supplier is using client accounts. A solution where a third party manages a client account to which the receivables would be paid and where they would then be split could in principle work. According to billing experts 32, experiences of these types of solutions have indicated that it may be very difficult to track payments using third party accounts in a relatively high transaction volume business. Tracking who has paid and what to whom and correcting billing mistakes in a situation when the receivables are split and customers inevitably from time to time are late with payments, use wrong reference numbers, pay double/too much etc. could be challenging. This type of solution may become too complex to be automated. Additionally, client accounts may impact negatively the cash turnover. 33 It can also be argued that the third party handling the client accounts could pose a counterparty risk. Requiring the routing of the entire retail energy supply and network services billing through third party client accounts is a big step, which should be carefully evaluated. Conclusions The developed Model 2 still includes the risk of supplier default to the DSO. It is recommended that there should be market entry requirements for the supplier regarding ability to handle technical requirements. In addition, collaterals should be required from the suppliers to protect the DSOs. Third party client accounts are not recommended because of complex administration and potentially slower cash turnover. 32 Interviews 33 Third party accounts could however be a feasible solution in a model where clients pay in advance - in potential prepayment solutions. In these types of solutions the customer may need some protection. Client accounts would in these types of cases guarantee that the funds, which are prepaid by the customers are not lost if a supplier goes bankrupt. If funds are not placed in a client account (are for instance placed in a normal bank account) they may be used to compensate different debtors and will not necessarily be reimbursed to the customer who has made the prepayment. 34 Payment requirements with combined billing

5 Analysis of the models 5.1 Summary of the developed model principles The table below outlines the basic principles which are proposed for the functioning of Model 1 and 2. Model 1 Model 2 Model principle Supplier bills customers and buys network services as a commodity from the DSO. The model where the supplier buys network services as a commodity is the recommended over a model where supplier buys the DSO receivables. Supplier bills customers on behalf of DSO. Supplier combines billing information of supplier and DSO on the same invoice, legally these remain two separate invoices. Contracts One contract for energy and network services between the supplier and the customer. 34. Standard agreement terms will be needed to regulate the relationship between the DSO and supplier. The DSO will need a contract for the network connection with the customer. Supplier and DSO both have a legal contract with customer for the services provided. Standard agreement terms will be needed to regulate the relationship between the DSO and supplier. Billing cycles and payment forwarding The supplier is free to invoice customers with a billing cycle of choice as long as legal requirements for the number of bills sent yearly to the customer are met. The DSO bills the supplier for network services monthly after delivery. Supplier pays DSO directly after receiving payments from end customers. This means that the billing cycle needs to be back-to-back between the supplier and DSO. A few possible standard billing cycles are set by regulation. Supplier or the customer can choose from them and DSO accepts payments according to supplier s choice. Producing billing information and the invoice DSO or HUB does the rating/produces billing information for the DSO services per customer. DSO or HUB produces the aggregated DSO billing information for billing the supplier. DSO retail billing information, which includes detailed information on tariff, energy, and other payments is made available to the supplier. Supplier does rating and produces retail billing information for energy services. Supplier combines the network and energy billing information and produces an invoice, which includes both network and energy charges. DSO or HUB does the rating/produces billing information for the DSO services per customer. DSO retail billing information, which includes detailed information on tariff, energy, and other payments is made available to the supplier. Supplier does rating and produces retail billing information for of energy services. Supplier combines the network and energy billing information and produces an invoice which includes both network and energy charges but remains legally as two separate invoices. 34 A one contract model is not an absolute requirement to implement this model. Detailed evaluation of required contract models are not within the scope of this project. 35 Payment requirements with combined billing

Debt collection, payment tracking and correction Debt collection only by supplier. Simple payment tracking of customer receivables by supplier. Both supplier and DSO are legally responsible for debt collection concerning their receivables. Supplier needs an efficient payment tracking system to monitor when payments from customers have been received and are ready to be forwarded to the DSO. Supplier and DSO need an efficient payment correction system in case there are mistakes, e.g. in DSO s billing data, invoices produced by supplier or customers payments. Taxes and other payments The supplier classifies customers in tax categories Suppliers collect taxes and energy related fees in the combined bill from customers and forward them to the authorities. The supplier pays VAT. The DSO pays VAT. The supplier classifies customers in tax categories Suppliers collect taxes and energy related fees in the combined bill from customers and forward them to the authorities. The supplier pays VAT. The DSO pays VAT. Supplier risk and cash flow management DSO /supplier billing cycle is long enough that the supplier has received payment from customers before payment is required by DSO. Suppliers need to reserve more cash to cover DSO collateral. Suppliers earn interest on DSO receivables to compensate the cost of providing services. DSO risk and cash flow management A supplier forwards payments after receiving them from customers in a back-to-back billing cycle. Suppliers need to reserve more cash to cover DSO collateral. No significant additional risks. Supplier needs to fulfil technical criteria to be able to enter the market Suppliers are required to provide collateral to the DSOs to cover DSOs expected receivables for 2 3 months Collaterals collected centrally by the HUB or the TSO Details of collaterals need to be developed Supplier needs to fulfil technical criteria to be able to enter the market Suppliers are required to provide collateral to the DSOs to cover DSOs expected receivables for 2 3 months Collaterals collected centrally by the HUB or the TSO Details of collaterals need to be developed 36 Payment requirements with combined billing

5.2 NordREG criteria NordREG has six core objectives for the Nordic electricity market harmonisation. The solutions presented in this study are evaluated against these six criteria 35 : Customer friendliness: One of the objectives of the common Nordic end user market is to increase the customer friendliness of the market and to make it easier for the customer to be active in the market. Well-functioning market: The goal is to have a well-functioning harmonised electricity market for both wholesale and retail. Improved competition: Improving competition among suppliers is an important objective, for instance through low entry and exit barriers. Improved efficiency: The society at large and especially customers must benefit from improved efficiency in the market. Compliance with EU regulation and development: The development of a harmonised Nordic end user market must comply with the general development in the EU and with existing and future EU regulation. Neutrality of DSOs: Since the DSOs shall function as market facilitators, it is crucial to ensure that the DSO neutrality towards customers and suppliers is kept. In the following section Models 1 and 2 are evaluated against these criteria. 5.3 Customer friendliness Benefits and downsides from combined billing From the point of view of electricity retail market customers, a supplier centric model with combined billing provides some benefits. There is a single point of contact for most electricity related matters. Customers receive only one bill for electricity. Other aspects of customer friendliness include clarity of customer service, flexible billing cycles, well-functioning processes with limited number of errors, and easy and intuitive customer services processes. A supplier centric model with combined billing eliminates mostly the customer relationship with the DSO. In network quality and outage related issues the customer needs to be informed of what services will be provided by the DSO and through what service channel. Even in these issues the customer should be able to contact the supplier as a first point of contact and then be guided to the proper service channel by the supplier. Multinational business customers active in several Nordic countries will most likely benefit the most from the harmonization of the Nordic market. They could profit from being able to receive service in all Nordic countries from the same supplier. This could simplify energy acquisitions for some international companies and make it possible to negotiate better terms. For a larger business customer it has very little impact if there is one bill or two. 35 Directly quoted from NordREG, Payment Requirements with Combined Billing, Terms of reference, 30 Oct 2012. 37 Payment requirements with combined billing

