From Universal Service to NO SERVICE?

The Redlining of Vulnerable Electricity Customers in Victoria

Andrea Sharam

Energy Action Group Essendon Community Legal Centre From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

Contents

Executive Summary 2 1. Introduction 1 Energy Action Group 2. Background 4 PO Box 136 North Melbourne 3051 3. Redlining: Definition 6 Tel 041 736 2709 4. The Consumer Protection [email protected] Framework in Victoria for Full Retail Competition 7 www.vicnet.net.au/~eag1/ 4.1 An Obligation to Supply? 7 Incorporated Association No. A0012789L 4.2 Minimum Standards ABN 14025 686 203 Framework: The Terms and Conditions of Supply 9 4.3 The Reserve Pricing Powers 12 4.4 The Concept of the Standing Essendon Community Legal Centre Offer as a Safety Net 13a Wingate Ave Mechanism 12 Ascot Vale 3032 4.5 Residual Market or No Supply? 13 Tel 9376 7929 5. Economic Discrimination 15 [email protected] 5.1 Distribution Tariffs in Victoria 15 www.vicnet.net.au/~essclc/ 5.2 The Electricity Distribution 17 Incorporated Association No. A5484V Pricing Review ABN 99 238 552 414 5.3 Discrimination: A Cost Structure Issue? 17 5.4 Retail Discrimination 18 5.5 Customer Inertia? 20 (c) Andrea Sharam 2001 6. Bundling and Multi-Utilities 21

7. United Kingdom: Emerging ISBN 0-9579653-0-3 Evidence of Redlining 21

8. Analogous Industries in Australia 23

9. Full Retail Competition: Editor: David Hudson Implementation Issues 24 Design: Kronemann Design Studio Pty Ltd 9.1 Lack of Demand Response 25 Printer: Ultimate Commercial Printing Pty Ltd 10. Anti-Redlining Strategies / Safety Net Alternatives? 26 10.1 Eliminating Fuel Poverty 26 10.2 Market Surveillance 28 The Energy Action Group and the Essendon Community Legal Centre 11. Recommendations 28 acknowledge the financial assistance provided by the Lance Reichstein 12. Glossary 29 Foundation for this project, and would like to thank Executive Director Chris Momot and the Board for their enthusiasm and support. 13. References 30

1 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

Executive ONE INTRODUCTION SUMMARY

ictorian households Electricity is widely recognised as an essential In addition, the regulation of the monopoly Not every electricity n developed nations, fuel for heating, cooking and or service, they cannot obtain what is needed or and small business service required for a minimum standard of living distribution businesses - the ‘poles and wires’ function customer is equally lighting are recognised as essential services that are wanted. Firms operating in free markets orientate their Velectricity acceptable to a developed nation like Australia. which comprises between 60 and 80 per cent of the profitable to serve. Not Ifundamental to quality of life. Users do not purchase business towards consumer groups that are able to customers are anticipated household bill - also permits redlining. every area costs the same ‘electricity’ but a ‘means’ to provide heating for their pay. In order to maximise the return on their to become ‘contestable’ In anticipation of ‘full retail competition’, as it is to serve. In a deregulated homes, the capacity to cook, lighting for security and investment, investors seek to increase the margin of called, certain provisions have been made by the Redlining has been well documented in the customers - that is, able to industry, electricity social participation. Electricity is the means by which profit on each sale or per customer. This involves Victorian government and the Office of the Regulator- insurance and credit industries in the United States, key welfare goals are achieved and as such is particular pricing and distribution strategies and the choose their electricity service sellers that General to have minimum standards of consumer and is now a major concern in deregulated considered a ‘right’. In the Australian context, state minimisation of bad debt. It is self-evident why retailer - from January operate solely on a for- protection for these small customers. telecommunications, gas and electricity. Evidence of ownership of electricity supplies for the best part of the expensive luxury stores locate in wealthy suburbs and 2002. profit basis may be redlining has also emerged in the United Kingdom since last century was coupled with the objective of why shops in poor neighbourhoods tend to sell only allowed to choose freely However, breaking with the past and differing from deregulation of electricity. In Australia, the deregulation ‘universal service obligation’ - that all customers are everyday necessities. Where a consumer has no whom they will serve and the United States, the United Kingdom and New of telecommunications and banking has seen entitled to supply at a fair and reasonable price. choice, firms in free markets are able to charge more Zealand, the Victorian government has not mandated substantial changes that could be described as the rate they will charge Universal service in areas like utilities, banking, than is fair and reasonable. Markets work to segment an obligation to supply to households. Rather, it has redlining. It is an economically rational strategy aimed each customer. If they do, insurance and health were underpinned by cross- customers and actively engage in discrimination. It provided for a temporary obligation to offer (the at allocating costs onto customers who have the least they can be expected to subsidies between customer groups, localities and can be either a positive form of discrimination - standing offer) which lasts until December 2003. This capacity to avoid them, or to encourage low return segregate customers by generations. Nevertheless, fuel poverty - deprivation or commonly called ‘cherry-picking’ - and orientated ‘safety net’ provision requires a current host retailer to customers to move to another supplier. In this way, a geographic area, past rationing of fuel - was and remains a social and health towards affluent customers, or it can be negative and offer supply to small customers. The price, however, is retailer can increase their overall rate of return. credit records and income problem. It is caused by several factors: low income, intended to deny service or over-charge for the service. to be set above the market in order to not undermine level, and sell to the most poor thermal quality of the housing stock, poor In the United States, such negative economic competition, which effectively means that vulnerable This report recommends that there be a legal attractive customers. If appliances (especially space and hot water heating), discrimination - sometimes based on racial and other customers will be forced to pay a premium above the obligation to supply and that an anti-redlining consumer they do, what quality at tariff structures and lack of an appropriate welfare prejudices, but not exclusively so - is called ‘redlining’. market. If they cannot afford to do so, they will be protection framework be developed for full retail what price can people in safety net. denied supply. competition. high-cost, difficult to The United States provides a useful contrast and a The supply of electricity in Victoria has undergone powerful lesson in market design. In areas such as serve, areas expect? How After 2003 there is no obligation to supply or offer. It also recommends that: radical reform over the past ten years, intended to insurance and banking, price/service discrimination has will people with lower In markets, not all customers are equal, and therefore • The standing offers be abandoned in favour transform the industry from a state owned monopoly been rife for decades. Consumer organisations and low incomes be assured they are not treated equally. Vulnerable customers - those on of another mechanism to protect vulnerable business to a fully competitive market. The final act of income advocates quickly recognised the emergence of can afford electric low incomes, with low consumption, in rental housing, customers who are unable to obtain the reform process is to deregulate the supply of energy a familiar pattern once the United States deregulated in rural and remote areas or who have experienced benefits in the market; service? Unless these to households in January 2002. ‘Full retail competition’ its telecommunications industry. As various states payment problems in the past - will all be at risk of • Substantial effort be made to reduce questions are equitably (FRC), as it is called, anticipates that residential users deregulate their electricity supply industries, redlining price/service discrimination in such a market. This household consumption and that cross- resolved, deregulation will be able to purchase their energy from a range of has already become a major issue. The United discrimination is called ‘redlining’. subsidies for air conditioning load, in will not benefit the whole competing providers. This is a profound change. Not Kingdom, importantly, provides empirical evidence of particular, be removed; nation (Alliance to Protect only is the concept of universal service to be redlining, post-FRC. Victoria stands in stark contrast to The consumer protection framework for full retail • Reduction in consumption of vulnerable Electricity Consumers abandoned, but there is to be no fundamental obligation the United States, the United Kingdom and New competition or the ‘minimum standards’ do not protect households be linked to a safety net, with [US]: 1998). to supply: the market is to determine the receipt of Zealand, who all deregulated their electricity industries, vulnerable customers from redlining, but in many emphasis on retrofitting; and benefits. This report argues that, under the current in that each of these countries has maintained a legal instances enable it to occur. The obligation to offer • The governments oversighting the National arrangements for FRC, this will mean a change from obligation to the right of supply at a fair and reasonable provision itself, as a legally sanctioned monopoly price, Electricity Market address a number of universal service to no service for many Victorian price. Victoria does not and, as a consequence, the redlines all customers from the outset, achieving what serious flaws in the market as a matter of households. It is also likely to mean that a great number effects of the markets on vulnerable customers are it would take the market some years to achieve. urgency. will be effectively forced to pay more than they should likely to be much more severe. for this essential service in order to secure supply. Market segmentation in a deregulated electricity industry is a two-part strategy. Firstly, it seeks to Consumer participation in markets is reliant on two discriminate in favour of those customers who can be key factors: the consumer’s ability to pay and the right encouraged to increase their consumption and those to be served. Where a consumer cannot afford a good with attractive consumption profiles. Secondly, it 2 3 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

marginalises those with low consumption electricity poles and wires (the distribution political hurdle for governments embracing National Electricity Code Administrator (NECA). The NEM lacks appropriate information The only grounds on which customers are and/or low income because they contribute function) is based on allowing economic market reform. This report outlines the Both NEMMCO and NECA are limited liability levels for all customers, does not permit differentiated are economic grounds, the very little to marginal revenues. These customers discrimination against small customers, measures that can and should be taken to companies constituted under the Corporations appropriate price signals, and generation grounds in which low income consumers are can be forced to contribute additional revenues reflecting traditional utility pricing practices. protect vulnerable electricity customers. Such Law and oversighted by boards appointed by ownership is arguably concentrated enough to exposed to discrimination as they require simply through monopoly pricing. The problem Moreover, redlining is not so new to Australia. protection - indeed, the elimination of fuel the state jurisdictions. The Australian allow market manipulation. The reliance on flexibility in debt collection practices and credit is that the utilities have economic incentives to Privatisation and deregulation of poverty - is possible with a ‘whole of Competition and Consumer Commission market discipline to deliver consumer benefits management policies...this lack of promote growth in consumption and, within a telecommunications and banking has quickly government’ approach. Victoria’s electricity (ACCC) has a role in authorising changes to the therefore is perhaps misplaced. understanding has resulted in many low income deregulated environment, a shorter timeframe and very publicly demonstrated the impact of prices have traditionally been relatively cheap, NEC by adjudicating access issues and people having to go without energy, water or in which to recover costs. Price discrimination markets on vulnerable customers of essential but a focus on the causes of fuel poverty has determining transmission pricing. The monopoly other essential services. Low income people does not reflect the cost incurred by the services. been lacking. The existing welfare safety net distribution function is regulated at the state experiencing difficulty paying their bills are customer, but the customer’s possible has not served the needs of the most vulnerable level; in Victoria, this is done by the Office of the the industry does confronted with disconnection or restriction, or contribution to revenue. As such, the claim of This report closely examines the Victorian customers. A ‘whole of government’ approach Regulator-General (ORG). The customer not have the they sacrifice essential expenditure, such as economic efficiency that is used to justify consumer protection framework for FRC, should address the poor housing stock and poor interface rules for full retail competition are also characteristics that food and clothing, to be able to pay their energy discrimination is challengeable. arguing that not only does it fail to recognise the appliances, mandate appropriate tariff being developed at the state level. Domestic and water bills. inherently discriminatory nature of markets, but structures and match financial rebates with customers are not directly engaged in any of are held to exist in Not only are the traditionally ‘fuel poor’ that the current arrangements actually facilitate programs to reduce consumption. these processes. The state-based Electricity ‘perfect’ markets. Romeril (1998) presents evidence of the likely to be targeted, but a new grouping of such discrimination. Broader FRC Industry Ombudsman of Victoria (EIOV) scheme substantial increase in disconnection during the customers, including those in rural and remote implementation issues are given some To that end, this report seeks to encourage was established to handle consumer corporatisation and early privatisation phases of areas, will find themselves with poorer access attention, raising questions of how functional debate around the implementation of safety complaints. electricity reform. Economist Roger Colton to this service at a more expensive price. the model really is, whether competition will nets and whether these really are the solution From a welfare perspective, an important (1995a: 1) also points to the rush to disconnect occur and at what price. to redlining, or whether there needs to be a The marketisation of the electricity industry aspect of the reform process has been the when California deregulated its electricity This report shows that the cost structure of fundamental shift in our thinking about the must be acknowledged as problematic from the removal of ‘social programs’ from the utilities industry: the industry itself promotes discriminatory The inevitability of redlining of customers of nature of competition. outset because the industry does not have themselves and the re-creation of some of pricing. The regulation of the monopoly essential services poses a serious policy and the characteristics that are held to exist in these programs as ‘community service Southern California Edison has already cited ‘perfect’ markets. obligations’ (CSOs). Victorian retailers, for competition as the primary reason to change its example, are paid by the government to deliver collection practices. In that case Southern For example: its winter energy concession program. Other California Edison chose to treble its service • Electricity must be used as it is produced important programs such as demand disconnection (up to one million customers in TWO and cannot be stored in quantity as with management and retrofitting have been 1995 alone), citing competition as the main BACKGROUND conventional commodities; abandoned. However, certain utility practices reason it was calling in debt. • Significant parts of the industry both implicitly and explicitly contain social (distribution and transmission) will always objectives. Tariff structures, for example, can be Both Colton (1995a) and Kliger (1998) state In the 1990s, following the rom 1993, the Kennett government in Victoria entering the market each year thereafter. In the initial be monopolies; highly regressive (as they are currently) or that debt and disconnection policies need to recommendations of the integrated the distribution and retail functions of years, contestable customers achieved considerable progressive. The Kennett government intended recognise the requirement for repayment plans • The purchase by households is non- National Competition Feleven municipal electricity undertakings with price cuts, primarily as a result of generators seeking to to have the reform of the electricity industry to be based on the customer’s ability to pay in discretionary (inelastic demand) and is in Policy Report (Hilmer assets from the State Electricity Commission of Victoria gain market share and the existence of the Master result in cost reflective pricing or ‘user pays’. In order to ultimately avoid disconnection. In some many instances non-substitutional; 1993), the Council of (SECV), then disaggregated and corporatised the Vesting Contracts underpinning the Maximum Uniform doing so, it was dismantling the central situations, Kliger argued, this will require • For large customers, it may be difficult or Australian Governments various business units and later privatised all the Tariff (MUT) for franchise (captive small business and redistributive function provided by the SECV. moratoriums and waivers. too expensive to substitute the fuel source; agreed to the reform of businesses with the exception of the SEC shell household) customers. Full retail competition (the entry FRC as it is currently being pursued is likely to and the state owned company. The government considered that markets of the smallest business customers and households achieve this end. It is therefore an oxymoron to electricity supplies. A deliver greater economic benefits than public sector into the market) was scheduled to commence in • Substantial public goods and merit goods suggest that vulnerable customers are national grid was provision. Promised benefits included lower January 2001, but this was delayed by a year. are involved (welfare, rural development) protected, let alone that they will be established from the state- prices, better customer service and greater and significant negative externalities exist beneficiaries of full retail competition. based systems; reliability of supply. This would derive from more The NEM is oversighted by its five participating (pollution). competition between efficient investment decisions made by private firms in government jurisdictions: New South Wales, Victoria, The Financial and Consumer Rights Council generation companies generation, transmission and distribution, and by the Queensland, the Australian Capital Territory and South A perfect market should have: argues on the basis of two sets of case studies was envisaged and a (Benvenuti and Walker 1995; Kliger 1998) that customer focus of retail companies. Australia. It is managed by the National Electricity • Many consumers and suppliers; separate retail market Market Management Company (NEMMCO) that has vulnerable consumers are already worse off • Perfect information; and created. The outcome was Retail competition was introduced on a staged the dual roles of operating the actual market (which is because of the emphasis on market objectives. the National Electricity basis, with the state’s three largest consumers akin to the stock exchange) and ensuring system • Appropriate pricing signals to which As Kliger (1998: 2) said: Market (NEM) that formally buyers can respond and influence the becoming contestable in 1995 and successive security. The rules of the market are contained within started in 1998. market outcome. ‘tranches’ (groups) of smaller and smaller customers the National Electricity Code (NEC) administered by the 4 5 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

