Customer Service in Deregulating Electricity Service Industries

1. Customer Service in Deregulating Electricity Service Industries Seun Faluyi Group Head, Power Honeywell Group Limited Lagos

2. 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

3. Generation Transmission Distribution Supply Competitive Electricity Industry Deregulation fragmentation of the traditional industry structure Industry Reform Reg. Distribn Monopolies Regulated Trans. Monopoly Competition in Supply Competition in Generation • Power pooling • Generation wholesaling • Trading • Power Dispatch • System Operation • Network Maintenance • Tariff setting • Fair Access • Power wheeling • Grid operation • Line maintenance • Faults clearing • Meter Reading • Billing • Collection • Complaints • Pricing

4. Liberalised , then privatised Path to Full Competition Market Liberalization Market Liberalisation None Planned Partial Full Eastern Africa State Owned Enterprise Nigeria France Ghana Ireland South Africa Italy East Limited Private Austria Southern Africa Ownership Ownership Spain Finland Portugal Switzerland Sweden West Africa Mixed Norway Privatised , Belgium US. then liberalised Cote d’Ivoire Private UK

5. Government Government control Protectionist Communist Subsidised The Economic Debate Free market economy Centrally Planned/ Controlled economy Ownership • Private • Liberalised • Deregulated • Capitalist • Economic cost Control Market Philosophy Pricing Industry Participation

6. 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 Why Privatization? Overall drivers are both economic and political Deregulation & Privatization

7. 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

8. 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

9. Retail Competition Challenges • Inadequate metering • Cost of metering • Inadequate load profiles • Load profiling rules • Product Commoditisation • Tariffs

10. 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

11. 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

12. Learning Curve for Customers • Total demand • Aggregated demand • Load factors • Seasonal variations • Load management scope • Supplier offers

13. Learning Curve for Wholesalers • Risks • Pool price hedge • Nature of contract • Duration of contract

14. Improved Customer Service • Affinity Deals • Loyalty Deals • Efficiency tariffs • New freezer/fridge trade-in offers • Online services • Combined billing • Insurance offers

15. 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

16. 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

17. 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

18. 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 Retailing Costs Supply Non-fossil 7% fuel levy 9% Transmission 4% Generation 51% Distribution 29% Note:Customer on a standard tariff with an annual consumption of 3,300 kWh Size of an average bill £285 exc VAT Breakdown of costs for a typical domestic customer

19. Retailing Costs • Advertising • Promotion • Marketing • Half hourly meters • Load profiling systems • Energy Settlement systems

20. Recommendations • Continuously review price control mechanisms • Deregulation does not mean non-Regulation • Promote Competition • Competition leads to improved price discovery

21. 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.