A common situation in the market is that customers need extension for payments. If such extensions are granted, it will in Model 1 require more cash funds for the supplier compared to the current model. In Model 2 this will make payments more complex to administer and require bilateral coordination between the DSO and the supplier. Customer service simpler in Model 1 than in Model 2 In Model 1, customer will only need to contact the supplier during the whole service process from changing suppliers to potential debt collection. All billing related questions can be answered by the supplier, including all debt collection issues and issues related to the DSO services. In Model 2 the customer is normally in contact with the supplier. However, if debt collection is initiated because of unpaid bills, the customer will receive two debt collection notifications, one from the supplier and one from the DSO. It may also be confusing for the customers. The only exception to this practice in Model 2 is when the same legal entity offers both the network services and supplies the electricity, and can therefore combine the debt collection from the customer. This gives an advantage to some incumbent suppliers. Additionally, in Model 2, it is possible that failure of the supplier to pay the DSO leads to debt collection by the DSO (of the end customer debt) even in cases when the customer has paid the bill to the supplier. To eliminate these types of possibilities for double billing of customers, the processes between the supplier and the DSO need to be extremely well planned and there needs to be good cooperation between the parties. Exact details of how Model 2 could function in this regard have not been established during this study. More flexible billing cycles in Model 1 than in Model 2 In Model 1 the supplier has the freedom to design its billing cycle freely, while in Model 2 the DSO invoices need to be sent in a coordinated manner, e.g. once a month. The smaller customers, who have currently chosen to receive 3 or 4 invoices a year, may not want to receive a mandatory monthly invoice and would consider a monthly invoice as poorer customer service than before. Recommendations by CEER mandate that the customers should have a choice of billing cycles 36. This means that Model 2 would need to work with multiple back to back billing cycles. 5.4 Well functioning market Definition of a well functioning market According to guidelines by CEER a well functioning retail market links wholesale markets to customers and should provide a choice of commercial offers at fair and transparent prices. A satisfactory quality of service should be provided to the customer and the market should support the develop- 36 CEER, 2012, Electricity and Gas Retail market design, with a focus on supplier switching and billing Guidelines of Good Practice, Ref: C11-RMF-39-03 38 Payment requirements with combined billing

ment of innovative services. There should be clear and reliable rules in place and access to information is easy for the customer. Also there should be clear distribution of responsibilities and effective and secure processes, which includes the secure handling of data. 37 In addition, other areas of NordREG criteria cover some aspects of the well-functioning market, such as competition and efficiency. Clearer processes in Model 1 than in Model 2 Model 1 has relatively simple and clear billing process and receivables tracking. The responsibilities between the supplier and the DSO are clear. Model 1 increases transparency of cost allocation, as costs for customer service and mass billing systems or outsourced billing solutions will be carried by the suppliers.in a normal billing case, processes in Model 2 are also relatively clear and simple. However, in payment tracking, corrections and debt collection processes are more complex in Model 2 than in Model 1. Model 2 will involve bilateral communication between the supplier and DSO regarding the collection of receivables. Complex tracking and coordination of payments and debt collection in special cases may create inefficiency and bears the potential to drive system costs especially if processes involve DSO and an independent supplier. To be efficient, processes would in most cases need to be automated, but in this model this could prove challenging and costly. Manual processes need to be avoided because they are costly and bear the potential for mistakes. The complex processes and the complex system requirements which could be the result could drive costs, which may create barriers for entry to new suppliers. A harmonized market and relatively simple processes between the DSO and the supplier in Model 1 may promote standardization of IT systems, which could lead to more competition in the IT sector, as the larger market area could become more attractive to IT suppliers, who could develop more standardized solutions. Changed risks for the suppliers and the DSOs need to be mitigated In Model 1, suppliers can face cash flow problems because of needing to handle the payment for the network services. Challenges in cash flow management could potentially be a barrier for market entry and could create problems especially for smaller suppliers. With the proposed billing cycle and extra days to pay the DSO bill in Model 1 cash flow risk should be possible to manage as a normal business related risk. To maintain credible market, protect DSOs and their customers from supplier defaults, collateral requirements may be needed in both Model 1 and 2. In Model 2 the risk allocation between the supplier and the DSO will be more similar to how it is allocated today. For the customer this model involves increased risk for double billing by DSO and supplier in cases where the supplier for some reason neglects to forward payments to the DSO or in cases where the supplier becomes insolvent. The DSO will in this model have legal possibilities for debt collection directly from the customers, unless this is eliminated by legislation or some other means, such as selling of the receivables. Supplier risk will not increase in this model. 37 CEER, 2012, Electricity and Gas Retail market design, with a focus on supplier switching and billing Guidelines of Good Practice, Ref: C11-RMF-39-03 39 Payment requirements with combined billing

Changes will affect IT and other related services Competition in IT services may be promoted by increased standardization of processes and data communication. Outsourcing of systems and services or cooperation with other supplier would need to be considered by some suppliers to enable efficient operations or economies of scale. This could make the Nordic area attractive to new IT suppliers. The competitive aspects in the IT services and other processes should also be considered in both models. 5.5 Improved competition Definition of a competitive market A competitive retail market requires low barriers for new entrants and a free choice of a sufficient number of suppliers, who provide services to customers. These suppliers should be able to differentiate services and develop new services. Customers need to be empowered, get clear information and the threshold to change supplier should be low. There should not be unnecessary barriers for a supplier to enter the market. Incumbent suppliers should not have a competitive advantage compared with independent suppliers. 38 Increased supplier switching Consumers in both models will all receive one bill, which lowers the threshold in supplier switching. Low supplier switching has been considered a problem in some Nordic countries. Today some customers avoid changing suppliers because they do not want to be burdened with two separate bills and potentially two different debt collection processes. Thus, in some cases customers do not take advantage of better price offerings just to avoid two separate bills. Level playfield for all suppliers slightly more so in Model 1 A combined billing model will enable independent suppliers to play on a more level playfield with the incumbent suppliers, i.e. cases where the supplier and the DSO operate as one company. Uniform practices and processes, which need to be enforced, and well as a functioning HUB type service would, however, be needed to enable this model to function in an efficient manner. Model 2 may be less neutral than Model 1. Model 2 may involve bilateral communication in payment tracking which involves the risk that DSOs do not treat suppliers equally. Incumbent suppliers may be able to benefit from more integrated processes and common IT systems with the DSO. This may be an obstacle to competition. Larger market area may attract new entry more so in Model 1 If a supplier centric combined billing model is implemented in a way which enables operating in the Nordic area with the same basic rules and basic business processes, it could make it possible to use 38 CEER, 2012, Electricity and Gas Retail market design, with a focus on supplier switching and billing Guidelines of Good Practice, Ref: C11-RMF-39-03 40 Payment requirements with combined billing

