Customer Service in Deregulating Electricity Service Industries

Seun FaluyiGroup Head, Power

Honeywell Group LimitedLagos

Customer Service in Deregulating Electricity Service Industries

Introduction Deregulation in the Electricity Supply

Industry Deregulation and competition in

developing countries Merits of Competition in the Electricity

Supply Industry Customer Service Opportunities for

utilities Recommendations for African

economies

fragmentation of the traditional industry structure

GenerationGeneration TransmissionTransmission

Industry Reform

Regulated Trans. Monopoly

Regulated Trans. Monopoly

Reg. Distribn Monopolies

Reg. Distribn Monopolies

Competition in Supply

Competition in Supply

DistributionDistribution SupplySupply

Competition in Generation

Competition in Generation

Deregulation

Competitive Electricity Industry

•Meter Reading•Billing•Collection•Complaints•Pricing

•Power pooling•Generation wholesaling

•Trading

•Power Dispatch•System Operation

•Network Maintenance

•Tariff setting•Fair Access

•Power wheeling

•Grid operation•Line maintenance

•Faults clearing

Path to Full Competition

Eastern AfricaFranceIreland

South Africa

Ghana

Italy

Nigeria

East

Austria

Southern Africa

SwitzerlandPortugal Spain

West Africa

Cote d’Ivoire

US.Belgium

FinlandSweden

Norway

UK

Market Liberalisation Market Liberalization

Ow

ne

rsh

ipO

wn

ers

hip

Private

Mixed

Limited Private

State Owned

Enterprise

None Planned Partial Full

,Liberalisedthen

privatised

,Privatisedthen

liberalised

The Economic Debate

Government

Government control

Protectionist

Communist

Subsidised

Centrally Planned/ Controlled economy

Free market economy

Private

Liberalised

Deregulated

Capitalist

Economic cost

Ownership

Control

Market Philosophy

Pricing

Industry Participatio

n

Deregulation & Privatization

Why Privatization? Desire for governments

to stimulate economic growth

Decreasing ability of governments to fund incumbents

Demands for increased efficiency of operations

Demand for increased investments to improve supplies and services

Demands for lower prices

Overall drivers are both economic and political

Value adding Functions of Retailers

Convenience of times and locations Complementary products Extensive inventories Multiple points of sale After sales service Discounts available from bulk buying Accurate and detailed information on

product quality and service

Basis for Product Development

Terms of payment Price Quality of Service Time of Use Source of Supply Point of Sale Security of Supply Product bundling Value added services

Retail Competition Challenges

Inadequate metering Cost of metering Inadequate load profiles Load profiling rules Product Commoditisation Tariffs

Social Value of Competition Efficient price formation Transparency in pricing determination

e.g Time of Use Duration of contract, etc

Informed decision making Better customers choice Better supplier offers Choice of plants

Learning Curve for Utilities Uniform fixed price Time of day, Time of year Interruptible prices Pool prices Hedging contracts Load contracts – Base load, peaking load Contract durations – monthly, yearly, multi-year Portfolio mix Contract Risks Competitive positioning strategies Business policies Market share

Learning Curve for Customers

Total demand Aggregated demand Load factors Seasonal variations Load management scope Supplier offers

Learning Curve for Wholesalers

Risks Pool price hedge Nature of contract Duration of contract

Improved Customer Service

Affinity Deals Loyalty Deals Efficiency tariffs New freezer/fridge trade-in offers Online services Combined billing Insurance offers

Customer Benefits Lower prices for interruptible contracts Billing flexibility

monthly, quarterly, etc Itemized site-by-site or aggregated bill Usage analysis for energy audits

Fixed price per month Dependent on size of family, type of house,

etc Tariffs for disadvantaged people

E.g. elderly people, less affluent people, Rural customers, students

Social Benefits Improved price responsiveness Greater durations of forward contracting

Reduces supplier risk, improves stability of supply, reduces price

Increased supplier competition More innovations in supplier offers, greater willingness to take exposed positions, design of new contract forms, willingness to incorporate non-price elements, willingness to seek out new trading partners e.g. embedded generators, distributed generators, entry encouragement for new and efficient suppliers

Other Benefits Growth of financial intermediaries

Brokers who take financial risks, arbitrage positions, deal packaging

Transmission and Distribution efficiencies Stimulation of distributed generation, on-

site generation, construction of more local connections bypassing local network, newer investments in distribution

Improved cost allocations

Retailing Costs

Retailing costs are small and increases do not add much to the final bill

Benefits of retailing translate to a much greater reduction in customer bills due to improved pricing for generation and reduced costs for distribution

Note:Customer on a standard tariff with an annual consumption of 3,300 kWh

Breakdown of costs for a typical domestic customer

Generation51%

Distribution29%

Non-fossil fuel levy

9%

Supply7%

Transmission4%

Size of an average bill £285 exc VAT

Retailing Costs

Advertising Promotion Marketing Half hourly meters Load profiling systems Energy Settlement systems

Recommendations

Continuously review price control mechanisms Deregulation does not mean non-

Regulation Promote Competition

Competition leads to improved price discovery

References Beesley, Michael E. 1997. Privatization, Regulation and

Deregulation, London and New York: Routledge, second edition (first edition 1992).

Beesley, Michael E, and Littlechild, Stephen C. 1989. “The regulation of privatized monopolies in the United Kingdom”, RAND Journal of Economics, Vol. 20, No 3, Autumn, pp. 454 – 72.

Goulding, A J, Ruffin, Carlos and Swinand, Gregory. 1999. “The Role of Vibrant Retail Electricity Markets in Assuring that Wholesale Power Markets Operate Effectively”, The Electricity Journal, Vol. 12, No. 10 (December): 61-73.

Hayek, F A. 1948. “The Meaning of Competition”, chapter V in Individualism and Economic Order, Chicago: The University of Chicago Press.