THREE REDLINING FOUR THE CONSUMER DEFINITION PROTECTION FRAMEWORK IN VICTORIA FOR FULL RETAIL COMPETITION ‘Redlining’ is a US term that refers he state of Georgia (1997) provided the following Recognition of economic discrimination provides an to the practice of literally drawing definition in a bill supporting anti-redlining important distinction between rational and irrational 4.1 AN OBLIGATION TO SUPPLY? a red line around an area on a Tlegislation for the insurance industry: market behaviour. Colton (1999: 69) says: map in order to clearly delineate The consumer protection The following tables set out the three main contract types, their purpose and application. framework for full retail it for discrimination in the delivery the term ‘redlining’ means a pervasive and Defining the type of market exclusion that one seeks Table 1: Deemed Contracts competition in Victoria is of a service or good. This was the consistent policy of discrimination, whether in the form to prevent is important for purposes of deciding upon the mandated by the Electricity method by which credit providers of differences in rates charged, policy applications public policy responses establishing appropriate Industry Acts (Amendment) Purpose • Transfer all franchise customers from MUT (MUT ended December 2000) and insurers in the United States denied, policy cancellations, absence of offices or remedies for the objectionable behavior. If, on the one Act 2000. Section 169A • Maintain near uniform prices across Victoria provides for the creation of identified neighbourhoods they •Provide transitional arrangement, to avoid all customers needing agents, employment practices, or any other indicia of a hand, the exclusion which one seeks to prevent involves what are now called the wished to deny service because desire not to do business in any area defined by a irrational and uneconomic decision making (e.g. based standing offers and Section to switch on first day market is open of views about the customers’ population of African Americans, Latinos, Asians, or low on stereotypes and prejudice), the appropriate response 169B for the deemed contracts. Both sections credit worthiness or assessment income persons. might be simply to promote increased competition. This • Three year duration only (ending December 2003) oblige the ORG to set the Application of possible profits. Historically, competition would increase the potential emergence of terms and conditions of • Subject to government reserve pricing powers this concerns a perception of Colton (1999) proposed the following wording for a firm that would serve this unserved, or under-served, supply, excluding prices. • Prices must be gazetted 60 days prior to commencement financial risk correlating with legislation for the state of Colorado as it prepared for yet profitable market. Prices are to be set by the retailers, subject to reserve • Fixed price (no pass-throughs) race and/or crime, hence deregulation of its electricity industry: pricing powers contained in • Service standards/conditions must comply with ORG Retail Code neighbourhoods that were If, on the other hand, the market exclusion which Section 158AA. The deemed generally black, ethnic and/or It shall be unlawful for any electric service provider one seeks to prevent involves economically rational contracts simply transfer the poor were targeted. In this sense, franchised small business to discriminate against any person with respect to any decision making, promoting additional competition and residential customers Table 2: Standing Offers it has a geographical basis: all aspect of a consumer transaction on the basis of race, would not be the appropriate public policy response. It from the MUT which expired persons within a particular area on 31 December 2000 to a color, creed, national origin, age, gender, religion, was the economics of the situation that created the Purpose • Provide a safety net for consumers (retailers required to make offer) will be discriminated against source of income, receipt of public benefits, family status, exclusion in the first place. temporary tariff that will cease to exist after regardless of race, although the credit status, sexual orientation, disability, or geographical December 2003. The Application • Subject to government reserve pricing powers discrimination is effectively racist location. In the context of human rights law in Australia, provisions of Section 169A • Prices must be gazetted 60 days prior to commencement in origin. Property insurance, for irrational market behaviour based on racism, for require that retail licensees example, may be denied because are obliged to offer a tariff • Fixed price (no pass-throughs) These definitions reflect much of what is contained example, is isolated. Colton’s second point is highly (subject to ORG approval) to of a fear of civil unrest in poor • Service standards/conditions must comply with ORG Retail Code with human rights legislation in Victorian and relevant in the Australian context of market-based small business and predominantly ‘black’ • Opportunity to vary conditions as per Retail Code Commonwealth statutes. The main distinction is the reform. The apparent objective of large banks to refuse residential customers until neighbourhoods. Not only are the inclusion of matters pertaining to ‘economic rights’. To service to small account holders directly relates to so- 31 December 2003. The • Sunset provision (December 2003) black people discriminated government put both this end, such a definition could be described as a ‘bill called rational economic behaviour. However, the rise of sections of the Act into against, but so are any other of rights’ for small consumers. But, as the state of New ‘community banking’ in rural areas subsequent to the effect by the Order in groups who happen to live in the York Public Services Commission (2001) points out, a withdrawal of commercial banking services may point Council of 21 September The deemed contracts and standing offers are currently identical in price and conditions, with the area. By and large, the practice is 2000. However, the issue of general legal obligation to supply removes the need to to behaviour on the part of the ‘big banks’ that may exception of Origin’s internet-based standing offer. outlawed in the United States, but how pricing oversight of identify individually all the forms of discrimination that challenge what is to be regarded as economically deemed contracts and minority rights groups maintain Table 3: Market Contracts may be envisaged. rational. Both are examples of economic discrimination, standing offers would be that it continues and providers are managed in practice was not but the issue is one of degrees of profitability. Rural still being taken to court. As new subject to public Purpose • Deregulation of customer/supplier relationship Price/service discrimination has a positive as well banking can deliver profits, but are those profits high consultation at the time, and industries emerge, new redlining as a negative aspect. Competition for affluent enough to satisfy shareholders? the legislative and regulatory appears. Internet-based store Application • Tariff negotiated between retailer and customer (attractive) customers is known as ‘cherry-picking’. In a instruments are silent on the Kozmo.com has already attracted matter. It took until the • No obligation to offer market that will permit bundling of non-utility services Later in this report we shall return in more depth to middle of 2001 for the the attention of the Equal Rights • Permits pass-throughs such as ancillary service payments with electricity provision, these customers have even the issue of economic discrimination. government to initiate the Centre for engaging in ‘consumer greater attraction. It provides the scope for cross- development of pricing • Tariffs/prices not required to be published racism’ (ZD Net News 2001). guidelines by a ‘Special subsidisation between different products or services as • Compliance with Retail Code but self-regulation Reference’ to the ORG under well as between customer classes. Part 4A of the Act. • Conditions can be varied

6 7 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

All residential customers are currently on a made the following comments in her Second It is the government’s view that the power Table 4: ORG Final Decision Minimum Standards Framework for Full Retail 4.2 MINIMUM STANDARDS deemed contract but, as these are transitional, Reading speech when the Electricity Industry should only be exercised if a de facto monopoly Competition, August 2000 (excerpt of provisions) RAMEWORK it is expected that customers will move onto Acts (Amendment) Bill was introduced in the exists and that the party holding that de facto F : The Terms Provision Requirement: full Comment either market contracts or a standing offer after Legislative Council on 30 May 2000: monopoly has or appears to have set retail and & Conditions of Supply retail competition the market opens. They will be able to go onto prices that result in it obtaining a monopoly rent he ORG was required by Sections 169A In addition, effective competition for 4.3.4 Graphs The existing standard to display a Retailers will be able to encourage a market contract offered by any retailer or (Hansard, Parliament of Victoria, Legislative and 169B of the Electricity Industry Acts domestic and small business customers must be graphical illustration of a customer’s customers onto market contracts by offering accept the standing offer(s) of Citipower, TXU, Council: 1415). (Amendment) Act 2000 to develop the matched with long-term consumer protections consumption will be retained, but a discounted price for omitting the T Origin, Pulse or AGLE. These standing offers customers can vary this standard when consumption graph. Graphs not only allow terms and conditions of supply for the deemed will cease to exist after December 2003 such as minimum standards, supplier of last This speech was preceded by earlier debate negotiating direct contracts with retailers. the customer to manage their consumption, and standing offer customers. In addition, it has unless rolled over by legislation. Therefore only resort protections, delivery of community service in the Legislative Assembly on 24 May in which but provide a wider benefit in terms of undertaken to develop the broader consumer market contracts will exist from 2004. These obligations and provision of minimum customer government Member for Dandenong North, demand management and greenhouse gas protection framework for small business and rights. The bill makes provision for both those will differ from the deemed and standing offers John Lenders, said: reductions. residential consumers, including a revision of and other matters too. in that they allow greater discretion to the Another feather in the government’s cap is the former Sale and Supply Code in order to retailers about what is involved in the offer. For the creation through the bill of fundamental 5.1.1 Issuing The three monthly cycle should be ORG’s usage of ‘explicit informed consent’ make the provisions technically applicable to full example, they may choose to shift the risk of However, the government is concerned that consumer protection rights for domestic and of bills maintained for FRC, with customers able to has been roundly criticised because it does competition. The Sale and Supply Code in its the protection afforded by the competitive ancillary service payments (ASPs) that are ad small business consumers. The bill will put in vary this cycle by agreement with their not really mean explicit or informed, merely new form is called the Retail Code. Other wider market may not be adequate for the last group hoc wholesale market levies onto the customer. place a supplier of last resort scheme to ensure retailers when under direct contract, as long that the customer accepts the conditions. regulatory decisions are contained within the of franchise customers including domestic and Victorian households have never previously that ultimately there is always a retailer from as explicit informed consent has been given. Whilst strictly speaking not necessarily a Minimum Standards Framework for Full Retail small business customers, particularly in the been subject to such charges, and it likely that whom electricity can be bought. These are Deemed customers who currently receive redlining provision, it may act to radically Competition (Minimum Standards). customer ignorance of them will result in many initial stages of the market’s development. important features of the legislation. The bill also monthly bills should remain on monthly bills. disempower certain customers. Retailers will be able to issue bills (as an example) accepting contracts that provide for pass- places obligations on electricity retailers to Part of the revision has been an assumption once a year but direct debit more frequently. through. It may mean an additional five cents on perform community services and provides for that monopoly provision requires a more These standing offers It is a likely tactic for dealing with low one bill, but an additional hundred dollars on the deemed contractors to carry over domestic and income households who may trade off prescriptive consumer protection framework next. ASPs are unpredictable in timing and will cease to exist small business customers from January 2001 receiving regular bills for some discount, but than when competition exists. As markets amount. after December 2003 (Hansard, Parliament of Victoria, Legislative may find themselves with little practical provide choice, there is a belief that market Assembly: 1719). control over payment or consumption. discipline will prevent market abuse. Hence, the A highly significant change is embodied in Minimum Standards incorporate a view that There are two reasons for this concern: Section 169A of the Electricity Industry Acts Broad’s speech was followed in the Council 5.3 Payment As basic terms and conditions, customers The cheapest payment options are those retailers and customers should be able to (Amendment) Act 2000. The consumer by another government member, Glenys methods must have the payment options of mail, predominantly available to affluent and negotiate some aspects of the 1. the technical systems required to facilitate protection framework does not countenance Romanes, on 31 May: direct debit and cash payment at a network educated households (e.g. internet). The supply/consumption relationship. Retailers retail competition for that group of any obligation to supply. Rather, the Bracks In addition, in putting forward a fundamental of agencies or outlets. No transaction fees second part of this clause in effect permits require ‘regulatory space’ to innovate, and customers may not be fully implemented by government has provided for an obligation to consumer rights protection regime, the bill will be permitted for over the counter ‘user pays’. As the number of people paying by customers will display their preferences by 1 January 2001, so that, although legally payments. a particular method dwindles, the cost per offer only, and even this is temporary in nature. provides for a supplier of last resort obligation on willingly exchanging certain protections in order entitled to choose between retailers from Customers may be able to vary this range of account grows (a common problem in residual The United States, United Kingdom and New the retail electricity industry to ensure there is to secure an alternative (and presumedly that date, it may not be possible in choices by agreement. Retailers should be markets). It is not difficult to see pressure from Zealand reforms all maintain the obligation to always a retailer from whom electricity can be better) benefit. practice for the customers to do so; and able to pass on the administrative charges retailers to charge for over the counter supply. The standing offer only guarantees bought. Further, it recognises and references 2. it is likely to take some time for those of the various payment methods to recover payments. The aged are especially vulnerable if access to supply if the customer is able to pay obligations on electricity retailers to perform costs. this was to happen. In providing the opportunity to innovate, the customers to become adequately informed the price being offered. As later developments community services. Many of those community Minimum Standards framework does not about the choices available to them and have revealed, that price is to be higher than services are already in place, but the bill 6.4 Assessment Retailers will be required to: Such clauses do not address fuel poverty merely permit redlining, but actually how those choices can be exercised. market contracts and, as such, is by definition provides an opportunity to recognise them, of capacity • Ensure timely assessment of issues. Unless there is recognition that provides an institutional framework in which capacity to pay; discriminatory and harmful to those it is reference them and ensure that they are to pay payment must be based on the it is encouraged. The following tables describe As a result of these concerns, the government • Seek assistance from financial customers’ capacity to pay and involve the clauses that establish such a framework. presumably intended to protect. maintained (Hansard, Parliament of Victoria, counsellors if they are unable to wishes to ensure that it has the necessary the potential for debt forgiveness, as well Legislative Council: 1490). adequately assess capacity to reserve power to regulate retail prices payable as retrofitting (to address the likely cause There is a very noticeable lack of policy pay; and Market contracts will aim at improving the by this last group of franchise customers, or, of problems), this clause is meaningless. articulation from government on this matter. An These two speeches seem to confuse the • Document formal procedures on cashflow position of the retailer. Retailers will possibly, a subset of those customers, as a Both price and consumption contribute to examination of the parliamentary debates, concept of retailer of last resort (which refers to capacity to pay which is available to seek to increase the usage of direct debit, transitional measure until a competitive retail customers on request. customers getting into debt media releases and ministerial speeches shows the unplanned exit of a retailer from the market) minimise the necessity for meter readings and market is adequately developed. Whether the Customers will be required to advise and arrears. an absence of specific engagement on the with the obligation to offer (standing offer). shorten the collection cycle. Customers are power is exercised will depend on the extent to retailers when they experience payment issue of obligation to supply. The government Moreover, it is clear that neither member has difficulties. likely to be offered some financial incentive to which the government is satisfied with the retail could be accused of misleading the parliament understood that the legislation does not provide move from the current three monthly cycle. prices offered by the incumbent retailers to because it infers a protection that does not for the most fundamental right - that of supply. Discounts for the adoption of direct debit are of apply on and after 1 January 2001. exist. The Minister for Energy, Candy Broad, particular concern for low income households. 8 9 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