the same IT systems in several countries. This could lower the barrier for a supplier in one country to operate in several countries. The harmonized Nordic market could also become more attractive for new entrants, which could lead to improved competition. Model 1 offers a more streamlined and clear process, which may make it easier for new suppliers to enter the market with lower system and administration costs than in Model 2. New requirements for suppliers will lead to market exits Reduction of the total number of suppliers in the Nordic area is likely as a result of implementing both the Model 1 and 2. Fulfilling the technical requirements will entail making investments in new systems or changes in legacy systems. The need for collateral deposits increase requires also new cash to be invested into the currently rather low margin retail sales business. Companies considering market entry will weigh the necessary investments against market potential. Energy risk management is today demanding for suppliers with volatile wholesale prices and multiple price areas. Additionally, the margins in electricity sales are at least in some countries not considered very attractive. All these factor in a decision whether market entry is interesting for a new supplier in addition to the market rules. It is possible that the retail electricity margins need to rise to attract more competition from new entrants 39. 5.6 Improved efficiency Reduction of double work improves efficiency but requires investments A supplier centric model should increase the total efficiency in the market by reducing the workload for the DSOs. Improved efficiency of the retail market can only be achieved if the total cost of producing services is reduced. Most efficiency gains have a monetary value, but these can be hard to estimate in some cases. Changes in the market model will require investments for example in new processes, contracts, and IT systems. In both models investments in training customer service staff of the supplier will be needed, for those suppliers who do not provide combined bills today. For the supplier centric model to make sense, the achieved efficiencies need to be greater than the initial investments. Simpler processes should make Model 1 more efficient in the long run Model 1 should on a long-term be a more efficient way to implement combined billing than Model 2. Simpler processes and the avoidance of duplicate processes will promote efficiency and cost effectiveness. Aggregated payment of services by the supplier is more efficient than transaction based payments. Model 1 may make it possible for the DSO reduce the number of customer service personnel and save in IT costs if a mass billing system is not needed by the DSO. 39 For example the retail market margins have been estimated to be around 3 c/kwh in the UK, less than 1 c/kwh in Denmark, Finland, and Norway, and less than 2 c/kwh in Sweden in 2010. See Lewis, P., Consideration of alternative billing regimes for the Common Nordic End User Market, 2011. 41 Payment requirements with combined billing

In Model 1, processes are simpler and the potential for errors, which impact customer billing, is reduced compared to Model 2. This leads to less time needed for complex error correction procedures. Long term costs which are borne by the customer may be lower, especially if costs for debt collection are considered. In Model 2 some parallel processes are needed by the supplier and the DSO. Debt collection needs to be performed by both DSO and the supplier separately, at least when external suppliers are concerned. Two debt collection processes will entail double the cost for debt collection for the customer, unless the customer buys from an incumbent supplier or unless the DSO has outsourced the debt collection formally to the independent supplier. An incumbent supplier may in many cases be able to combine the debts and collect with one debt collection process. Operative costs lower in Model 1 In Model 1, the DSO may avoid the need of a mass billing system for sending invoices etc., if some billing related tasks are performed by a HUB and/or the suppliers. However, the kind of IT-systems which are needed in the future depends on which type of market model is proposed and on whether there will be a data exchange HUB solution and if some functions can be transferred to a HUB solution. The DSO will as a result of this model not need as many people handling billing related questions in customer service. This may save some costs for the DSO. In Model 2, the DSO may need a more extensive customer information system/mass billing system than in Model 1. In Model 2 the DSO has a need to track receivables on a customer and transaction level and to be able to perform debt collection either directly or by outsourcing of debt collection to a supplier or a third party. Automating these processes may be challenging and expensive. In Model 2 the DSO will possibly need to keep some more customer service staff for debt collection and for handling the receivables. Resources will be needed for coordinating payments and debt collection with the DSO. The supplier may need more customer service personnel because of a more complicated, error prone process. Preliminary analysis of the Cost reduction potential Model 2 processes are more complex and involve some double processes. On a long term this may lead to more costs for customer service. Extensive cost-benefit analysis has not been in the scope of this study. The cost reduction potential of Models 1 and 2 for a DSO is calculated and presented in Table 5.1. The calculation covers operations which are connected to customer service and invoicing, and which could be handled by the supplier. The calculation also includes customer information systems. The average cost of each function per customer is an illustrative estimate for the allocation of costs and the total costs 40. On the basis of these estimates, the cost reduction potential is assessed for both models. The costs in the calculation are divided in three main categories, which are customer service, invoicing and customer information systems. 40 Exact costs are in part confidential information and should not be disclosed publicly. 42 Payment requirements with combined billing

Table 5.1. Illustrative cost reduction calculations of studied models for an average size DSO. The costs are presented as per customer per year and the calculations are conducted for Model 1 and the Model 2 separately 41. Function Cost / customer Cost reduction potential Model 1 Model 2 Cost reduction Cost reduction potential Cost reduction Customer service New and leaving clients 3.0 50 % 1.5 50 % 1.5 Changes regarding existing customers 3.0 50 % 1.5 50 % 1.5 Reclamation and billing help desk 3.0 80 % 2.4 80 % 2.4 Other customer service functions 3.0 50 % 1.5 50 % 1.5 Customer service, total 12 58 % 6.9 58 % 6.9 Invoicing Collecting billing information 2.0 0 % 0.0 0 % 0.0 Billing 2.0 100 % 2.0 100 % 2.0 Accounts ledger 1.0 0 % 0.0 0 % 0.0 Reminders and debt collection 1.0 100 % 1.0 0 % 0.0 Invoicing, total 6 50 % 3.0 33 % 2.0 Customer information systems 3.0 30 % 0.9 30 % 0.9 Customer information systems, total 3.0 30 % 0.9 30 % 0.9 Total 21 10.8 9.8 The calculations assume that many customer service functions could be handled by the supplier in both models. For example, registering new customers, closing down customer accounts from leaving customers, and making changes in the customer data would require less resources if the data could be delivered efficiently between DSO and supplier. In total, the costs from customer service are estimated to be around 12 per customer per year. The DSO savings potential in both models is almost 60 % which is around 7. Reducing the costs from invoicing is one of the main targets in a supplier centric combined bill model. Indeed, some savings would occur in normal billing, which would be completely handled by the supplier. The two models differ mainly in reminders and debt collection, which in Model 1 are delivered by the supplier and in Model 2 still remain as the responsibility of the DSO. The difference in savings potential is estimated to be around 1 on average per customer per year. Regardless of the supplier centric model, the DSOs still may need to calculate the billing information 42 and maintain an accounts ledger. The savings in invoicing would in Model 1 be around 50 % and in Model 2 around 33 % of the total cost of 6 per customer per year. 41 The estimations and cost reductions are based on expert estimates and reflect the cost savings in an average size company with 10 000 to 50 000 customer. 42 There is also the option that the billing information is prepared by a centralized HUB. 43 Payment requirements with combined billing

Finally, the customer information systems of DSOs could be simpler in a supplier centric model. For example the amount of billing information could be reduced. The cost reduction is estimated to be around 30 % which is around 1 per customer per year. Total savings of the supplier centric model for a DSOs could be thus around 11 and 10 per customer per year in Model 1 and Model 2 respectively. In an average size company the upper limit for savings would be around 1 2 % of the annual turnover. This also reflects the potential upper limit for the discount in the customers distribution costs. The actual savings will be smaller, because of the required initial investments. DSO risk management is costly but necessary If suppliers are required to provide collateral to the DSOs to cover DSOs receivables, this will create a new cost element for the suppliers and for the market. There is a cost associated for the bank guarantee which will depend on the overall situation in the financial markets and the creditworthiness of the entity requiring the guarantee. The cost is highest in the case where the supplier does not have a credit rating. The example in Table 5.2 illustrates the potential costs for a typical mid-sized supplier with 600 GWh of sales in a year. Potential exposure for the DSO is assumed to be two months, i.e. around one month normal billing cycle and one month for notifications, debt collection, and supplier change procedures. The value of network services is estimated here to be 5 million euro by using a 50 /MWh cost for the services. To fully protect the DSO, the collateral requirement should be equal to this 5 million euro. If the supplier does not have a credit rating, then the bank guarantee can be costly, and is estimated here to be 3 % of the value of the collateral. If it is assumed that the supplier needs to place equal collateral throughout the year, the cost of the collateral requirement is 0.15 million euro. Table 5.2. Illustrative example of the cost of collateral for a supplier. Consumption / year 600 GWh Consumption / two months 100 GWh Network service 50 /MWh Collateral requirement 5 MEUR Cost of bank guarantee 3 % Cost of bank guarantees / year 0.15 MEUR The cost of collateral corresponds to roughly 0.5 % of the annual total value of the assumed value of network services. If it is assumed that roughly half of the electricity consumption in the Nordic markets would need to be collateralized, the overall additional cost for the Nordic market would be 50 million euro. As there are market participants with better credit ratings, the total cost should be lower currently. In addition, it should be noted that part of this cost is used to protect the DSOs and customers from bankruptcies and only part is used to cover additional work and bank margins. 44 Payment requirements with combined billing

