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Dr Christopher Decker Regulatory implications of new products and services in Australian electricity markets FINAL REPORT Prepared by: Dr Christopher Decker 17 July 2015 Table of Contents Summary .................................................................................................................... 1 1. Introduction ............................................................................................................ 4 1.1 Purpose and context of this research .......................................................................... 4 1.2 New products and services in electricity markets ....................................................... 5 1.3 Structure of this paper ................................................................................................. 6 2. Rationales for consumer protection regulation ................................................. 8 2.1 General economic rationales for consumer protection regulations ............................. 8 2.2 The nature of consumer protection regulation .......................................................... 13 2.3 The need for additional consumer protections in retail electricity markets ................ 14 2.4. Interactions between consumer protection policy, competition policy and the wider regulatory framework ................................................................................................ 16 2.5 Summary ................................................................................................................... 19 3. Review of approaches to new products and services in other jurisdictions 21 3.1 United States ............................................................................................................. 21 3.2 European Union ........................................................................................................ 31 3.3 Germany ................................................................................................................... 35 3.4 United Kingdom ......................................................................................................... 42 3.5 The Netherlands ........................................................................................................ 49 3.6 Summary .................................................................................................................. 52 4. Review of approaches in other regulated industries ....................................... 55 4.1 Telecommunications ................................................................................................. 55 4.2 Postal services .......................................................................................................... 62 4.3 Air Transport ............................................................................................................. 67 4.4 Taxis and private transportation ................................................................................ 70 4.5 Gas ............................................................................................................................ 72 4.6 Water and wastewater .............................................................................................. 75 4.7 Peer-to-peer platforms and the sharing economy ..................................................... 78 4.8 Summary ................................................................................................................... 79 References ............................................................................................................... 82 Summary Australian electricity markets are experiencing a period of significant change. A range of new products and services are emerging that are changing the way in which electricity is supplied to consumers, and how consumers engage with the market. The organisations providing these services, and their business models, also differ from traditional suppliers. In aggregate, these changes have potential implications for the approach to the regulation of retail electricity markets and, in particular, on regulations designed to protect electricity consumers. The key findings of this paper, in summary, are: i. For most products and services, robust competition is the best form of consumer protection, and only minimal consumer protection regulations are required. In markets newly opened to competition, such as retail energy markets in Australia, additional consumer protection regulations are frequently premised on a need to: inform consumers of risks, and their rights, in a new, unfamiliar, context; address the new incentives of suppliers in the changed context; and address any differential impacts on consumers of the opening of a market to competition. Consumer-related regulations may also be introduced to help achieve the policy objective of promoting competition in these markets. ii. Consumer protection regulations are not costless. They can have important impacts on supplier (supply side) and consumer (demand side) behaviour, which, in turn, can affect the intensity of competition in a market and the incentives for innovation. Aspects of the wider economic regulatory framework (such as allowed pricing structures) can impact on consumers, including in relation to questions of distribution (for example, whether some consumers are cross-subsiding others), affordability, and, because these aspects impact on the long-term viability of network operators, on consumers’ long-term interests in energy security. iii. A survey of selected countries suggests that a range of new products and services, and new entrants, are emerging in retail electricity markets. In particular, in response to various subsidies and incentives, and declining installation costs, there has been significant growth in the adoption of onsite solar PV technology at the household level (i.e.: behind the meter). However, the financing of this onsite generation differs across jurisdictions surveyed. In the US, a third-party owner-operator financing/leasing model is most common, while in Europe most onsite generation facilities are typically financed by the owner and are funded through a feed-in-tariff (FIT) that sets a guaranteed price for renewable generation for a set period (of up to 20 years). iv. The consumer protection issues, and policy responses, in relation to emerging products and services in electricity markets have differed across the countries surveyed, reflecting different supply contexts and policy frameworks. 1 • The US has seen calls for greater consumer oversight of third party operators of onsite generation facilities following consumer protection concerns around misleading sales practices and general consumer confusion around their rights and obligations under these arrangements. In addition, in some states, third-party operators/owners face potential classification as a ‘utility’, and, accordingly, the same regulatory conditions as traditional electricity suppliers. Another issue in the US has centred around net metering policies, and in particular the uneven distributional impacts of such policies (they have been seen to benefit those who net-meter at the cost of those who don’t). This has led to a review of the net metering policies in some states. • Concerns about consumer protection for onsite generation have not featured to the same extent in the EU countries surveyed, but more general concerns have been expressed about the costs of renewables policies, including in terms of the system balancing costs of intermittency, and the distributional impacts this may be having on certain categories of consumer. In Britain, the energy regulator is currently consulting on the regulatory treatment of non-traditional business models, and third party intermediaries, including in the context of consumer protection. In the Netherlands, a recent change in the law will allow for the trial of local generation supply arrangements without regard to the existing regulatory framework, the purpose being to evaluate what issues arise, and whether a special regulatory regime may be required for local energy generation. • Regulatory policies directed towards consumers who have low-incomes or special needs are sometimes cited as a potential barrier to entry for certain emerging business models. However, different regulatory approaches are adopted across the surveyed jurisdictions to such consumers. In the US, federal and state assistance programmes assist consumers with special needs, or those consumers on low incomes. In Europe, specific consumer protection measures exist for ‘vulnerable’ consumers in electricity markets. However, the concept of ‘vulnerable’ is within the discretion of EU Member States. In some countries, such as Germany and the Netherlands, vulnerability is defined having regard to existing universal social policies, while in the UK, the notion of vulnerability has been interpreted broadly to include situations where a consumer is significantly less able than the typical consumer to represent their interests in the energy market. v. New services and products are challenging traditional services and supply structures in a number of other regulated industries and activities. A brief review of these sectors offers some potential insights to guide the approach to the treatment of new products and services in Australian electricity markets, in particular: • The emergence of over-the-top (OTT) services, such as VoIP, in the telecommunications industry has given rise to similar issues as those associated with the
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