Table 5: ORG Electricity Retail Competition for Small Customers Position Direct debit removes the discretion to choose (a) The Office must monitor the licensee’s Paper: Obligation to Offer Terms of Supply, Default Retailer and Price between competing financial demands. 5.3 What Retailers should not be prevented from Having a disclosed standing offer and an compliance with the customer-related Information Disclosure, November 2000 (excerpt of provisions) Moreover, lack of control over timing places ability should reducing the price of their Default or undisclosed market contract is the standards, procedures, policies and considerable risk of bank dishonour fees on the practices developed by the licensee in retailers have Standing Tariffs to meet competition. mechanism that permits redlining. Provision Requirement: full Comment account holder. Cost per user of the ‘old However, ORG does not believe that Retailers can tailor tariffs to the customers accordance with the conditions; and to negotiate retail competition fashioned’ system rises as fewer customers retailers should be allowed to charge they want (they are under no obligation to (b) if the Office considers that any of the against the use it (an increasingly expensive residual different prices to different customers for offer market contracts). Customers they customer-related standards, There should be a general obligation applying This clause allows non-host retailers to published 3.1 Which market). After a period it is likely to be tariffs incorporating exactly the same do not want can be relegated to the more procedures, policies and practices, or to all retailers to offer terms of supply on cherry-pick the more affluent customers and retailers have abandoned for cost reasons, forcing all tariffs? terms and conditions. This would not expensive standing offers. compliance by the licensee with any request within their licensed supply area (i.e. increases the likelihood of residual (poorer) preclude retailers from developing a range an obligation customers into the ‘modern’ system - a regime of them, disadvantages, or may the state of Victoria). customers being captive to their host retailer of Standard or Market Tariffs incorporating to offer? that does not necessarily meet their needs. disadvantage any class of its But, as an interim measure, no obligation for - and hence subject to monopoly pricing. different terms and conditions at varying Besides issues of accountability in adoption of customers, or all of its customers, the second tier retailers to offer terms of supply to prices. customers using below 160 MWh from 1 highly automated systems (One-Tel is a relevant Office may make a determination January 2001. example where direct debits continued after requiring the licensee to modify or the company’s collapse), new technologies are revoke any part of the standards, capable of delivering efficiency gains, but this procedures, policies or practices. 3.2 Which Once all customers have a choice of If the obligation to offer is removed, some particular innovation is most suited to customer 5.4 Which All customers in the <160 MWh/year Markets only function properly when the retailer, the obligation to offer terms of customers will not be able to secure customers groups that are well off, educated and internet customers tranche. customers have perfect knowledge. If Sections (a) and (b) appear to impose upon supply should apply to all customers supply, because no retailer will be obliged literate. For customers who need longer there is no obligation to publish any prices the ORG an obligation to identify and remedy should be should be below 160 MWh. ORG will consider to do so. More than any other group, the ORG will also consider, however, whether and it is difficult to obtain pricing protected by collection cycles because of small disposable disadvantage. The redlining provisions of the whether it is appropriate to roll back the ‘hard to serve’ customers - those with protected by incomes or who want to pay over the counter it is appropriate to roll back the application information, there is a clear potential for Minimum Standards, however, mean the ORG an obligation application of this obligation once it debt and/or poor payment history - will be the obligation because it is what they understand, a premium will of the obligation once it considers market abuse. will permit licensees to engage in such to offer supply? considers competition to be fully refused service. to publish competition to be fully effectively be charged to have this option. discrimination. The generic nature of the established, and will provide advice to the prices? established. government in this regard. Discounting of certain payment methods introduces government’s statements in regard to their another level of discriminatory pricing practices. legislation does help us to interpret this clause. This obligation is also currently subject to a sunset clause of 31 December 2003. The Retail Code and Minimum Standards It is also difficult to see how the standing conceive of competition in electricity retailing offers do not conflict with the objectives of the as it has been conducted since contestability proposed Essential Services Commission (ESC). was introduced - as an individual client-based Objective (1) states: 5.1 To what All retailers should be required to publish Only the deemed contracts and standing relationship. This may be reasonable given the Table 6: ORG Draft Electricity Customer Transfer Code, 17 August 2001 extent should their Standard and Default Tariffs in the offers are required to be published. The smallness of the market to date and the nature (excerpt of provisions) In performing its functions and exercising its Government Gazette under Section 35 of lack of obligation for market contracts to retailers be of the demand of individual large customers powers, the primary objective of the the Electricity Industry Act 2000. be published denies the customer the obliged to (and the requirement for real time Commission is to protect the interests of Retailers should be permitted to offer opportunity to know the market clearing S5.1 valid Must be aggregated debt of more than This provision recognises that blocking communicative interval metering, required by Victorian consumers with regard to the price, publish all wider selection of tariffs tailored to price. The very existence of undisclosed $200; not be in dispute; be outstanding transfer, and hence the possibility of a the NEC). However, this does not mean that it objections quality and reliability of essential services. prices? individual customer groups without a prices and customer specific offers is a for at least 40 business days; customers customer accessing a cheaper price, is a is appropriate for mass contestability. The ORG on the ground requirement to publish these. For redlining provision: It allows retailers to have been offered restructured payment major impediment for vulnerable of certified published tariffs, retailers should include choose their customers, rather than has been very concerned to provide the terms; and other than debt for which customers participating in the market. And (2) states: sufficient information, e.g. breakdown of allowing the customer to accept a retailers with the opportunity to innovate. But, debt held restructured payment terms have been However, like the Retail Code itself, the the component charges, to allow a generally offered deal. combined with lack of obligation to supply and by the retailer agreed to and adhered to for at least restructured payment option fails to be ...the Commission must have regard to customer to calculate total cost given the lack of emphasis on information disclosure, three months. defined in terms of what is affordable to the following facilitating objectives... their consumption level/pattern. the ORG’s approach could be regarded as naïve. the customer. This provision is likely to mean (f) to ensure that users and consumers that the most vulnerable are locked into their (including low income or vulnerable It is difficult to reconcile the creation of existing retailer or are denied supply. customers) benefit from the gains from standing offers, and their consequent treatment competition and efficiency. by the ORG in setting the Minimum Standards, with another requirement of the Electricity However, the ESC legislation is to be Industry Acts (Amendment) Act 2000. Section subservient to the Electricity Industry Act 2000, 163(8) states: if there is any conflict between the two.

If a licence is subject to conditions of a kind referred to in sub-section (3)(k) -

10 11 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

US states has been a lack of competition, access to supply as households will be unable The approach of most jurisdictions in the effect being unofficially reinstated as default be able to access supply in a market situation. 4.3 THE RESERVE primarily because of the safety net tariffs being to accept the offer at the price at which it is United States that have opened competition to aggregators, which in effect amounts to re- The ORG (2000a: 11), in interpreting the RICING OWERS P P set too low. Rosen, Sverrisson and Stutz (2000) tendered. There will also be an increased households is significantly different to Victoria’s. monopolisation. government’s intention, suggested: cite the Pennsylvania default provider service burden on social services in terms of increased By and large, they priced the default tariff at the ection 158AA of the Electricity Industry being priced without the inclusion of retail demand for emergency relief and with the wholesale energy price, effectively undermining The Power Exchange is not - as some It must be recognised that not all customers Acts (Amendment) Act 2000 provides the costs, and how this has deterred competition health and social consequences of households competition. A number of observers noted that revisionists have recently argued - the will be equally attractive to competing Sgovernment with the right to intervene from alternative providers. Some states going without supply. there is a political interest in delivering price competitive market that Californians were retailers; therefore there is a need to ensure and set retail prices for the deemed contracts auctioned small customers in an effort to deliver cuts to ease the way for deregulation promised for their $30 billion in 1996. It was that those customers who for whatever and the standing offers. These deemed universal service whilst maintaining some kind (Alexander 2001; Rosen, Sverrisson and Stutz created as a backup system for the reason, are less commercially attractive to contracts and the standing offers commenced of competitive pressure. Consumer advocates 4.4 THE CONCEPT OF THE 2000). A default tariff at a discount price was unprofitable consumers (hence the term retailers, are protected by having access to on 1 January 2001 with prices (as a are concerned that these prices reflect loss- STANDING OFFER AS A broadly accepted by consumer advocates. The ‘default service’), much as many states have supply on reasonable terms and conditions. consequence of not being over-ridden) which leading bids intended to deter new entrants, and SAFETY NET MECHANISM only attempt to introduce a default tariff above created property insurance redlining pools can be said to have been approved by the fear the eventual consequences of lack of competitive rates was ‘roundly criticized and for poor people in ‘high risk neighborhoods’ Despite what appears here to be an explicit government (ORG 2001a). The prices were in competition (Patrick 1998). onsumer rights consultant Barbara withdrawn’ (Alexander 2001: 5). Despite the who often cannot find an insurer who will recognition of the inherent discrimination that line with the previous MUT, with the exception Alexander, who has developed a model ‘protection’ provided by these tariffs, most offer them coverage. The fact that this occurs in markets and the need to protect of Citipower who delivered cuts of The Pricing Reference currently being consumer code for competition which states have consequently faced decisions about redlining pool includes 95% of Californians vulnerable customers, the subsequent formal approximately 6 per cent. The government did C undertaken by the ORG is considering of what has been utilised by a number of US states, raising prices in response to wholesale market does not make it a market. position (ORG 2000b) adopted at best fails to not release any guidelines circumscribing the order the headroom should be. The exercise is observed in regard to US deregulation that the pressures. Alexander concluded that ‘default understand how such discrimination conditions for the use of this reserve power. In one in which the market price must be adoption of ‘default’ tariffs (standard offers, pools’ as residual markets diminish the capacity Fenn identifies one of the key problems with would operate and at worst repudiates the the parliamentary debate, the potential for identified, and then a premium over and above provider of last resort, basic generation service) to deliver reasonably priced service to their default suppliers, that being the inappropriate earlier view. The framework that has resulted monopoly pricing as a result of a lack of that agreed upon. The standing offer, has been the result of two conflicting policy customers and (keeping in mind that she allocation of risk onto the customer: contains many measures that do not merely competition in the early period of contestability therefore, is a state sanctioned monopoly objectives. These default tariffs are the advocates anti-redlining provisions in the permit the market to operate in a discriminatory was mentioned. The desire to maintain prices in price that discriminates against those equivalent of Victoria’s standing offers. consumer protection framework) that: Community Choice offers significant fashion, but enable and legitimise redlining. The line with the MUT was cited in a number of customers who are unable or unwilling to move Alexander (2001) identified that: consumer security against fluctuations in standing offers, following Fenn’s analysis of speeches. onto market contracts. The government has, in there is experience that demonstrates that wholesale power prices by transferring the California, put all the small customers into the effect redlined all residential and small business • If you believe that the prime imperative that residential customers can be provided with risk to the private sector rather than to the redlining pool at the outset. By June 2001, three host retailers had customers. It does for the retailers what would must govern the decisions surrounding the rate decreases or rate caps, and the consumers. In the Cape Light’s power sought to raise their deemed have taken them some years perhaps to implementation of retail competition is the opportunity to shop for lower prices in a supply contract the winning bidder was contracts/standing offer tariffs. Citipower achieve. The existence of monopoly priced need to create a competitive market as competitive market IF the wholesale market required to provide performance bonds that 4.5 RESIDUAL MARKET OR sought to bring its price back up to the MUT, standing offers at the outset of competition, soon as possible, Default Service is a tool is relatively stable and utilities do not incur are left in escrow in case the power supply O UPPLY while TXU and Origin sought increases above it. N S ? moreover, provides the scope for price cuts to that should be wielded to achieve that end. risks that threaten their economic viability is in default of contract. Under the The government was forced to address the be delivered to the most attractive customers. (Alexander 2001: 6). agreement, if the supplier pulls out of a issue of process in the exercise of the reserve ithout the standing offer obligation, Such price cuts will be acclaimed as successful • If you believe that the competitive market is contract and the Compact must find a new pricing powers. It referred the three requests to retailers would have the choice to competition. unlikely to develop in the near future or Paul Fenn (2000), representing Local Power supplier at a new price, the bonded supplier the ORG for advice under the Special Reference rid themselves of these ‘hard to when developed, is likely to result in higher - a consortium of Californian consumer must pay the difference. In this way, W provision (Section 34A) of the Electricity serve’ or marginal profit customers entirely. The How the ORG’s inquiry is supposed to prices or less stable prices for residential representatives - in his testimony before the Community Choice offers a method of Industry Act 2000, with further instructions to provision ends on 31 December 2003. From reconcile the stipulation in the Terms of customers, Default Service is viewed as a Joint Hearing (Senate Energy, Utilities and assigning risk to the private sector where it develop general guidelines for retail pricing. 2004, retailers will be able to refuse to supply Reference for the Special Reference that the tool to maintain important consumer Communications and Assembly Utilities and belongs. households. In New Zealand, where full standing offer tariffs must prevent market protections and maintain the longstanding Commerce) said the default supplier It became rapidly apparent that the deemed competition has already commenced, David abuse (monopoly pricing), when by definition acceptance of the universal service aspects arrangements for California’s deregulation and Many US states have deferred or stopped contracts and standing offers are, by definition, Russell (2001), Chief Executive of the standing offers are monopoly prices, is an of basic electricity service for residential and customer inertia meant these suppliers had a full competition on the basis that wholesale set at rates that are above the likely market Consumers Institute, reported the fall-out of indication of poor policy formulation. low income customers. monopoly over the customers: market problems cannot deliver the required price. The government and the retailers are recent high wholesale prices on unhedged Disregarding the imperatives behind the Under AB1890, these companies are stability and price constraint required for concerned that without adequate ‘headroom’ retailers: ‘One company in particular, has been, The customers who are likely to be default service, she notes that, as the vast designated as ‘default suppliers’ of political acceptance by the residential sector. between the cost of supply and the deemed without compassion, disconnecting residential adversely affected are those with low majority of US residential consumers have Californians who do not find their own contracts and standing offers, there would be consumers who are behind with their consumption, low income, poor payment opted not to enter into the market, the ‘Default power suppliers. As I mentioned before, When the Victorian government introduced little incentive for retailers to offer lower prices. payments, making it clear that they do not want history, pre-existing debt, in rural localities, Service decisions have [therefore] been the 95% of Californians have not found a the standing offers, such little explanation If they are set too close to the market price, them as customers again in the future’. Faced living in poor housing stock, and tenants (both primary factor in determining the price and supplier. By allowing these deregulated accompanied it that it is only possible to provide customers will not switch. Lack of competition with the stark choice of not being supplied at public and private). Lack of competition will identity of the provider of basic electric service former power suppliers to hedge the state conjecture as to why they thought it was a would mean consumers would forego the all, many customers will be forced into mean retailers will have an effective monopoly for the overwhelming number of customers in pool or California Power Exchange (PX) and necessary measure. It is possible to infer from efficiency dividends that are said to be created contracts that exploit them. Firms will seek to over these customers. Standing offers will states that have implemented retail electric offer hedged ‘service packages’ to their the speeches of Mr Lenders and Ms Romanes through competition. The experience of many allocate costs onto the less competitive mean a decline in affordability, and reduced competition’. former power supply customers, they are in that a fear existed that not all customers would 12 13 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