Further cost benefit analysis needed Accurate estimates of the total savings potential in a supplier centric model are hard to conduct. Part of the savings for the DSOs will create additional costs for the suppliers. Changes to the business model are likely to require investments in IT-systems and internal procedures both with the suppliers and DSOs. The investments for current systems for DSOs may need to be written down. Also, on a system level, set-up of a possible data exchange HUB and overall changes in the system will create costs. In many cases the DSO and supplier are part of the same corporation and already have shared customer service and invoicing departments which include shared debt collection. In this case, the saving potential is low although the costs can be transferred to the supplier and shown as savings to the DSO. The costs per customer can also vary from company to company depending for example on the size of the DSO and supplier. In general, larger companies can manage invoicing and customer service with lower costs per customer because of economies of scale. 5.7 Compliance with EU development Development of the EU electricity retail markets In designing the common Nordic retail market, NordREG states that it is important to keep in mind and follow the harmonization process of the EU electricity market so that the recommended market model and business process solutions are as future proof as possible. 43 This means taking into account the requirement s as well as future plans for developing the retail market on a European level. The following principles that need to be considered in billing and payment solutions have been outlined by CEER and the Energy Efficiency Directive 44. In addition MiFID regulations have been considered. Recommendations made by CEER 45 CEER and BEUC have presented a vision for the energy sector. In the vision a special priority is put on consumers and creating a functioning market for smaller customers. The main criteria presented by CEER for a market are 46 : Reliability Affordability Simplicity 43 NordREG, Road map towards a common harmonised Nordic end-user market, 2012. 44 In addition the REMIT regulation has been analyzed, but it is not relevant for the supplier DSO relations analyzed in this study. 45 CEER, 2012, Electricity and Gas Retail market design, with a focus on supplier switching and billing Guidelines of Good Practice, Ref: C11-RMF-39-03 46 CEER & BEUC, A 2020 Vision for Europe s energy customers, Joint Statement, 13 November 2012 45 Payment requirements with combined billing

Protection and empowerment According to CEER well-defined processes for meter value management are of essential importance to obtain well-functioning processes for switching, billing, moving, etc. The data exchange should be in a standardised electronic format between market actors, in order to obtain automatic, costefficient, timely and reliable data exchange. The regulation of the data exchange should cover at least data formats, timetables and the minimum set of information. DSO, as a neutral market facilitator, should give all suppliers access to the same information on their customers data with regard to billing. It should be guaranteed that the incumbent supplier does not have any advantage due to for example combined computer systems. Finally, according to CEER customers should be offered at least two payment methods of which one has to be free of charge. Payment methods are seen as a way for suppliers to differentiate their products. The customer should have a choice of a minimum set of different billing and payment frequencies, including the possibility of a monthly frequency. The Energy Efficiency Directive 47 The Energy Efficiency Directive adopted in 2012 states the following requirements regarding the billing and payment processes: Network tariffs and regulations should incentivise improvements in energy efficiency and support dynamic pricing for demand response measures by final customers. 48 Flatrate billing based on estimates should only be done if billing can t be based on actual consumption. Customers should not be charged for the billing. 49 Actual consumption data can be provided by an internet based web service or by a meter. Billing should take place on the basis of actual consumption at least once a year. Billing information should be made available at least quarterly, on request or where the consumers have opted to receive electronic billing or else twice yearly. Both models meet requirements Model 1 more in line with recommendations Both models conform to the guidelines for a functioning retail market. However Model 1 may better fulfil the requirement that suppliers should be offered a level playing field. Model 1 is more in line with the guiding principles of customer friendliness and efficiency as it is clearer to both stakeholders and customers and bears more potential for reducing operating costs on a long term. Depending on the specific model solutions chosen, Model 2 bears the potential, that some of the benefits of the incumbent suppliers could still remain. Costs for the independent suppliers to establish the systems and processes for operating in the market may be higher than for the incumbent 47 DIRECTIVE 2012/27/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 October 2012 49 There should be at least one free billing option. 46 Payment requirements with combined billing

suppliers. Cost allocation for IT systems and customer service between the DSO and the supplier may not be as transparent as in Model 1. 5.8 Neutrality of DSOs DSO neutrality one key goal for the combined billing The lack of DSO neutrality has been considered a problem in the current billing regime. All DSOs do not treat independent suppliers and the incumbent supplier equally, which impacts competition. The possibility for the DSO to cooperate with the incumbent supplier in producing a combined bill has created a possible advantage for the incumbent supplier. For example, use of the same shared data systems with the DSO may give the incumbent supplier advantages. In combined billing models, DSO actions may in a worst case scenario make it impossible for the supplier to produce a timely combined bill. A combined billing model may, in principle, enable both the external supplier and the incumbent supplier to produce a combined bill on the same terms, creating a more level playing field for suppliers. HUB or some other data exchange promotes DSO neutrality Neutral and effective data exchange is one prerequisite of a well functioning market. A supplier centric model, which would promote DSO neutrality, will necessitate some type of neutral data exchange and enforced standard processes and rules for data exchange. In both models it is assumed that there is a data exchange HUB through which billing information can be exchanged, which would enforce common rules for data transfer and content and timelines. Ideally the DSO would not know which supplier is delivering to its customers. A prerequisite for this is that data exchange between DSO and the supplier is organized through some type of data exchange solution both for the incumbent supplier and the external supplier. It is especially the HUB which will promote neutral operation of the DSO. In both developed models in this study, it is proposed that there will be entry requirements for the supplier to be able to operate in the market in order to reduce risks to the DSO and customers. The evaluation of whether the supplier can be active in the market is proposed to be done in a centralized way, either by a centralized HUB operator, the TSO or by the regulatory authorities. Model 2 requires more cooperation between suppliers and DSOs than Model 1 Model 2 is transaction based. The individual customer payments need to be collected by the supplier and then transferred to the DSO. The supplier ability to bill and to perform billing related customer service is very much dependent of how well the cooperation between the supplier and the DSO works. Timely and correct data transfer has a high impact on the supplier and the ability to perform the combined billing and customer service function. The high complexity of the interactions and processes necessitates bilateral contacts between the supplier and DSO in tracking payments and coordinating debt collection. Thus the model involves more risk of being impacted by actions and performance of DSOs. 47 Payment requirements with combined billing

In Model 2, the debt collection process is not completely neutral between incumbent and other suppliers. Incumbent suppliers may be able to legally collect debt in a combined debt collection process with the DSO. This is not possible for the independent supplier, unless outsourcing arrangements are made or DSO receivables are sold to the supplier. 48 Payment requirements with combined billing

