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"Two separate contracts – one for distribution, one for sales of electricity or painting a ford-T yellow"

Robert Guzik
Department for Promotion of Competition

You can paint it any color, so long as it’s black - although there is no proof that Henry Ford did actually say it, this quote is often perceived as the essence of the seeming right to choose where in fact there is no other option available. It may very well be true in case of the customers’ right to choose their electricity supplier. Although provision of art. 4j of the Energy Law entitling all electricity customers1] to freely switch a supplier removes legal monopoly in electricity supply, it is by far insufficient for retail competition to come into being. The factual monopoly of incumbent distribution companies results from two circumstances. Firstly, customers are bound by contracts signed with incumbent suppliers. Secondly, chances that new competitors could enter the retail market are slim.

 

Contracts

Household customers buy electricity in packages combining the product itself with its physical delivery (transport). This is done on the basis of an agreement called the universal contract. The transport service is unique as it can only be accomplished by means of using a specific infrastructure: transmission and distribution networks. Switching supplier does not imply connecting to a different network - a customer remains physically connected to the same distribution network and keeps the right to be served on the same terms. All that is changing is the company selling electricity. The prerequisite for an effective switch is the split of the universal contract into two separate ones – sales and distribution.

It seems however that although the Energy Law was amended with a goal to implement customers’ right to choose supplier, it does not provide for rules eliminating the obstacles preventing household customers from switching. Lack of obligation to split contracts can be the foremost cause of their reluctance. Even after unbundling of the distribution system operator (DSO) a trader functioning within the same capital group will take over all household customers inheriting universal contracts and signing just one comprehensive distribution agreement with the DSO. The ford will remain black unless a customer himself arranges for varnish and additional painting.

 

Competition among suppliers

Here the situation is more complex. It seems obvious that the incumbent supplier will have no incentive to voluntarily facilitate customer’s switching to a competing company. The possibility of newcomer traders to successfully enter the retail market depends on the terms and conditions of operation they face as compared to incumbents. These terms include a number of issues: access to the metered data, customers’ demand assessments and switching procedures.

 

Metering data

Conditions of access to customers’ consumption data are the key factor in terms of development of competition because he who owns the data actually rules the market. The party responsible for metering should act independently from both traders and network companies. Data reading and processing, billing as well as error and claims handling are related problems that could be to the large extend solved by installing electronic hourly metering devices. These measure the actual hourly consumption of electricity instead of a sum of electricity consumed over a longer period usually read once or twice a year. If all customers including households are to be equipped with such meters it cannot be achieved sooner than in the course of a few years provided a respective meters replacement program is launched. Considering that a data approximating approach has to be adopted meanwhile.

 

Demand profiles

The Energy Law Act takes no account of the standard demand profiles for small consumption customers. The DSO as parties currently responsible for demand data management are predestined to work out such profiles and render them accessible to traders. The profiles should be adopted as a part of the distribution system grid codes subject to the regulatory authority approval.

 

Switching procedures

The last potential barrier to switching that requires removal by means of undertaking legal steps is lack of standardized switching procedures. It refers to definitions of individual actions and their durations that have to be fulfilled in order for a switch to take effect. These actions should be defined such that, from a customer’s point of view, the switching process is as simple as choosing a mobile telephone operator. The rules should be therefore transparent and straightforward. This, along with the time limit imposed on the switching process stages and standardized agreements, adds up to a solid legal framework for switching. Assuming that universal agreements have been separated, the sample stages of switching as perceived by a customer could look as follows:

day 1 – choice of a new supplier, signing of a new contract,

day 8 – new contract renouncement deadline, cancellation of the old contract (with a 30 day notice), providing the DSO with information about the new supplier,

day 39 – old contract expiration date, new contract coming into force.

In the meantime, i.e. between days 8 and 39 some technical operations take place of which a customer does not have to be aware e.g.:
- notification to the DSO (by the new supplier),
- notification to the old supplier, registration of the new supplier and assigning a customer’s metering point, sending confirmation to both suppliers (by the DSO),
- submitting reservations to switch (by the old supplier),
- meter reading or assessment of consumption on the basis of profile, sending metered data to both suppliers and customer (by the DSO or metering operator if appointed),
- billing (by the old supplier).

All of the above stages and their maximum duration should be defined in the secondary legislation.

 

Conclusions

The effective implementation of the customers’ right to choose electricity supplier has to be underpinned by the appropriate market design with well defined roles and responsibilities of all players. This requires elaborating a legal framework providing for standard technical requirements with respect to metering and data transmission systems and standard procedures. So far barriers that non-household customers in Poland have encountered while attempting to switch indicate that incumbent monopolists are likely to apply complex and non-transparent procedures allowing them to maintain their market position. Therefore this matter must not be left at their discretion if we want the right to choose not to remain a meaningless notation and our fords not to remain compulsory black.

 

 



1] In case of households it will become effective on 1 July 2007.
29.05.2007

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