customer segments in favour of the more The state of New York Public Services The experience of the FAIR law enacted by competitive customer segments where they Commission (2001: 52-65), in grappling with the US congress to counter discriminatory can. Where the purchase is non-discretionary the notion of a ‘provider of last resort’, FIVE property insurance practices is valuable to the ECONOMIC such as with electricity, this strategy is not just concluded that with sufficiently robust current debate. Colton (2000) explains that, possible, but probable. competition this would not be needed. Despite after urban rioting in the 1960s, property DISCRIMINATION this, the Commission acknowledged that, insurers withdrew from inner urban In markets, retailers seek to increase the unless the law imposes an obligation to serve neighbourhoods. The FAIR law resulted in margin per customer. They may make a healthy all customers, some customers would not be insurers covering customers with good profile ISTRIBUTION ARIFFS IN ICTORIA profit from dealing with affluent customers, but served. It argued further that ‘the greater 5.1 D T V the overall rate of return will be less if they have concern is the price a poor customer would and leaving the rest to a residual public market. too many low return customers on their books. have to pay to receive service from the market’. This public market offered less insurance In Victoria, the monopoly he traditional view is that small customers require a customer may choose to run machines at different A retailer could introduce a policy, for example, The Commission regarded rational economic coverage at higher rates: distribution systems or extensive infrastructure to serve them and that times as the cost of supply varies over the day, week or that they will not offer supply to customers discrimination (providing price signals for load ‘poles and wires’ Teach customer (consuming relatively little) season. holding a health care card, based on the management) as allowable, but discrimination It was widely believed that the FAIR plans businesses are regulated therefore returns only a small margin on this assumption that people on limited incomes will based on the customer’s income ‘should not be would make insurance available to all (by the ORG) because investment. In contrast, large customers require far less Three central issues emerge. Firstly, is the not use much electricity and will not have the permitted for the supply of these essential insurable risks. Regrettably, this did not competition is not extensive infrastructure and provide greater margins. assumption about which customers contribute to what This is illustrated by the fact that there are only around costs correct? Secondly, what are the implications of disposal income to purchase other products the services’. It was basically saying that a come to pass...Denied coverage in the practically possible. In a 17,000 contestable (large) electricity customers in the assigning (or reassigning) costs to particular customer retailer may be seeking to sell. Or a retailer vulnerable customer’s lack of economic power voluntary [private] market for whatever post-reform environment may not wish to supply customers living in should not be exploited. The Commission also entire NEM who represent about 60 per cent of the classes? The third involves other cost variables such as reasons, rejected applicants found it is distribution, rather public housing because they regard such discussed the problem of creating residual total demand for electricity. In Victoria alone there are location. themselves paying appreciably higher than generation or customers as a credit risk. People living in markets to supply vulnerable customers as around two million small business and residential premiums for less coverage. Some of the retailing, which most rural areas may find there is little competition these spread the cost of supply over a smaller customers who account for less than 40 per cent of the As Australian consumer rights advocate Lisa Carver reflects traditional pricing because of the overhead costs involved in customer base, effectively lifting the cost of plan’s rate were over three times those of state’s demand. It is assumed that, if all customers paid (1995: 19) noted: practices. It is important servicing a small number of customers over a supply to each customer in that residual the voluntary market with the result that the same price, this would involve a cross-subsidy from 1) The various methodologies available for vast territory. market. risks often were ‘written out’ by the to understand the large users to small users. Utilities as a consequence quantifying costs of production are highly voluntary market and then ‘rated out’ by traditional thinking in have engaged in ‘Ramsey pricing’ which involves arbitrary (e.g. marginal and avoidable costs, fully FAIR plans. regard to the allocation of marking up the prices (that is, adding a premium) to distributed costs and stand alone costs); and costs on customer classes those customer classes which display the least 2) The discretion inherent in how pricing may be and the resulting pricing elasticity of demand. In other words, residential prices composed (e.g. the use of marginal cost pricing in structures in order to are set at a higher rate than tariffs for larger customers volumetric usage and access and minimum charges understand some of the because households can do little but pay and are to recover capital costs) can have a dramatic effect assumptions that underpin unlikely to alter their consumption in response. In the upon equity of access. Further the potential for price discrimination and, context of state ownership of utilities, governments discrimination between classes of consumers (e.g. subsequent to balanced the interests of large customers wanting Ramsey pricing) and regressive pricing packages in cheaper electricity and the political consequences of the exercise of discretion is considerable. disaggregation, why rating domestic tariffs too highly. In Victoria this has these assumptions must meant that domestic prices have been higher than Colton (1996) distinguishes between the be revisited. industrial and commercial tariffs, but within bounds contribution low income households make to cost of acceptable to the community. supply and the general domestic demand profile. He challenges the assumption that domestic users as a It has been argued in the Victorian electricity whole are in receipt of subsidies from non-domestic distribution pricing review and more generally that users. The subsidies flow, he says, from low income retailers and distributors need the flexibility to users to affluent residential customers. Because poorer ‘rebalance’ their tariffs to make them more cost customers generally do not have appliances such as air reflective. Cost reflectivity or ‘user pays’ is a conditioners, they are penalised by being forced to pay cornerstone of neoliberal economic thinking as it prices that reflect the cost air conditioning imposes on presumes customers need the correct pricing signal in the electricity system at peak times. Growth in demand order for the market to achieve the most efficient from the less well-off customer segment is less than in allocation of resources. In concrete terms, this means the more affluent segments of the residential class. that a customer may choose differently between two This means that poorer customers are paying for locations if the price they paid for electricity reflected new capacity that is not justified by their the difference in the cost of supply to each locations, or consumption patterns. Colton argues that, as low 14 15 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