6 Conclusions 6.1 Performance of the models against NordREG criteria Table 6.1. Overview of how well the Model 1 and 2 fulfils the NordREG criteria for a well functioning Nordic retail market with a supplier centric model with combined billing. NordREG criteria Model 1 Model 2 Customer friendliness One bill to all customers One contact point only with the supplier One debt collection process by the supplier Possibility for flexible billing cycles for customers Multinational customers can get service from the same supplier Suppliers can be more reluctant to grant payment extensions + + + + + - One bill to all customers Two sets of debt collection invoices for customers of external/independent suppliers (unless outsourcing agreements are made for debt collection) Multinational customers can get service from the same supplier Suppliers can be more reluctant to grant payment extensions Customers face the risk of paying twice for network charges in case of supplier default + - + - - Well functioning market Clear responsibilities between DSO and supplier Increase transparency of cost allocation Has potential to create cash flow management problems for suppliers Centralized processes can reduce number of billing errors A harmonized market and simple processes may promote standardization of IT systems and promote competition in IT sector + + - + + Equal risk distribution between DSO and the supplier for receivables Debt collection costs for customers buying from external suppliers may be higher than for those buying from incumbent suppliers Risk for errors because of complex processes, which impact supplier and DSO costs and customer satisfaction Challenges in tracking receivables for both DSO and supplier Complex systems and processes may limit number of suppliers and market entry + - - - - 49 Payment requirements with combined billing

Improved competition Increased efficiency Compliance with EU regulations Likely to reduce number of current suppliers 50 One bill to all customers may increase supplier switching Level playfield with independent and incumbent suppliers Possibility to differentiate billing related services for suppliers Possibility to use same IT systems in whole market area may increase IT supplier interest in entering market Potential for eliminating mass billing system for DSOs Potential for reducing customer service personnel for DSOs Potential for other operative savings for DSOs Reduced cost of debt collection Very high investment costs relating to the transition Possibly somewhat higher costs for supplier customer service - + + + + + + + + - - Likely to reduce number of current suppliers One bill to all customers may increase supplier switching Potential for level playfield with independent and incumbent suppliers Possibility to use same IT systems in whole market area may increase IT supplier interest in entering market Complex processes and systems for billing and debt collection may become a barrier for entry Some operative savings for DSOs High investment costs relating to the transition Higher costs for supplier customer service Some parallel processes Complies with EU regulations and recommendations + Complies with EU regulations and recommendations + - + + + - + - - - DSO neutrality Will guarantee DSO neutrality if common rules and regulations are actively enforced and a HUB solution is used for data and billing information exchange. + Will mostly guarantee DSO neutrality if common rules and regulations are actively enforced and a HUB solution is used for data and billing information exchange. Some bilateral communication between supplier and DSO regarding tracking of payments risk for DSO neutrality + - 50 It is assumed that some supplier may decide to exit the market or will be consolidated 50 Payment requirements with combined billing

6.2 Conclusions Supplier centric model has some benefits From the point of view of electricity retail market customers, a supplier centric model with combined billing provides benefits which may foster additional competition in the market, especially across networks. There is a single point of contact for most electricity related matters. Customers receive only one bill for electricity which lowers the threshold for supplier switching. Integration between the distribution companies and local incumbent suppliers will be broken, which removes some of the advantages to the incumbent suppliers for being associated with a DSO. This creates a level playfield for other suppliers in the area of the DSO. If a supplier centric combined billing model is implemented in a way which enables operating in the Nordic area with the same basic rules and basic business processes, it could make it possible to use the same IT systems in several countries. Customers that use electricity in several Nordic countries can benefit from having only one supplier. The supplier centric model should increase efficiency in the market by reducing the workload for the DSOs. Depending on the implementation, double work and processes related to IT systems, customer services and invoicing can be reduced. Accurate estimates of the total savings potential in a supplier centric model are hard to conduct. Part of the savings for the DSOs will be offset by additional costs for the suppliers. Significant transition costs can occur Changes to the business model require investments in IT-systems and internal procedures both with the suppliers and DSOs. The investments for current systems for DSOs may need to be written down. Also, on a system level, set-up of a possible data exchange HUB and overall changes in the system will require investments on the short term. Potentially obsolete DSO staff will have to be reduced. In many cases the DSO and supplier are part of the same corporation and already have shared customer service and invoicing departments. In this case, the total efficiency gains are low. It can be argued that transformation costs only should not be the key criteria when choosing a long term billing model or market model. Efficiency and lower costs on a long term, reliability and good customer service should be key factors when evaluating what kind of billing and payment option should be chosen. Rules need to be attractive for suppliers Changes towards a supplier centric model will increase responsibilities, costs, and administrative burden of suppliers compared to a current situation. In making the business case of Nordic electricity retail sales feasible, companies will weigh the necessary investments against market potential. Energy risk management is today demanding for suppliers with volatile wholesale prices and multiple price areas. Additionally, the margins in electricity sales at least in some Nordic countries are not considered to be very attractive. All these factor in a decision whether market entry is interesting for a new supplier and if current suppliers are willing to continue to operate in the market. Any additional burden to suppliers can cause suppliers to exit the market altogether or to cease sales outside 51 Payment requirements with combined billing

their areas. It is possible that the retail electricity margins need to rise to attract more competition from new entrants. Model 1: Balancing between retail market competition and DSO risks In the studied Model 1, supplier invoices the total claim, including network charges. The end-user is in debt only to the supplier, making the model clear and customer friendly. Key questions in the retail market design relate in Model 1 to balancing between the need to create attractive conditions for supplier competition and the need to protect DSOs from the risks of supplier insolvency. If consumers in the future pay for the electricity only to the supplier, the counterparty risk of a distribution company changes because the number of counterparties would be reduced to only a few suppliers. If the supplier has the responsibility for collecting debt from consumers and the supplier is obligated to make a payment on behalf of the customer to the distribution company, the credit risk of a supplier will increase. In the supplier centric models, DSOs have no possibility to influence which suppliers can operate in their market area. Such policy is needed to protect the principle of DSO neutrality. Therefore DSOs will be subject to accepting any supplier in their market area. If any requirements are set for the suppliers, this will create an additional barrier for market entry. 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. in addition, 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. These measures will create additional costs in the market and increase market entry barriers for the suppliers, but are required to protect the DSOs, the market, and ultimately consumers. It should be noted that the decision how supplier competition and DSO protection should be balanced is in the end up to a political consideration on market design. More protection will mean higher overall costs and may lower competition, but on the other hand less protection can result in market disturbances, rogue behaviour, and lower trust in the electricity market. Model 2: Less flexibility and complex processes In Model 2 supplier invoices the total claim, including DSO s claim in the name of and for the account of the DSO. However, the customer is in debt both to the DSO and the supplier, making this model more complex from the customer perspective. The main principle in Model 2 is that the billing cycles between the suppliers and the customers and the suppliers and DSOs 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. This creates the need to fix the billing cycles in regulation. In order for the Model 2 to work, efficient processes for debt collection and payment tracking system are needed for the supplier. This may require substantial changes to suppliers current systems at least regarding those suppliers who sell to external DSO areas. Also, payment correction in cases of errors due to the DSO or customer requires a lot of non-standard work for the supplier. Payment 52 Payment requirements with combined billing