income households are effectively over- approach, including the social and pregnant’, and the compromise it involved is customer to have choices - the right to exercise only served that particular customer class). As the • Standing charges support marketing charged, programs designed to remedy fuel environmental implications of Ramsey pricing: largely entrenched in the physical structure of choice in the face of reasonable and legitimate table below demonstrates, there is a huge strategies to increase consumption; poverty are economically justifiable. There are ‘it is often difficult to determine what proportion industry and the regulatory framework. options. If a customer is in the position of being a price difference between the boundaries and between the • Standing charges tend to collect of course low income customers who do have of fixed costs should be allocated to each Transmission is subject to ongoing decision taker, then in economic terms there is market failure. cost allocated to each customer class. disproportionately more revenue from high consumption, but in Victoria there is often customer group’. making regarding allocation of costs (including low income quantity consumers than the a strong correlation between these households location and line losses). The fact that most The other constraint was that rebalancing costs these customers impose on the and the thermally poor housing stock/poor The allocation of costs onto individual electricity assets are long lived and involve (increases) should be smoothed over a number network; appliances (Backman et al. 1987; Deasey and customers and classes of customers is fairly intergenerational equity has been lost in the of years, avoiding price shock for the customers • Lowest income households use, on 5.2 THE ELECTRICITY Montero 1983). Households often have no arbitrary and involves a number of other need for the new owners to recover costs in a involved. This approach provides the DBs with average, less electricity than other control over the stock because of lack of considerations besides the relationship much shorter time frame than under public DISTRIBUTION PRICING tremendous scope to tariff rebalance even consumers and pay higher prices with a property ownership or inability to secure capital between customer classes. It is at this point ownership. And because - like ‘greed’ - REVIEW within the constraint of the ‘x’ cut to the tariff standing charge (Pareto Associates 2000: 6) for improvements. It is vitally important to that the Victorian reforms become a little consumption is good, whatever price signals basket. ictoria has adopted the use of a ‘tariff appreciate the economic powerlessness of nonsensical. For a start, there is no publicly exist involve cost smearing (indiscriminate The Pareto report was scathing in regard to basket’ approach to setting of these customers. Not only do they shoulder a available data to demonstrate what allocation of costs onto customers) that has the As Victorian home occupancy is close to the ORG’s approach to pricing principles, distribution tariffs. The ORG imposes an greater proportion of costs than they should, subsidies exist post-1992. Discussion of effect of encouraging more consumption. V 100 per cent and as people do not choose describing its faith in regard to DBs behaving ‘x’ factor (being a price cut in percentage terms) but this is frequently in the context of quite a tariff rebalancing is on the basis of where to live on the basis of electricity prices, it reasonably within the economic incentives to the total of the tariffs, that is, to the ‘basket’ punitive attitude towards debt and assumptions, and no credible attempt has been If economic efficiency requires proper is rational for the DB to load costs onto the provided as ‘naiveté’. It concluded that, without as opposed to each individual tariff. It is left up disconnection. made to establish the veracity of such claims. assignment of costs, then tariff rebalancing is of residential class in favour of their larger explicit policy constraints, ‘unfair price to the DBs how they wish to allocate the price The assumptions underpinning the cost limited use. It is extremely crude to suggest customers who can relocate and have a discrimination’ would occur and tariffs would cut explicit in the ‘x’ to each customer class In the United Kingdom, licence conditions allocation and tariff structures of the SECV that the only variable in assigning costs is the stronger interest in electricity prices. Only time not be ‘aimed at cost-reflectivity’, rather that (tariff). The 2001 Electricity Distribution Price on distributors prohibit discrimination between cannot be used for the post-disaggregated class of customer - in itself a crude will tell if this is the case, but the imposition of Review by the ORG determined that an ‘x’ customers or customer classes (OFGEM businesses. The creation of postage stamped categorisation that involves intra-class an effective price cap on residential retail prices the DBs will...behave as the monopolists they factor of 12 to 22 per cent apply to the tariff 2000a). The Utilities Act 2000 mandates that distribution franchises (DBs) in its own right has subsidies. as a result of the deemed/standing offers is are...the DBs can be expected to [sic] everything basket (depending on which DB) in the first year the new regulator, the Office of Gas and led to much distortion. Each has a distinct possibly constraining rebalancing of distribution within their power to optimise any opportunities of the regulatory period (2001) and 1 per cent in Electricity Markets (OFGEM) - created by geography and customer profile. Allocation of Tariff rebalancing is a reassignment of tariffs for the moment. However, the view that they find to appropriate monopoly rent including, each of the subsequent years of the regulatory merging the former separate electricity and gas costs to each customer class within each DB costs, but it is challengeable whether or not it residential customers may be more profitable setting anti-competitive tariffs, setting upper and period (2002 to 2005) for each DB. That is, the regulators - shall have regard to (amongst other therefore has no historical reference point. results in ‘economic efficiency’. Electricity than frequently assumed is supported by credit lower bounds on tariff [sic] that are not consistent ORG mandated a price cut (after an adjustment objectives): production can be conceived of as a closed rating agency Fitch (2000) who highlighted in with economic efficient principles and practicing for inflation) of 12 per cent across the board in • The interests of consumers who are disabled For example, the Kennett government system. Reallocation of costs amounts to one of their regular market updates the unfair price discrimination (Pareto Associates the first year and of 1 per cent in each or chronically sick, consumers of a instigated the unwinding of the estimated $100 rearranging the deck chairs on a ship. Some significance of the domestic sector for 2000: 35). subsequent year. So long as there is a total pensionable age, consumers with low million per annum locational cross-subsidies customers will be better off but, if they choose distribution profits. price cut of 12 per cent (or 22 per cent, incomes and consumers residing in rural between urban and rural users in the early to spend their new gains on additional depending on which DB) in 2001, the ORG is not areas; and 1990s through the Grid Equalisation Fund. The consumption of electricity, there is a point The Energy Action Group was critical of the concerned about which customers are the • Guidance issued by the Secretary of State in fund, however, only addresses the subsidy where that additional consumption imposes 2001 Electricity Distribution Price Review 5.3 DISCRIMINATION: recipients. In effect, it allows for domestic respect of social and environmental between urban and rural DBs. A significant new costs on all users. If more electricity is Determination because it allowed OST TRUCTURE tariffs to lift by the rate of inflation, while other A C S policies. proportion of the subsidies going to rural consumed, the unit cost declines until the point discriminatory pricing and could not guarantee users receive cuts of 12 per cent. The tariff ISSUE? customers is funded by the urban customers of where marginal revenue meets marginal cost. that households would receive fair and basket approach is ostensibly to allow the The basis of the non-discriminatory pricing the two rural DBs (Electricity Markets Research After that, the cost of all units must rise to fund reasonable prices. In addition, the methodology rebalancing of tariffs. conomist and low income advocate is that prices ‘should not differ between Institute 2000). Moreover, this scheme also the new investment required to satisfy the new embedded substantial air conditioning cross- Eugene Coyle argues that economic subsidies that harm low income households. customers or groups of customers except in so involved asset write-ups and write-downs for demand. The only constraints imposed were that each Ediscrimination between classes of Consumer groups were also critical of high far as these differences reflect reasonable the DBs as temporary offsets, so the situation is tariff should represent a point between ‘avoided customers is fundamental to the recovery of standing charges. Jeff Washusen of Pareto differences in the costs of providing those far from clear. Discrimination, on the other hand, on the cost’ (the amount the business would save if it did costs in industries such as electricity. In Price Associates, a consultancy engaged by the ORG services’. However, the Act does not basis of the customer’s consumption pattern not serve that customer class) and ‘stand-alone’ Discrimination, Electric Redlining, and Price on behalf of small electricity consumers, noted countenance rural users facing higher charges Cost to the system depends on the location (the only thing in this market that distinguishes costs (the amount it would cost if the business Fixing in Deregulated Electric Power, he points on the basis of a higher cost of supply. In its of the customer, their consumption profile, the one electron from another is the time of its use) the impact of standing charges on equity: to the history of undifferentiated commodity consultation paper, OFGEM argues that age of the assets (intergenerational equity) and provides the customer with a choice - with the Table 6: Distribution Charges markets in the United States that demonstrate marginal cost pricing may be seen by some as the time of use, whether it be day or week or ability to respond by either accepting a deal that cooperation rather than competition has Tariff category Avoidable cost c/kWh Stand-alone c/kWh the appropriate price signal, but that it was season (temporal issues). Variables other than gives a lower price for shifting or reducing maintained profits in these industries, including unlikely to deliver the revenue required to fully tariff rebalancing are either ignored, or are consumption, or paying a higher cost when cost Small single rate 1.6 0.3 electricity. Secondly, he says that large recover costs. The alternative suggested is the deemed too be to hard or somebody else’s of supply is higher. Price discrimination on the overhead costs put pressure on plants to application of ‘mark ups’. Even so, OFGEM problem. For distribution, locational cross- basis of income maintains the customer firmly HV demand metered 6.7 2.4 practise ‘yield management’: (2000b: 8) acknowledges the difficulty of that subsidies became a case of being ‘half in the role of price taker. Markets require the Source: Citipower 2001 Distribution Price Review Submission, App. 7: 247 16 17 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

Selling all output at a single profitable price, Other jurisdictions have approached the 2.2 Fairness carry too many low volume accounts, otherwise may recognise economic redlining as a Case 3 i.e. at average costs or higher, is also not issue with an acknowledgement of the current As a supplier of essential services, Dunedin the overall rate of return falls. problem, but they are failing to understand the If we look at the life cycle of a household, feasible. The full price might be so high as to inadequacy of methods of determining cost Electricity intends to set fair and reasonable distinction between active exclusion and we can see that usage is generally high while discourage sales. If sales were not large contribution and the equity considerations prices. Delivery charges as a whole are cost The market segmentation in electricity omission. families occupy, but drops as children move enough to fully employ the capacity of the involved. The Independent Pricing and based and the recovery of those costs will retailing is a two part strategy. Firstly, it seeks to away and particularly at retirement. Households plant, or come close to that, then total costs Regulatory Tribunal (IPART) in New South be spread fairly over users of the network. discriminate in favour of those customers who There is increasing contribute differently to costs over time. Price would not be recovered. The solution, long Wales established a working work to develop The application of fairness to delivery pricing can be encouraged to increase their discrimination means that the retailer will seek understood and employed by electric pricing principles for distribution charges. In is one of the most difficult objectives to consumption. Secondly, it marginalises those evidence that to have the retired householder pay a greater utilities, is price discrimination and cross- doing so, it recognised that regulation should be achieve as users will have varying views on with low consumption and low income because generators in the contribution (not recognising any previous subsidization (Coyle 2000: 19). ‘balanced between the interests of the what is fair, based to a large extent on how they contribute little to marginal revenues. National Electricity higher contribution) because they want the stakeholders’ and that the objectives of pricing pricing policies impact on their individual These customers, being equally unattractive to return on capital within a shorter period than Proponents of deregulation and competition are to achieve: delivery process. all retailers, can be forced to contribute Market are engaging used to be the case. These households, being argue strenuously that it is highly desirable to • Economic efficiency; additional revenues simply through monopoly in market abuse income limited, tend to resist higher bills even if obtain price signals based on the system • Revenue sufficiency; and pricing. Therefore, retail price discrimination will they involve consumption sweeteners. The marginal cost as this is the means to the most • Equity. not reflect the cost incurred by the customer, solution as demonstrated by the Kennett efficient allocation of resources. Coyle disputes 5.4 RETAIL but the customer’s possible contribution to The following three scenarios describe why government was to increase the standing this view that competition will mean utilities will These pricing principles should reflect DISCRIMINATION: revenue. Ernst (1994: 45) warned that the lack redlining is problematic and broader than welfare. charges. These are unavoidable and almost price output at the system marginal price, economic costs by: of economic power of domestic customers impossible to counter by lowering consumption. because to do so would bankrupt them. This • Being subsidy free; ‘could result in the introduction of tariffs for the Case 1 It also highlights the lack of pricing signal as In terms of retail costs, low income view is supported by OFGEM (2000b) in relation • Reflecting the level of available capacity; he disaggregation of the industry means domestic sector well in excess of those being advantageous for the utility. Allowing for customers may cost more (they may need to to distribution networks. Coyle (2000: 30) says • Signalling future investment costs; the retail functions are ring-fenced from necessary to meet marginal cost requirements, discrimination between residential customers negotiate more often with a customer services that utilities traditionally do not price on the • Discouraging uneconomic bypass; distribution, if not formally separated with virtual impunity’. means that intergenerational equity is distorted. T officer, or pay more frequently over the basis of marginal cost but engage in Ramsey • Allowing negotiation to better reflect the under different ownership. Likewise, generation counter), but this is because the service is pricing, which is ‘difficult to distinguish from simple economic costs of specific services; assets were separated to encourage The idea that firms will segment the market The ORG assumes that tariff rebalancing inherently discriminatory towards them (Kliger textbook monopoly pricing, where the profit • Returning the allowed revenue stream competition. This was the case in Victoria in the in order to maximise yield is not new. The will only occur to the extent that prices will 1998) . Because much fuel poverty in Victoria maximizing rule is to squeeze each customer for the while recovering the gap between immediate post-privatisation period, but that Consumers Federation of America (Cooper and reflect the contribution the customer makes to derives from poor housing quality, they are maximum revenue possible’. marginal and average costs in the least has changed recently as retailers seek Kimmelman 1999) claims that there is a ‘digital costs, but this is manifestly wrong. penalised when they may otherwise cope. By distorting manner possible; and ownership of generation as a natural hedge. divide’ in which telecommunications customers How generators will recover their costs is allowing double discrimination, we are Coyle (2000: xi) maintains that it is essential to • Promoting equity, stability and The separation of electricity retailing means are segmented and some are discriminated beyond the scope of this paper. However, Coyle entrenching the poverty and removing their understand the cost structure of the industry itself, consistency of outcomes by: that it is no longer tied to a capital intensive against. Stepanek (2000) and Bowers (2001) (2000) argues that there will be price wars and capacity to remedy the situation. The because it is this that provides the pricing incentives. * Having regard to the impact business and is therefore likely to adopt a explore the emergence of another form of then corrections involving mergers and ‘investment’ the customer is required to make The incentive he summarises is price of price changes on the customer; different strategy in relation to customers than redlining - ‘weblining’, the use of the internet to collusion in order to support the ‘correct’ in obtaining electricity should in part be going to discrimination: * Being transparent; and formally vertically integrated utilities or even segment markets - and its potential for abuse. amount of capacity. Such a wave of mergers fix the housing quality. It is economically * Being based on published costs and DBs. In this sense, they can operate much more has already taken place in the United Kingdom inefficient to allow this mismatch of investment The largest electric customers will have methods (IPART 2000: 4). like retailers in other commodity markets. The The New Jersey Board of Public Utility (Unison 2001) and is even underway in the need to investment capacity. options such as fuel switching, self- distinction is that, with Ramsey pricing, even Control (n.d.) has explicitly provided for anti- United States, despite the recently mandated generation and relocation, and will be Despite the inclusion of ‘equity’ as a pricing the smallest accounts contribute something economic discrimination measures in its Interim disaggregation of vertically integrated utilities. offered low prices to lock them in as objective, its application is not dissimilar to the because, having built the network and Retail Choice Consumer Protection Standards Case 2 The Victorian industry is already experiencing its An affluent customer has invested in energy customers. Those with fewer options - small ORG approach. ‘Equity’ is defined as ‘limits generation plant for all the other customers, any for electricity competition: first wave of reintegration (each of the three efficient appliances, insulation and a solar hot business and residential customers - will be [in] the annual change in some prices’ contribution this small customer makes to costs planned gas fired power stations involves water heater and is therefore a low charged higher prices. Within the small- (IPART 2000: 5). However, IPART recognises helps. Or, to put it another way, not supplying Redlining means a procedure which involves retailers and generators as owners) and consumption user. This customer has avoided business market and among residential that there is ‘considerable debate over the the customer would not lower the cost of unreasonable discrimination based upon race, increases in horizontal market power (permitted contributing to the requirement for new customers, further discrimination will take measurement of the upper and lower bounds supply to the other customers, but doing so - color, national origin, age, gender, religion, by the recent relaxation of the cross-ownership investment in the electricity system. Yet, place. Emulating the airlines, which try to price for the range of subsidy free prices’ and that even at a ‘loss’ - benefits all users. Retailing is source of income, receipt of public benefits, provisions in the Electricity Industry Act 2000). because their consumption is low, a retailer will each seat to yield the maximum revenue, ‘the requirement for revenue recovery may not a capital intensive business; rather, each family status, sexual preference, or There is increasing evidence that generators discriminate against them. The margin available sellers of electricity will charge the highest conflict with the requirement for economic additional customer adds new costs. A geographical location. in the National Electricity Market are to the retailer is low; the competition for this price they can obtain from each customer. efficiency’ (IPART 2000: 4, 6). Nevertheless, it particular set cost needs to be recovered from engaging in market abuse intended to drive customer will be little or nothing and they will Within this group, those willing to buy a bundle chose to not sensitise the pricing principles to each customer. Small account holders In doing so, the New Jersey Board of Public up the average price of electricity. find themselves in the ‘residual pool’ paying of products from the same vendor may get a reduce the scope for market abuse by the DBs. represent high cost/small return. The strategy Utility Control (1997) also acknowledged the more than they should. They will be financially better deal on electricity than those who do for retailers is to concentrate on accounts distinction between the opportunity and the penalised for having invested in energy not, without regard to the cost of production. In contrast, Dunedin Electricity (1999: 1) in New that involve a higher volume of sales and not actuality of obtaining benefits from competition. Zealand has the following objective (amongst others): However, as Coyle (2000) notes, governments efficiency. 18 19 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