tracking also requires cooperation between the DSO and the supplier. Automating this type of process would be challenging and expensive with multiple DSOs and suppliers. The relatively complex transactions could make the processes in Model 2 more prone to errors than Model 1. This may impact customer service and customer satisfaction. Standardised solutions for data exchange, such as a HUB, seem necessary to promote an efficient and neutral billing model Some type of HUB (one or more) solution for data exchange seems necessary for guaranteeing an efficient and neutral market model. National level HUBs may be an efficient solution for providing basic data exchange. The HUB could at a minimum function as a data exchange but the functions could be developed to span also some transactions such as supplier switching, moving etc. A HUB could be used as a regulatory tool to enforce good practices and standards. It should be evaluated where the DSO service billing information should be produced. It can be produced in a HUB or by the DSO. Rating of DSO services by a HUB may be more cost efficient if it makes it possible to eliminate some mass billing system functions from the DSO. This seems possible in Model 1. Avoid unnecessary parallel processes and process exceptions An important question to resolve is how to avoid the confusion when a model seems supplier centric, but in reality is not when contractual relationships are looked at. In a non-payment situation the supplier centric model in Model 2 disintegrates in practice to the current model - customer in debt to DSO and supplier. This means that in situations where payment problems arise, both supplier and DSO need to be active towards end customer in collecting their receivables, unless outsourcing arrangements have been made. This may be confusing for the customer and is not the desired result of a supplier centric combined billing model. Parallel processes and process exceptions may drive costs for IT systems and customer service. When designing any business process, including billing and debt collection, it is critical to take into account both that legacy systems can be used as far as possible and that that the model is simple and cost efficient to implement with new systems. A balanced approach which takes these two needs in consideration can be difficult to design, while taking into account neutrality issues. Harmonization of DSO tariff structures could be beneficial DSOs may need to harmonize tariff structures in both Model 1 and 2. This is necessary if a HUB does the DSO rating or if the supplier does the rating of DSO services. 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. Both models will make dynamic pricing of network services possible in case the DSOs needs to use this type of pricing in the future to be able to provide demand management services. This may be necessary in the future to manage the network better and to use the network more efficiently. The need may arise when there will be more grid connected distributed power production. 53 Payment requirements with combined billing

Standardisation of basic business processes will promote a well functioning market The Nordic market will profit from some standardization, especially regarding data exchange and some of the most common transactions (supplier change, moving, billing etc.) Standardization of some main processes and data exchange, billing and some transactions on a Nordic level will hopefully make it possible for IT system providers to design more standardized systems, which will not require unreasonable amounts of tailoring for each supplier or DSO or for each market. A high degree of tailoring or alternative solutions generate costs which the customer will ultimately pay in their electricity bill. Fostering healthy competition in IT and billing services is important Fostering healthy competition in the IT market and making the Nordic market area interesting for new IT and billing service providers is important. 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 supplier and DSO. Good solutions are needed so that suppliers can develop better customer service and innovate new services. Promote hourly metering and basic standardized business processes To be able to get full benefits from implementing a supplier centric model with combined billing all Nordic countries should ideally be in the same situation regarding hourly metering. This would enable designing processes, which would be similar in the different Nordic countries, which maybe a prerequisite for being able to use the same IT systems in several countries. Being able to use the same IT systems in a larger market area is a key element in making the supplier centric combined billing market model efficient and in promoting competition and cross border sales. It is clear that no solution will be optimal for all stakeholders and some compromises need to be made by both suppliers and DSOs if a supplier centric model with combined billing is to be taken into use. A transition period is needed before implementation to enable planning IT system changes A transition period is needed before adopting a supplier centric billing model in order to make it possible for DSOs and suppliers to plan and optimise IT investments and required process changes. Stakeholders need to know what the chosen model is and to have access to relatively detailed plans well in advance of an implementation. This will increase the possibility for optimal investment decisions, e.g. in phasing of the investments in ordinary IT system updates or cycles for renewing systems. Decisions regarding changes made on very short notice before the required adoption of a new model or a prolonged unclear period regarding solutions would drive investment costs higher. Implications for regulators Regulators will need to take a more active role in enforcing common rules and guidelines. This will require resources. Especially if the monitoring of which suppliers are eligible to enter the market is placed on the regulators the regulators need to make rules and plan the processes and guidelines for this. Some tasks which may need to be coordinated by the regulators may be credit risk control func- 54 Payment requirements with combined billing

tion of suppliers. Additionally, 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 in Model 1 and 2. Supplier centric model may force some current suppliers to exit the market Reduction of the total number of suppliers in the Nordic area is likely as a result of implementing both the Model 1 and 2. Some may not be able to handle the technical requirements for joining a HUB or some other exchange solution. Fulfilling the technical requirement will entail making some investments in new systems or changes in legacy systems. In each of the Nordic countries only a limited number of suppliers are large enough to be able to support operations in more than one country. The reduction of suppliers can thus lead to overall reduction of suppliers in the countries, at least in the short-term. This may lead to lower competition, higher retail margins and higher costs to the consumers compared to the current low retail margins in most Nordic countries. It is assumed that the reduction in the number of suppliers will mostly be the result of consolidation and because of the need for smaller supplier to cooperate regarding customer sales and IT systems. Large companies to benefit most from the change Larger suppliers may be the ones with the most to gain with a supplier centric combined billing model. They will have the potential for economies of scale in implementing the solutions. The larger suppliers may be able to negotiate better terms when buying outsourced services. They have the resources for the necessary administration and will have the financial capabilities for handling possible collateral requirement, supplier credit risk and to manage cash flow efficiently. Larger suppliers may have more interest in cross border sales and sales to external DSO areas. 6.3 Guidelines for further market development Model 1 Supplier responsible for the whole billing process Model 1 seems more efficient and customer friendly than the proposed Model 2. It has the potential to better fulfil the criteria set by NordREG. Therefore it is proposed that Model 1 should be further developed and that the processes be described in further detail. The developed Model 1 is a model where the supplier buys network services from the DSO as a commodity and carries the risks involved with the billing of network services. This is seen as a more customer friendly solution than the alternative billing and payment model. It will make it possible for the customer to get services with one contact. Debt collection can be performed by the supplier who can also in some cases be in charge of disconnection of a customer. The model is simple and straightforward and does not involve many possibilities for errors in the billing process, which could impact customer service and cause additional costs. Tracking of payments is relatively straightforward and will not involve complex bilateral interactions between the DSO and supplier, which can drive system development costs as well as operating costs. 55 Payment requirements with combined billing

Model 1 does not include duplicate processes and the responsibilities between different stakeholders are clear. It would entail simple standardized processes, which would most likely lead to a more efficient billing process. Optimally, if the processes could be designed in such a way that the all the DSO mass billing and invoicing functions can be performed by a supplier and the production of the billing information by for instance a HUB, the DSO would not need a mass billing system. The Model bears the potential to eliminate some functions for the DSO. Given this, the potential cost savings are estimated to be higher for the DSO in Model 1 than in Model 2. Model 1 includes some drawbacks which are related to the fact that in this model the supplier buys services from the DSO and carries also the credit and cash flow risks for the network services. The risks for supplier cash flow have been resolved by giving the supplier additional days to pay the DSO for the network services. The rules for collateral requirements, for instance in the form of bank guarantees, managed by a centralized party covering for instance 2-3 months of DSO receivables should be further evaluated. Model 1, implemented together with a HUB for data exchange, which could perform the rating of DSO services, promotes DSO neutrality. Ideally there will be very little need for direct contact or communication between the DSO and the supplier. In further analysis, the relevant processes should be described on a level which makes it possible to evaluate the costs and benefits of the solution on a reasonably reliable level to be able to evaluate costs for developing systems. This means that transformation costs can be calculated regarding changes to IT systems and customer service. An in depth cost benefit analysis should be done to make it possible to make well informed decisions on whether to implement it in the proposed way and how to implement it in an efficient manner. Needs for further study Sharing of billing data requires a system solution for sharing the measurement and billing data. The design of these systems has not been within the scope of this project. Exact details of the models have not been fixed here in some cases because the data sharing system has not been decided on. In addition, the contractual relationships between the parties were not in the focus of this project. The detailed implementation may affect the division of responsibilities and risks between the parties. Creating a harmonized binding framework for all Nordic countries will require good cooperation between the countries and between the involved stakeholders. In addition one important are to define clearly is what happens in the case of when supplier fails to fulfil their requirements, i.e. what are the rules for supplier of last resort, supplier changes, etc. Detailed cost-benefit analysis of the proposed model compared to status quo has not been included in the scope of this project. The cost of integration will depend highly on what changes are needed for IT systems and related processes. The relative costs can vary significantly between new independent suppliers and existing players, and both viewpoints should be considered. 56 Payment requirements with combined billing

57 Payment requirements with combined billing

References 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. Bröckl, Vanhanen, Virtanen, Harmonization of the Nordic electricity retail market benefits and challenges, Gaia Consulting, 2012 CEER & BEUC, A 2020 Vision for Europe s energy customers, Joint Statement, 13 November 2012 CEER, 2012, Electricity and Gas Retail market design, with a focus on supplier switching and billing Guidelines of Good Practice, Ref: C11-RMF-39-03 Directive 2012/27/EU on energy efficiency. Danish Energy Agency, From combined billing to the wholesale model. New Danish regulation of the electricity market, June 2012 Ernst & Young, Credit risk management in future billing regime, May 2012 Ernst & Young, Taxation issues in future billing regime, May 2012 Eurelectric, 2011, Customer-Centric Retail Markets: A Future-Proof Market Design High level suggestions for common Nordic processes for information exchange- obstacles and possibilities, NordREG 1/2012 Lewis, Philip, Consideration of alternative billing regimes for the common Nordic end-user market (Vaasa ETT), 2011 NordREG, Payment Requirements with Combined Billing, Terms of reference, 30 Oct 2012. NordREG, Road map towards a common harmonised Nordic end-user market, 2012. 58 Payment requirements with combined billing

Appendix 1: Stakeholder feedback Model 1 - Feedback from the stakeholder interviews 51 Customer friendliness Most interviewees see Model 1 as being simple to understand from the customer point of view. The customer contacts would in all normal cases be with the supplier. Given that the supplier in this model is responsible for billing during the whole process, including a possible debt collection phase, the model would be easy to communicate to customers and easy for the customers to understand. The main positive aspect from the customer point of view is that in all phases it will be clear who the customer should contact, including in those instances where the customer has questions concerning the DSO tariffs or DSO billing. This model is considered a normal way of doing business in other markets such as the telecom market. One especially important aspect to be considered in this model is that it does not make it possible for a situation to arise where a third party would suddenly be introduced into the relationship, which is sometimes unavoidable in Model 2, if the customer has not paid the bill in time despite reminders. Introducing the DSO in this type of situation (negative situation) is not seen as something desirable by anyone - neither from the DSO, supplier point of view nor from the customer point of view. Receiving one bill is a customer friendly solution. Most customers find it hard to understand why they receive separate bills for network and energy services. However some pointed out that in the future, when paper bills may not be sent in the same extent as before which may mean that (ebilling and direct debit) the number of bills in a normal situation may not be so critical. More bills may however be acceptable to a customer if the process is convenient and costs are low for handling the bills. Other interviewees pointed out that paper bills are still required by some customers and therefore in making choices, the costs for paper bills are still relevant. Regarding monthly billing, some smaller customers could consider receiving a monthly bill bad service as they are used to receiving bills once a quarter or three times a year. Therefore other options should be possible. However, some negative issues were also raised on implementation of this model regarding customer friendliness. One such negative aspect can be that changing from the current regime with one bill for integrated companies and two for separate DSO and supplier to a mandatory combined bill model may be confusing to customers. However, some argued that many customers, and especially those who have not switched supplier, may not today be aware of this division. Others raised the issue that customers of small local suppliers may not see advantages in switching supplier even given that solution 1 would make this easy and that they would receive a combined bill. Efficiency and costs 51 Most views are based on interviews where the Ernst & Young alternatives were presented and different alternative solutions especially for handling risks discussed. Some validating feedback was also received on model 1, after the model was partially developed. 59 Payment requirements with combined billing

Some interviewees mentioned that if the market model would entail making investments into systems and major changes to business processes, then the starting point of the planning needed to be designing simple, efficient and sensible processes and avoiding unnecessary duplicate processes. The end result should be improved efficiency and improved customer service. Some considered that the whole initiative with combined billing and the supplier centric model would have no point if these two criteria could not be fulfilled. One interviewee considered Model 1 quite near a model, which could be sensible to implement if given a clean slate and without the baggage of the current practices and legacy systems. DSO tariff structures would benefit from being harmonized Some interviewees proposed that DSO tariff structures should be simplified in this model. They considered it unnecessary to continue with the current diversity of tariff structures. Some considered that if this model would involve a HUB type of solution, and if the HUB would be doing the rating service, this would lead to a situation where harmonization of tariff structures would be necessary. A harmonized tariff structure would additionally make it easier for the supplier to provide customer service concerning DSO tariffs, which is an important consideration. However at the same time it was mentioned that more dynamic tariffs may be needed in the future because of the need for demand flexibility services. Model would involve high transformation costs One of the main concerns raised regarding this model is that it will entail many changes to current practices and will change the division of tasks between the supplier and DSO. This will lead to a need to make major changes to business processes and will require making investments in systems and changes in legacy systems. It will also involve major changes in how work is organized within DSOs and suppliers. However, some were of the opinion that, viewed on a long term, changes to the current practices should not be seen as a deterrent if efficiencies, increased competition and customer friendliness are achieved. If a combined bill is in the future mandatory the processes should be designed in a way which will lead to efficient and cost effectiveness and customer friendliness should be a key consideration. Despite some objections, which are related to the risks for the supplier and the DSO, most agree that Model 1 would be more cost efficient on a long term and that it will serve customers better than Model 2 if a truly supplier centric model is the goal and if a combined bill regime becomes mandatory. Achieving efficient processes and technical solutions is seen as being more likely to be realized in Model 1. A prerequisite for this, however, is that there are clear rules and standardized agreement terms in place for the most critical interactions and that some centralized functionality is assigned to national HUB/HUBs 52. Standardized data exchange is seen as key in this model, as in any other future model. 52 A more efficient solution to make these investments in a few centralized HUBs than that bilateral exchange between suppliers and DSOs continues as today. 60 Payment requirements with combined billing