which reflects marketing strategies and poor discrimination, such as the geographical Unless carefully regulated, bundling decreases transparency. As indicated earlier, Baker (2001) found USTOMER NERTIA 5.5 C I ? consumer awareness. Unison (2001) question disadvantage experienced by rural and remote SIX that customers taking bundled packages for gas and electricity were paying more for fuel than those the ability and incentive for small customers to customers, but this depends on access to who purchased each separately. If the objective of energy industry reform is to seek efficiency gains olton (1999) states that the failure of a switch, citing possible savings of as little as £5 equitable telecommunication services which is that result in lower prices to consumers, then pressure must be maintained on prices and competitive industry to protect the per year. subject to similar discriminatory strategies. BUNDLING performance. Bundling can involve inappropriate cross-subsidisation between electricity and non- interests of low income consumers C electricity products. The benefits of these kinds of arrangements tend to flow to wealthier flows from two general types of problems: the AND MULTI Consumer inertia is clearly an issue even if Either lack of competition or customer inertia households who are targeted for the non-utility goods. failure of competitive markets to compete for there is a robust competitive market. The provides incumbent firms with the market power. UTILILITES such consumers, and the inability or experience in the United States for both gas An effective monopoly allows prices for captive Regulators should also be wary of claims that bundling will reduce costs. It may mean one billing unwillingness of such customers to participate Market contracts will be not just be about energy and electricity is the extent to which energy system, but it will need to be a very complex system. Victorian retailers are having difficulties with in the competitive market. Referring to Stutz’s customers to be subject to undue price increases. prices. They will also be about branding and companies actually compete in the residential billing systems now, as evidenced by the EIOV Annual Report (2000). Substantial customer servicing Californian study that posits that small Rosen, Sverrisson and Stutz (2000: 56-7) state: selling other products. Bundling of products and market. Successful markets have many will be involved with selling other products, and what may be saved by having common billing consumer participation in competitive energy When price discrimination is not based on services, however, is yet another means of competing firms and the threat of new entrants the willingness to pay but, rather, on the redlining and can actually result in anti- systems may be offset by additional service requirements. To this end, it is possible that those markets is limited, Colton says: provides discipline on prices and service. The consumers’ inability to negotiate the terms of the competitive behaviour. purchasing only electricity will cross-subsidise those purchasing other goods and services. decision by a potential new competitor to enter • First, some consumers are simply not sales contract, or some other manifestations of will depend on assessment of the likely profits interested in making market decisions. This market power that turns a particular customer (rate of return) and the period over which customer behavior involves routinized class into price takers, particularly for a investment can be recovered. If potential decisions, often based on habit purchases. necessity of life, then it is clear that price SEVEN competitors do not materialise, that leaves UNITED • Second, some customers do not seek to discrimination has taken a negative turn. It is incumbent firms with significant market power. maximize their economic benefits. Instead, also clear that such price discrimination is likely Work by Costello (quoted in Colton 1999) these customers engage in what is to hurt small customers, while large customers KINGDOM revealed that the cost of acquiring a domestic called ‘satisficing’. These customers are likely to benefit [author’s emphasis]. gas customer was $200, while the margin per engage in a process that ‘after considering EMERGING EVIDENCE OF REDLINING annum was $25 over an eight year payback to some degree the potential exchange, Stutz, quoted in Colton (1999: 36), warns period. Enron, the world’s largest energy trading here has been a considerable change in the oversight a ‘whole of government’ taskforce As its principal objective, OFGEM is they conclude that the status quo is good that small customers face the risk of ‘cost shifting company, pulled out of residential gas retailing regulation of electricity in the United on the elimination of fuel poverty; required by Section 9 Part 4AA of the Act to enough, albeit not necessarily the best and lack of market power [that] will result in small in the United States, citing profit margins as Kingdom since the election of the Blair • Improving information and understanding of protect the interests of consumers, having possible deal that they could get.’ This T captive customer rates increasing’. He makes the being too low. After surveying the field of Labour government, which after extensive consumers to enable them to participate in regard to: process of ‘satisficing’ is particularly comment that existing programs, many of which electric providers on the eve of the opening of consultation introduced new legislation (Utilities the market; • Individuals who are disabled or chronically sick; prevalent amongst small users, where do not afford adequate consumer protection the Californian market, UCAN (1998) found that Act 2000) to strengthen protection of small • A reserve power to provide for the cross- • Individuals of pensionable age; maximizing benefits would nonetheless still ‘would need to be strengthened and expanded’. ‘few legitimate businesses are interested in customers. The new approach is summarised by subsidising of particular groups of • Individuals with low incomes; and yield small gains. Fear of cost shifting, price discrimination and entering the small business or residential the Department of Trade and Industry (2000) as: disadvantaged customers; • Individuals residing in rural areas. • Third, market barriers exist that impede market failure were central to the Consumers market’. The cost of acquiring residential • Providing a fundamental right to energy • Requirements on electricity licensees to customer participation in the competitive Union / Consumers Federation of America 1998 consumers was also expensive for Enron when (obligation to supply); provide energy efficiency improvements; Among the work OFGEM is undertaking to fulfil market. These barriers include high this market opened, reflecting experiences in report, The Residential Ratepayer Economics of • Recognising that markets do not treat all • Direct investment by government in the these objectives which are of interest here are: information and transaction costs, the other markets such as New Zealand. Electric Utility Restructuring: Balancing All the customers equally and that small, poorer energy efficiency of housing stock (£300 • Monitoring the development of new tariff uncertainties involved with making Costs and Benefits. customers may be disadvantaged; million over the next two years); options including low user tariffs; assessments, and the efforts needed to be Coyle (2000) believes that the high cost of • That, to date, vulnerable customers have • Additional payments to pensioners for fuel • Limiting the use of standing charges; and expended to switch providers. acquiring small business and residential The move from universal service to markets been discriminated against; bills; • Researching the extent of rationing and customers and the low rate of return increases has also been identified as resulting in the • That, at a general level, the market has • Additional funds to local government for self-disconnection (OFGEM 2000a). International experience has seen very low the need to discriminate between affluent withdrawal of services from particular regions. The provided benefits; maintenance and improvements to social ‘churn’ (customers changing retailers) rates in customers to whom bundled products can be University of Newcastle upon Tyne (2000) found • That, in order to address fuel poverty, a housing (£3.6 billion in 1999-2002); The Utilities Act 2000 and the subsequent most jurisdictions where full competition has targeted and low income, low consumption evidence that energy providers were withdrawing ‘whole of government’ approach is • New social security measures specifically Social Action Plan developed by OFGEM is not occurred. Colton (1996) cites work undertaken services from disadvantaged neighbourhoods. required; and for fuel poverty; without critics. National Energy Action (NEA) by the US General Accounting Office which households who are to be avoided. This, he Customers in such areas were more likely to have • That households should not face price • Decreases in the VAT on energy bills; (2001) point out that much is being left to reports that only about 4 per cent of small gas says, can be achieved via data mining pre-payment meters and as a consequence pay discrimination on the basis of geography • Seeking to increase the number of interpretation; that, despite the legal obligation to customers had opted for a new retailer. Baker technologies and the substantial lack of more for their electricity. The study concluded that (specifically, Scottish households are customers with bank accounts so that they supply, insufficient guidance is provided to protect (2001) reports United Kingdom churn rates are personal privacy. Moreover, new technologies ‘Privatisation and restructuring have left less protected). can take advantage of direct debit offers vulnerable households from disconnection; that higher but related to the take-up of dual fuel such as the internet, which in terms of personal affluent neighbourhoods and social groups with deals. However, low income consumers were use correlate heavily with affluent households, that involve lower prices; and programs are too narrowly targeted; and that only limited access to services which could be actually paying more for fuel purchased dually provide a remarkable tool for such Some of the actions that the government is • Linking fuel poverty elimination with energy efficiency measures need to be directed than if they had purchased each separately, discrimination. The internet also provides a considered essential for full participation in taking include: achieving reductions in greenhouse gas towards all consumers. In its Response to the possibility for overcoming some reasons for contemporary society’. • Establishment of a Ministerial Group to emissions. United Kingdom Fuel Poverty Strategy Consultation, 20 21 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

NEA (2001) stated that that no new initiatives or new The second study, Competitive Energy response to the inequity faced by users of these resources are identified to achieve the objectives and Markets and Low Income Consumers by Baker meters, OFGEM (2000a) is seeking greater uptake EIGHT that the energy efficiency measures spread too few (2001), involved a three year longitudinal survey of other payment methods such as direct debit. In ANALOGOUS resources over too many households. NEA (2000b) of the experience of low income households in contrast to Australia, many people in the United also expressed concern about the lifting of price the competitive energy markets. Commissioned Kingdom do not have a bank account, and the INDUSTRIES IN AUSTRALIA controls, arguing that ‘from the perspective of by the National Right to Fuel Campaign and the greatest proportion without accounts are poor. prepayment customers it will be difficult to view such Centre for Sustainable Energy, it found that The strategy to introduce no-frills bank accounts developments as non-discriminatory’. many people had been lifted out of ‘marginal and to extend universal banking services at post Key observations about deregulation in of 35 per cent in funds-management activities. mortgages were cross-subsidising bank fees fuel poverty’ as a direct result of lower prices offices so direct debit can be utilised reflects, from telecommunications and banking in Australia are This beats the 16 per cent interest earned on before deregulation and that the situation was OFGEM (2000a:13) acknowledges the consumer (acknowledging that gas input prices had the Australian experience, little awareness that as follows: credit cards, or the 7 per cent on a home loan, now much fairer. [However,] household fees groups’ argument that blocking customer transfer on declined substantially over the period), but that the deregulated banking industries discriminate in and provides a great incentive for financial jumped 18 per cent last year against a 12 per the basis of prior debt contributes to low income number in severe fuel poverty had actually increased. exactly the same way. • Banks have substantially raised their overall institutions to devote resources to attracting that cent rise in business fees. It [the Reserve Bank customers being unable to access the benefits of rate of return, and Telstra has recorded sort of business rather than dealing with report] found that the fee rise hit the competition and is a mechanism that marginalises Baker (2001: 8) noted that: Importantly, the study recommended that record profits; Australia’s poorer retirees, pensioners and householders who were least well off - the these customers. New suppliers were continuing to ‘cherry- energy efficiency investment and advice be • Banks have sought to jettison their small students...the banks close branches in areas elderly, unemployed and low income earners. pick’ the more affluent consumer. Most integrated with debt management as few people account holders or have increased fees for where a lot of pensioners and poor people live. Two important studies have been companies were competing on price for certain in hard to heat housing reported receiving such these customers; Country areas were the first target, but Telstra’s attempt to appease Melbourne published recently on users’ experience of consumer groups, primarily Direct Debit payers, advice or help from their energy supplier. • Banks have withdrawn services from rural increasingly it is also branches in suburbs not urban fringe customers who have been paying the deregulated energy market in the United rather than ‘added value’ services. Special areas; considered to hold enough bottom-line long distance charges for calls into the Kingdom. The School of Architecture, services to vulnerable groups, such as disabled Baker’s conclusions are supported by the • Telecommunications services are poorer in contributions or wealth-management metropolitan area was welcomed as overdue Planning and Landscape at the University of and pensioner households, were not improving. House of Commons Select Committee on Public rural areas; targets...the banks tell them to use telephone or but not as altogether positive. In the Age, Newcastle upon Tyne (2000) examined Accounts (2000): • Telecommunications competition works on Internet banking or ATMS...customer who stick Annabel Crabb (2001) said in ‘Telstra’s new privatisation and restructuring, and found that The study referred to this disparity as (v) A key reason why prepayment meter customers a mass marketing strategy, but customers with the bank...are hit over the head with rising pitch to bush, city fringe’: for disadvantage neighbourhoods: ‘uneven development’. This is characteristic of pay higher prices appears to be that price are being increasingly profiled fees. • ...there was evidence of [now private] service economic discrimination or redlining: competition amongst gas suppliers for prepayment (selective/strategic advertising); and Telstra customers living on the fringe of providers either physically withdrawing from they [fuel suppliers and OFGEM] argue that customers is weaker than in other parts of the • Telecommunications call rates are dropping In the Sydney Morning Herald, Matt Wade cities and in regional areas were offered flat-rate an area or distancing themselves from Direct Debit consumers are much cheaper to market. Of the 21 companies seeking to sell gas to for highly competitive calls (long distance (2001) reported ‘Fury as banks grab record STD calls for as little as 25 cents, in a along customers there... service than prepayment meter and frequent such customers in January 1999, ten offered tariffs and overseas), but other fees and charges $6.3bn in fees’: awaited response by the carrier about its call • While disconnection from services was cash payment customers. Competition, costing about the same as British Gas Trading and (in particular, line rental) are rising. zones...But the new rates will not be automatic, uncommon, use of services, particularly encouraged by regulatory action, leads to cost five had tariffs costing more. Only six had tariffs private customers bore a heavy fee burden and consumers ‘opting in’ to the cheaper calls energy, was very restricted. Households often reflective pricing and the elimination of cross- producing a saving, the largest being no more than The economic discrimination practised last year, with banks earning $2.1billion from will face higher prices on other products in fine experienced difficulties with a range of subsidies. This means that previously ‘hidden £18 a year. By contrast, all of the companies that against small account holders has become households, up from $1.8 billion in 1999. The print - a situation that the Australian Consumers services at the same time, compounding cross-subsidies’ of certain payment options are have entered the market since competition was the focus of national political debate in growth in these fees has averaged 49% a year Association yesterday labelled as confusing. financial problems revealed. Suppliers seek to gain competitive introduced are offering prices for consumers using recent months, with the Commonwealth between 1997 and 2000, and they are growing • Generally, the poorer the access to a advantage by attracting consumers who pay by other payment methods that are lower than British government and opposition appealing to the faster than fees for business. This ‘good news’ story was followed around service, the more it cost. The higher costs more cost effective payment options. However, Gas Trading’s... banks to adopt ‘social charters’ or face possible two months later by an announcement that line of using pre-payment meters... exacerbated these trends exacerbate existing inequities regulation. Chief Executive Officer of the Loans were the biggest source of fee rental on ordinary household accounts would the difficulties of managing on a low income. between affluent and low income households (viii) OFGEM want to ensure that the process Commonwealth Bank, David Murray, income from households, accounting for 43 per rise by $2.40 to over $20 per month (including since prepayment meter and frequent cash charged to prepayment meter customers reflect threatened to dump the Commonwealth’s small cent, but income from transactions has been GST). The increase was disclosed to account The observation that privatised services options are more commonly used by low income the costs of supplying them, and reviews by account holder, inspiring public wrath and growing faster. holders in a letter announcing a special ‘1 cent were withdrawing from low income households (Baker 2001: 14). OFGEM of these costs have resulted in lower substantial media attention. In an article in the Saturdays / 10 min International $1’ offer neighbourhoods reflects the experience of prices for prepayment meter customers. Age entitled ‘Banking on the rich and famous’, Webb (2001) in the Sunday Age said the (Telstra Retail 2001). The increases provoked private sector service provision in US cities. Many full-time workers were found to have Anne Lampe (2001) said: Reserve Bank had found that banking had ACCC chair Allan Fels to investigate Telstra’s Colton (1995b) cites research by Zidek switched suppliers, but pensioners and those of Approximately 80 per cent of customers become cheaper since deregulation, but the promotion of its ‘low use’ tariff. His findings comparing banking services available to poor ethnic background had not. Many households using pre-payment meters did so because they Essentially they [the banks] want these so- benefits had not been distributed equally. Webb suggested that Telstra had not done enough to black neighbourhoods and those available to were not aware of the costs associated with owed money to British Gas Trading, which called low-value, income diluting or negative- explained that the banks claim that competition ensure those eligible were taking it up. nearby wealthier white neighbourhoods which the various payment methods, for example, that prevented them from switching suppliers: contributing customers to go elsewhere - and to from non-bank mortgage lenders is responsible, found the white areas had three times the pre-payment meters were the most expensive take their unprofitable transactions with them. and has: Carver (1995) says that pricing oversight is services, and those branches had more tellers option. The study cited the demand made by We are very concerned that...customers required to prevent captive residential and loan officers. Redlining involves not just the suppliers that price controls on pre-payment using an average amount of gas pay...around 30 A recent article in Perspective, the forced Australian banks to reduce the customers from footing a greater than refusal to serve, but a refusal to provide the meters be lifted, arguing that the price cap is too per cent more if they pay by a prepayment meter PricewaterhouseCoopers magazine, pointed to a money they made on home mortgages. To off- proportional contribution to sunk costs: same level of service. low and the customers are costly to service. In than paying by monthly direct debt. European survey, which revealed profit margins set this they lifted fees. They argued that ‘Competitive parity between market 22 23 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

participants ought to be an objective of the One of the reasons why the implementation processes has proved far more difficult contestable customers strongly suggests that the regulatory environment in which utilities NINE costs of FRC are likely to be so high is that, and complex than envisaged, leading to a mechanism for demand side bids is not functional. operate’. She recommended that a pricing FULL RETAIL contrary to the intention of a ‘national’ market, delay of one year in Victoria’s case. Technical Wholesale market problems need to be addressed to oversight board be established as part of the the metrology (metering for customer transfer and difficulties and lack of certainty about recovery deliver the correct signals to the retail market. Rebidding market reforms taking place, suggesting that COMPETITION settlements) procedures are being developed by of FRC costs have meant that the Market by generators, physical withdrawal of plant and the poor such a board must consider the issue of each individual jurisdiction and a ‘rail gauge’ Settlements and Transfer systems (MSATS) and liquidity of the hedge market have all been identified as ‘competitive parity’ but should also include: IMPLEMENTATION ISSUES issue has already emerged. Each retailer will Customer Administration and Transfers (CATS) are significant problems. Whilst generators can engage in be required to have different IT build for each at only 20 per cent of total required build and allow market manipulation, new investment in capacity will • Maximum prices that monopolists can jurisdiction it operates in. This escalates the cost an interface with NEMMCO but not much more. fail to make much impact on the security of supply Between 1995 and 2001, small To date, the number of customers in the contestable part of charge should be set through a transparent and is clearly inefficient. One may ask how this This ‘portal’ will not permit automated transfers on problem and the prices such scarcity promotes. customers were franchised the market has been relatively small. This has meant that the and independent process such as a could happen, and it goes back to a fundamental the scale required by mass contestability. At the information technology (IT) requirements for customer statutory tribunal; (not subject to competition) flaw in the NEM in which there is no proper time of writing (September), the MSATS-CATS The lack of demand side response embeds settlement and transfer have also been limited. The • Legislation must provide explicit criteria for and prices were regulated governance. As industry commentator Robert was at the closed trial stage for a market that is intra-customer class cross-subsidies for air infrastructure cost per customer in relation to the profit margin the factors to be taken into account in accordingly. They were Booth (2000) says, it allows the states to behave intended to open to five million small customers in conditioning, the major factor driving peak per customer therefore has been realistic. Moreover, the setting maximum prices; supplied by host retailers who as ‘warring tribes’. The result in terms of FRC is January 2002. The portal may be ready, but it is summer demand and high prices. This market retailers have been able to spread these costs across all their • Efficiency, equity and ecologically had mandated Master Vesting that retailers will choose a jurisdiction rather than highly unlikely that the retailer IT needed for these failure is exacerbated by the ORG’s customers, not just those who are contestable. The IT sustainable development should be Contracts (MVCs) with operate in the national market. It is likely that only customers to switch in a timely and cost effective determination on distribution tariffs in which air requirements for mass contestability (full retail competition) are incorporated into those criteria; and Victorian generators. This host retailers will serve formerly franchised manner will be. In the absence of a cost/benefit conditioning is also heavily cross-subsidised. likely to be enormous. The cost per customer in relation to the • Price regulation should promote least-cost arrangement provided small customers. Non-host retailers can continue to analysis in which both retailers and customers can profit margin available per customer is vastly reduced. Victoria’s planning and demand management as tools serve large customers because the IT they perceive sustained benefits, it is questionable There is a serious conflict between the customers, retailers and host retailers (Citipower, Pulse, TXU, Origin and AGLE) will need for achieving ecologically sustainable currently have will suffice; this capacity also whether the systems will ever be put in place. The objectives of protecting consumers and generators with price stability, to recover these costs at the same time as competing for development. allows them to cherry-pick the largest domestic Victorian government is due to begin its advertising maintaining industry viability in such an but has probably masked customers. users, leaving the host retailers with a residual campaign in September 2001 to promote and prepare Fitch identified a perverse underlying wholesale market environment. Jeannette McHugh (1995), Federal residential and small business class. small customers for the opening of the market in incentive in the New Zealand market in which problems that are now only The Energy Action Group has sought estimates of the IT Minister for Consumer Affairs, in her opening January 2002. There remains a possibility that retailers who were afraid of losing market share if emerging with the expiry of costs, but none of the official authorities have been willing to address to the Consumer Protection and Citipower recently sought increases to the competition will officially exist, but that the ability for they raised retail prices in response to wholesale the MVCs. For example, make any such analysis public - if indeed any such analysis has Utilities Reform seminar, said: deemed contracts/standing offers on the basis of customers to switch will actually be extremely limited. market volatility actually increased their financial because they ensured supply been undertaken. On the basis of the publicly known data, the Energy Action Group estimates the implementation and running FRC costs. Their case is instructive. They have a risk (and loss of margins) because ‘consumers for franchise customers at an In markets where transfer has been possible, Public utilities...must not discriminate costs of FRC (on the basis that current retailers operate in each quite small residential base, but their IT costs are have no incentive to lower demand’. Fitch (2001: assured price, they also customers have been reluctant to switch. In the United against customers who are suffering financial, jurisdiction - i.e. that it is a ‘national’ market) as somewhere basically the same as those of a retailer with three 3) argue that, because the price signal is not limited the extent to which Kingdom, low churn rates and lack of competition - physical or geographical disadvantage...these between $1.5 billion and $4 billion over the next five years. times as many residential customers. This present for the consumer to reduce consumption, generators could manipulate especially for smaller customers - prompted calls by the obligations [must be] enshrined as part of the Unison (2001) argue that the computer costs for FRC in the immediately puts Citipower in an uncompetitive it would be likely that retailers would not have National Electricity Consumer Council (2000) for a mass basic framework of competition policy and the wholesale market. The United Kingdom will be £726 million (£30 per customer) over position vis-à-vis other retailers; moreover, it will appropriate hedge coverage for their entire load. roll-out of interval meters as a means to foster greater privatisation practice. MVCs underwrote competition the next five years, threatening the retail profit margins on small be difficult for them to compete and recover costs Price spikes and lack of hedge coverage ‘can have competition. Similar calls have already been made in the for large contestable customers. These are overhead costs incurred whether or not a at the same time. Combined with the current and disastrous consequences’. United States. New Zealand is cited an example of high Referring to the Consumers customers, giving perhaps an customer switches. If FRC costs are combined with the costs of probably continuing wholesale market volatility, it churn rates by Fitch (2001) (although they have steadied Telecommunication Network’s research For unrealistic picture of acquiring small customers, then the return on investment may is little wonder that Citipower is once again up for Retailers face considerable financial risk as at about 10 per cent a year), but they do not see FRC as Whom the Phone Rings, she noted that: competition. In theory, the actually be negative. If not, the existing tariff rates for small sale. The outcome is likely to be that the a result of having no half-hour demand profile of customers are sold to another retailer, as occurred resulting in even this level in Australia due to the their customers’ load and no ability to control small customer classes no customers are clearly excessive (raising further issues for the The CTN demonstrates the need for social when AGL exited the New Zealand market after advantage of incumbency by existing host retailers. their customers’ consumption. Without smart longer provide such stability. setting of standing offer rates). FRC IT costs effectively mean policy to be integral to the general policy heavy losses. ‘interval’ metering, they have no means to Specialist credit rating agency that the margin for every customer is reduced, even the larger framework for telecommunications. It manage this risk and must pass it on to Fitch (2001) believe that the customers. Some firms may engage in competition in order to recommended (among other things) that social achieve market share (there is a view that retailing businesses FRC is being driven by the jurisdictions. customers - with large cost smearing involved. MVCs hindered the 9.1 LACK OF DEMAND RESPONSE policy objectives be given equal weight in require something in the order of 500,000 customers to be Each jurisdictional participant is able to Interval meters would allow, as Rosen, telecommunications competition with narrow development of a secondary determine when that state will proceed with Sverrisson and Stutz (2000) describe it, financially viable in the future), but it would be a strategy that is key impediment to competition in the hedging market. economic efficiency objectives and that 1 ‘competition’ reform. Both Queensland and ‘negotiating’ rights or, as mentioned earlier, likely to involve substantial initial losses. NEM is a lack of ability for the demand evaluation of the effectiveness of South Australia recently elected to defer FRC. ‘choice’. Washusen (2000) suggests: side to drive price or service delivery. telecommunications competition include Host retailers, on the other hand, have little A low consumption households look unattractive to The current franchise load, around 42 per cent assessment of social policy objectives. option but to proceed if their state government retailers from a margin perspective, but a low consumption 1 The holding of deemed contracts/standing offer prices to the former MUT has meant an un-level playing field between host retailers. The gap between of the Victorian demand, receives no price signal the cost of supply and the price charged (the headroom) to the customer differs between retailers. The two rural retailers do not have much, if any, mandates FRC. For the two states that are household using little high cost power is a different kettle of and therefore cannot be held responsible for the headroom. On the other hand, Pulse has substantial headroom and may be able to engage in a price war without losses. Short-term gains for consumers proceeding - Victoria and New South Wales - fish entirely to a retailer looking at hedge coverage; and a will be rapidly diminished by a longer-term reduction in competition. impact of their demand. In addition, the experience of the development of the IT and ‘back room’ low or marginally profitable household that commits to load 24 25 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