Some were of the opinion that model may eliminate the necessity for companies to invest in tailored systems for data exchange (for bilateral exchange). It may also make it possible to eliminate some billing functionality related to handling DSO receivables, which could be provided in a centralized manner. Some assumed that Model 1 will eliminate the need for DSOs to have mass billing systems and complex other systems since monthly billing will be of suppliers only. This could cut costs for the DSOs. All interviewees assumed that costs would rise for the suppliers for organizing customer service functions and for producing a combined bill. 53 Especially challenging would be transforming current processes and transforming the legacy systems to adapt to the new processes. All interviewees considered it to be very important that the model and its practical implementation would be designed so that processes were simple and clear. Exceptions to the normal processes would not be left, which could drive up costs without producing any substantial benefits for stakeholders and especially customers. Impact on competition Whether or not there would be improved competition, was not clear to the interviewees. Some considered that the model could, if implemented uniformly in the Nordic area, make it easier for new entrants to enter the market than Model 2. New entrants could possibly to see the market as more attractive if most processes are harmonized, making it possible to operate in the Nordic market with the same systems and similar processes. Some considered that combined billing would improve competition. The practical possibility for only the integrated supplier to provide one bill was seen as providing a competitive advantage for the integrated suppliers. Most were of the opinion that a period of consolidation of DSOs and suppliers would follow. Some suppliers would most likely choose to exit the market or would find it necessary to cooperate with other suppliers in organizing joint customer service or billing, to survive. Some considered that the larger suppliers would benefit most from the model. Model could support impartiality of DSOs This model was seen as having the potential to guarantee DSO impartiality. It seemed that a prerequisite for guaranteeing DSO impartiality is some type of HUB/exchange functionality for data exchange. A HUB would act as an intermediary between the supplier and the DSO. It was assumed that a HUB could enforce rules efficiently, which would force the DSOs and suppliers to follow common standards and rules better, than bilateral arrangements ever could. Many were of the opinion that the HUB could, in fact, become a regulatory tool. Model 2 Feedback from stakeholder interviews Customer friendliness 53 Few independent external suppliers produce combined bills today. 61 Payment requirements with combined billing

This model is considered confusing from the customer point of view. There are many serious doubts expressed as to whether this model would be in the customers interest. Most felt it had the potential for being confusing and misleading to the customer especially in certain circumstances. The interviewees pointed out some customer cases, which can be considered problematic in Model 2: A situation where the DSO would be introduced in the debt collection process seemed to all interviewees as very undesirable from the customers, DSOs and suppliers perspective. Another extremely problematic situation is a situation where the customer has paid the supplier but the supplier doesn t pay the DSO as agreed. This can result in a situation where the DSO bills the customer a second time or in a worst case scenario disconnects the consumer. This is a situation which should not be possible in any market model. Another situation which causes problems today in combined billing is when a customer moves and in Model 2 receives the normal bill and an end bill from both the DSO and the supplier. This situation often results in confusion. As a result a customer leaves some of the bills without payment from which a debt collection situation follows. Normal billing situations will need to be handled. Some examples are late payments, partial, payments, wrong reference numbers etc. All the above situations need to be resolved in a clear and effective way. These special but common billing situations were seen as the ones which will make the Model 2 difficult to implement in practice. The interviewees provided few suggestions of actions which could make this model less confusing from a customer point of view. One suggestion which was presented was if it would be possible for the supplier to take care of the debt collection process on behalf of the DSO to avoid the introduction of a third party into the debt collection process. This is in principle possible through outsourcing of the debt collection process to the supplier. Debt collection is normally done per invoice and the counterparty in debt collection needs to be legally the DSO unless it is contractually transferred to the supplier. The model is considered less efficient than Model 1 It was assumed that this model is less efficient than Model 1 and would possibly not lead to savings in system costs. It was assumed that this model would require the DSO to have a mass billing system and to be able to manage receivables and keep a ledger of end customer receivables. The interviewees also foresaw serious challenges in the practical handling of tracking of the receivables and handling special cases where the billing and payment process is no longer straightforward. The only specifically mentioned positive aspect in this model is the fact that it does not introduce additional risk to the supplier and that it will involve less restructuring of operations. However, some considered restructuring operations to be something which could be seen as positive if it would lead to more efficient operations and efficiency when evaluating market function as a whole and on a longer term. The future billing process in Model 2 was not easy to visualize for DSOs and suppliers. Because of the issues described above, external client accounts were not considered a feasible solution. External client accounts would most likely not simplify the model. It introduces a third party to the relationship, which may complicate issues further. 62 Payment requirements with combined billing

Those favouring Model 2 were focused on the supplier risk question Those stakeholders who felt that Model 2 would be a better option were mainly focused on the risk distribution between the DSO and the supplier and especially on the increased risk to the suppliers. The responsibility for billing the network charges and for taking risk related to network service was seen as a major drawback and possible burden, especially for independent suppliers with less financial strength. Some also felt that changing the current practices, which have been challenging to explain to customers, could be confusing. However, even these stakeholders felt that Model 1 would be more efficient and would most likely lead to lower system costs. This would be true, provided that it is implemented in a manner, which focused on efficient processes. A prerequisite is also that good technical solutions and necessary rules and standard practices are established in the market (including some type of HUB or data exchange solution). Some wanted to point out that the current model, which does not require combined billing, has lower entry barriers for new suppliers. Establishing operations is currently relatively simple without combined billing. However some mentioned that the lack of a realistic possibility for independent suppliers to produce combined bill was a major obstacle for competition and gave some incumbent suppliers a clear advantage. The role of a HUB type solution for data exchange which would support combined billing The role of a neutral data exchange (for instance a HUB type solution) is seen as critical in the models. It could promote efficiency and uniform standards and could enforce the rules for information exchange. To implement combined billing most interviewees assumed that a HUB solution would be needed, which would function as a data exchange. The following services should in the opinion of several interviewees be provided by the HUB to support especially Model 1: 1. collect metering data from the DSOs 2. administer connection/ customer ID 3. collect tariff data from DSOs 4. administer the following basic transactions: moving, supplier change, termination of contract/disconnection 5. possibly as an option do the DSO rating (producing billing information for DSO services) The HUB could also have some functionality related to producing billing information (rating) for the DSO, which would simplify billing for the suppliers and could eliminate the need for a mass billing system (CIS) for the DSOs. A HUB could alternatively also be the means to provide up-to-date tariff data, which would be used for producing the billing information of DSO services. DSO neutrality could be promoted by a HUB solution, which would enforce certain rules such as data quality and time limits, which would be common for everyone. The interviews did not, however, provide clear guidance concerning whether the HUB should do rating of DSO services or whether the 63 Payment requirements with combined billing

DSOs should do the rating and the rating information would then transmitted by a HUB to each supplier. Both solutions were seen as possible to implement. There was broad agreement amongst the interviewees on some things which a hub type solution should not in their opinion do: - The HUB should not produce the combined invoice or send the invoice to customers. - The HUB should not do the rating (produce the billing information) for the supplier. If a HUB were to produce the supplier billing information most interviewees considered that this could limit supplier product development and differentiation. - The end customer should not be in direct contact with the HUB. The HUB should not be a customer interface. 64 Payment requirements with combined billing

65 Payment requirements with combined billing

Appendix 2: Interviewees Henrik Hornum, Dansk Energi Jan Jansrud, Guldbrandsdal Energi Anders Wickström, Timo Liiri, Riitta Vaissalo, Timo Toivonen, Fortum Pia Borg, Din El Jonas Persson, Mälarenergi Elnät Rolf Åkesson, Töreboda Energi Jarmo Roiha, Elina Kortessalo, Vattenfall Arnstein Flaskerud, Fjordkraft Akke Kuusela, Paikallisvoima Oy Petter Sandoy, BKK Net AS Jussi Pitkänen, Oy Elkraft Finland Ab Bo Hesselgren, Konsumenternas elmarknadsförbund IT and other service providers Pyry Huhtanen, Nordea Finance Arttu Hollmerus, Lindorff Oy Johan Öhnell, EG Utilities/ Oberoende Elhandlarna Marcus Törnqvist, Daniel Linden, Tieto Mikko Paalumäki, CGI 66 Payment requirements with combined billing