manage during high price periods will be worth up to 1-200 TEN customer segments make. This involves • For market surveillance; and context of a framework that prohibits redlining times more to a retailer than a conventionally ‘profitable’ ANTI-REDLINING removing explicit and implicit cross-subsidies, • For promotion of competition. of customers. The obligation to supply removes high volume consumer who won’t load manage. imposing higher prices, utilising alternative the need to define types of discrimination, but a technologies, seeking government subsidies Competition in the electricity market for the prohibition on discrimination is required in addition Fenn (2000) also argues that demand STRATEGIES and reducing service quality. In some cases, already contestable customers can be to that obligation. The framework would also responsiveness is a key to protecting small ‘captive’ customer segments may afford a characterised as a market where the seller (the require the remedying of fuel poverty. consumers from wholesale price risks. He SAFETY NET ALTERNATIVES? business the opportunity to create cross- retailer) finds buyers and is typical of client- suggests consumer controlled aggregation, subsidies going from marginal customer groups based relationships. This is rational when there National Energy Action (2000a: 130) in the noting the conflict between the incentives for 10.1 ELIMINATING FUEL POVERTY to the profit centre of the business. are a small number of customers and the United Kingdom, in The Case For An Energy growth in consumption on the part of the margin per customer is significant, and where a Universal Service Obligation, says: industry and the interest of consumers in When David Murray, Chief Executive Officer of detailed understanding of the customer’s needs • Sustainable energy services should be controlling consumption in order to control prices: IT SHOULD BE THE OBJECTIVE OF hilst markets have been held up as delivering the Commonwealth Bank, threatens to ‘dump’ is required. It is, however, impractical for a provided at an affordable price; GOVERNMENT TO ELIMINATE FUEL economic efficiency and hence lower prices and small customers, he is asserting that the bank will mass market. Mass markets typically involve • Should be set in terms of people’s needs for POVERTY IN VICTORIA. Community Choice of public Energy Efficiency better services to consumers, the fact that they be judged in the share market as under- the seller attracting buyers via advertising, and actual services e.g. heating, lighting, Electricity prices are not expensive W and Renewables funds is also critically needed to by international standards and the do not treat all consumers equally has rarely received performing. These customers, despite the fact a less customised relationship. With two million cooking, power; mainstream existing summer spike-levelling climate is not severely cold. Fuel attention from our governments in the Australia. This is also that they may not actually be incurring losses for the small customers in Victoria who each represent • There should be a cap on inequality - the technologies that will continue to remain marginal to poverty could be easily and fairly probably true of the other English speaking democracies that bank, are dragging its overall profitability down. As a only a small profit margin for the retailer, it is definition of need should relate to society’s cheaply eliminated given a ‘whole the power supply market as long as the state’s wires of government’ approach to the embraced market reform over the past twenty years. This is consequence, the share value will decline. clearly a mass market. There is only one reason expectation, rather than an ‘absolutist’ notion companies continue to control the hotly contested issue. The government currently now changing in countries such as the United Kingdom, and Universal service meant: why the non-disclosure of price/service offers of minimal need (i.e. social inclusion); energy efficiency and renewables surcharge funds spends between $50 million and $60 increasing pressure is coming to bear on Australian • Explicit cross-subsidies and redistribution of would be sought as a right by retailers, and that • No energy supplier should be able to seek million per annum on energy relief that are currently collected from every Californian. governments as consumer disadvantage becomes more wealth to the smallest customers, promoting is to avoid scrutiny and to enable discrimination competitive advantage by excluding grants and winter energy concessions. This income relief apparent. It reflects perhaps a shift from ‘disadvantage’ as it greater inclusiveness. This policy recognised the between customers. significant sections of the community. The Sacramento Municipal Utility District addresses in part people’s traditionally understood to a greater number of ordinary requirement for certain infrastructure to be in (2000) in California provides a very recent example incapacity to pay, but does nothing consumers being made poorer as a result of the removal of place and to be accessible to enable How the poor fare in markets has long been Colton (1999) proposed that Colorado to resolve non-income related universal service in sectors that have been deregulated. of the benefits of load control. It has a program causes of fuel poverty. In particular, industrialisation and other economic understood (National Consumer Council 1977; adopt a ‘cap the gap’ principle in which called Voluntary Emergency Peak Corps who agree programs to address consumption Programs orientated towards ameliorating this traditional development, especially in regional areas; and Scottish Consumer Council 1994). The National tariffs for residential customers and to have their air conditioning remotely turned off are noticeably absent. This lack is disadvantage can be characterised as safety nets, where • Servicing of low profit customers because it Consumer Council (2000) in the United industrial/commercial customers cannot exceed a economically irrational because the during peak load crises (which have become only ‘a few will fall between the cracks’ and need was economically feasible to do so, given Kingdom has recently sought to understand the predetermined differential. Tariff rebalancing concessions budget (by no means something of a feature of electricity supply in that small) is an ongoing liability to assistance. Disadvantage is believed to be isolated and the the lower rate of return. process more fully, describing ‘consumer therefore would be limited, reflecting social and state). One hundred thousand customers government, whereas retrofit exception, hence programs need only apply to the few. disadvantage’ as a persistent shortfall in welfare objectives. Taking this concept further, participated in the program, which enabled programs are a one-off investment Deregulation will alter what we mean by ‘disadvantage’. In It could be said that the policy preference ‘consumer benefits’ and identifying the causes as: regulators such as the ORG could assess retailers’ that, in a great number of cases, attempting to produce a consumer protection framework for delivery of system security to the wider grid on six will preclude any further material itself for deregulation and privatisation has • Lack of purchasing power; offers in order to determine the implicit rate of occasions and also a tenth consecutive price cut assistance by the state. Moreover, a deregulated industry such as electricity, it is important to created an insatiability for profits that • Exploitation; return and the period over which it is anticipated. at a time when other Californians were there are obvious welfare benefits ask what are the underlying assumptions. necessitates social and economic exclusion • Discrimination; This way the regulator could see how each class experiencing price shocks. of the customer being able to (Kliger 1998, citing Teeple). Government and • Social exclusion; of customer was being treated vis-à-vis other increase spending on energy (these Equity holders, particularly in the share market, have customers typically self-restrict) or regulators need to thoroughly address market • Other people’s transactions; and classes. It could also provide an understanding of One attraction of interval meters in the other essentials. In addition, retrofit greater expectations of higher rates of return than in segmentation issues and the implicit rate of • Provision deficit. how competitive the market was in actuality, and context of full retail competition is that the remote programs will result in the reduction previous eras. This change has taken place since the return for the utility (in total) and for each some insight into what segments may need some of greenhouse gas emissions. meter reading function alleviates the geographical widespread deregulation of the economy. In part this is market segment. They need to develop Their analysis provides an understanding of regulatory change/incentive. Coyle (2000) outlines Government can use its welfare attributable to the promotion of reform by governments and cost differential between customers. Rural spending and environmental regulatory strategies to guarantee social and how these ‘vulnerability factors’ combine with the ease of calculating the basis of returns per the private sector. Debt holders, particularly in privatised customers therefore would start looking more mandate to assist vulnerable economic inclusion. ‘supply features’ (the characteristics of a customer segment. assets, were in many sale processes given very clear signals attractive to serve. Whilst electronic handling can electricity customers. It can also particular market) to cause consumer ensure that the economic regulation about the rate of return that they would be permitted to marginalise some customers, it is also capable of of the industry does not encourage Mass contestability, particularly if disadvantage. Provision ‘deficits’ can be In any framework on pricing, the total cost extract from former government trading enterprises - such remedying other forms of disadvantage, and increasing consumption, or participation is an issue (which, given electricity is identified by plotting vulnerability factors to the customers needs to be examined. expectations being capitalised into the sale price. geographical disadvantage may be one of them. In marginalise those who cannot afford an essential service, it is), requires a market in against the supply features of the industry or Analysis must be sensitive to the imposition of to pay for an adequate level energy order to create an anti-redlining consumer which the buyer chooses the seller, not the other service in question. In developing a consumer penalty charges that are applied mainly to low or those who invest in energy This has engendered a restructuring dynamic in which protection framework, it is essential to make efficiency. From a market way round. Moreover, it requires mandatory protection framework, provision deficits should income customers and can quickly increase the low profit centres and non-performing areas of these retailers ‘blind’ to the location of their customers. perspective, it will be extremely disclosure of, and a high level of understanding in be identified to provide the conceptual basis. actual price paid for service provision. The businesses are being identified and removed. If it is not important for government to ensure regard to, pricing. This is necessary: The vulnerability factors and supply imposition of such charges should be closely that all customers can exercise possible to move the business away from these areas of Competition requires the right price signals • To provide a publicly known market clearing characteristics of the electricity industry quickly scrutinised as they are one method of effectively choice in the market and that the service provision, then strategies are being developed to and the proper allocation of costs. Neither of demand side is capable of price; highlight the need for a legal obligation to allocating costs to the low income segment of the limit exposure to them and increase the contribution these these conditions are going to be met for FRC. influencing market outcomes. • For delivery of non-discriminatory pricing; supply at a fair and reasonable price, in the customer base. 26 27 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

10.2 Market Surveillance Recommendation 8 ELEVEN That the Victorian government provide TWELVE he use of advanced IT to data mine, sort and adequate resources to consumer advocacy analyse personal information provides organisations. Tsubstantial opportunity to utilities seeking to selectively target consumers, especially in relation to RECOMMENDATIONS GLOSSARY bundling of services. It allows profiles of customers and potential customers to be developed and put to a number of uses. This includes selective marketing Recommendation 9 Cherry-picking Master Vesting Contract and identification intended to exclude or deter Recommendation 1 Recommendation 3 That the Victorian government review its own Competing for the most attractive customers The government-negotiated contracts between customers (Coyle 2000; Bowers 2001). It is a while not competing for the unattractive the Victorian generation companies and host That the Victorian government provide for a That the Victorian government ensure effective welfare safety net and orientate it towards quantum leap from the days in which zipcodes customers. retailers which underpinned the prices to legal obligation to supply electricity at a fair and demand side response to prices and enable fast addressing consumption as a means of increasing (postcodes) were used as identifying tags by credit franchise customers in the period up until 2001. reasonable price in amendments to the and efficient customer transfer process by affordability and participation in the market. providers and insurers engaging in redlining. For Demand (Load) Electricity Industry Act 2000. Further, that the mandating a mass roll-out of interval metering example, it is possible to identify a street address as The consumption of the customer. Maximum Uniform Tariff Essential Services Commission develop and as a regulated distribution asset. public housing or cheap private rental. Armed with A tariff that assigns the same price to enforce a consumer bill of rights that provides such knowledge, the retailer can then refuse to offer Distribution Business customers irrespective of location and that for a prohibition on redlining. Such a bill of rights anything but the standing offer (on the assumption The ‘poles and wires’ business that distributes incorporates a maximum price to be paid. would include: Recommendation 10 that poor tenants are either of poor creditworthiness Recommendation 4 That the Victorian government implement non- energy via the low voltage network. or warrant little attention in terms of bundling of Monopoly Pricing • Pricing guidelines providing for non- That the NEM jurisdictions quickly address price measures (for example, taxation services). However, there are similar technologies Franchise Customer The price a monopoly supplier can charge over price discrimination; issues of generator gaming (price measures, rebates, regulation) for demand that provide the capacity to identify such The customer of a monopoly supplier prior to and above what a competitive market would • A ‘cap the gap’ principle; and manipulation), transmission constraints and the management. discrimination. Ralph Nader’s Essential Information’s the opening of the market to full competition. deliver. • Pricing guidelines to remove cross- growth of ancillary service payments. Geographic Information Systems Project ‘allow[s] subsidies for domestic air conditioning. traditional database queries to include the ability to Full Retail Competition Price Taker analyze data based on locality’. This is used by The opening of the electricity market to all A customer who accepts prices which they Essential Information ‘as a tool for advocacy Recommendation 5 Recommendation 11 customers regardless of size. have no market power to affect. purposes...to analyze a variety of databases Recommendation 2 That the Victorian government adopt a least- That the ORG and the Victorian government highlighting patterns of discrimination’ (Essential Hedge Ramsey Pricing That the Victorian government scrap the standing cost planning framework for distribution undertake a review of whether or not bundling of Information n.d.). An action designed to militate against risk. The marking up of prices to customer classes offer provisions and develop an alternative safety regulation. energy services with non-utility products is Financially, hedges can involve a number of who display inelastic demand, in order to deliver net. This may be a state purchasing pool, appropriate. It is absolutely clear that the creation of instruments such as futures, swaps and other lower prices to customer classes whose especially if it was linked to low income programs. residual markets is to be avoided. An alternative is derivatives. demand is more discretionary. If the standing offers were to be retained, they aggregation schemes such as the Community should be linked to government programs that will Recommendation 6 Choice programs proposed by US advocates. Host Retailer Redlining work with the customers to reduce their That extensive publication and promotion of Recommendation 12 These involve the designation of the municipal Retailers who supply customers prior to Price/service discrimination against certain consumption on a permanent level. Such prices and packages be required by legislation. That the ORG instigate a longitudinal study to government as the provider, but permit customers competition. The Victorian host retailers are classes or types of customers. assistance should involve actual retrofits and The opening of the market should involve an examine the impact of the market on vulnerable to opt out. The city secures the supply through Citipower, TXU, AGLE, Pulse and Origin. should not be merely advice. Secondly, the initial period of standardised packages. customers and on customers more generally. contracting. However, as Fenn (2000) has Retrofit standing charges or service to property charges Consumers also need to be made aware that indicated, the city would have a strong interest in, Interval Meter An energy efficiency make-over of a building by should be significantly lowered to permit the there is a distribution price differential. and capacity to undertake, management demand. A meter that is capable of recording replacing inefficient appliances, installing customer greater discretion over their Another option is for the state to be the provider. consumption on an interval basis (e.g. every half insulation, weatherisation etc. consumption. Recommendation 13 A ‘pool’ arrangement using the state’s own That individual investors be encouraged to think an hour), as opposed to simply accumulating purchasing power in the market could secure Recommendation 7 about whether or not utilities can be regarded the total that is read on a periodic basis. Tariff reasonable deals for vulnerable customers. The price schedule for electricity services, That the ORG undertake extensive market as ethical investment if they engage in redlining. Systems benefits charges - or levies on the more Marginal Cost Pricing generally including a per kilowatt hour surveillance and reporting, and resources be Investors should seek to have these companies affluent customers - are common in the United The setting of the price at the ‘marginal cost’ consumption charge and a standing charge or provided to consumer advocates to undertake adopt a social charter that precludes redlining. States as an explicit cross-subsidy intended to (the expenditure actually incurred by producing service to property charge. their own market reporting. benefit low income households. In the United the next unit of product or service). Kingdom, the Utilities Act 2000 provides for Universal Service reserve power to take a similar measure should The supply of a good or service to all customers. disadvantage become pronounced.

28 29 From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria From Universal Service to No Service? The Redlining of Vulnerable Electricity Customers in Victoria

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