‘UK domestic energy contracts, the 28 day rule, and experience in Sweden’

In the UK, domestic customers must be able to terminate energy contracts at 28 days’ notice. This has been seen as a transitional protection for customers and for competition. This paper reviews the arguments for and against the 28 day rule, and examines the extent to which UK suppliers have offered fixed-price fixed-term contracts. It also looks at experience in Sweden, where there is no such restriction and where there is greater use of fixed-price fixed-term contracts. The paper concludes that there is no longer a need for the 28 day rule to protect customers, and that it is more likely to restrict than to protect competition.competition, electricity, regulation

The bird in hand: stipulated settlements and electricity regulation in Florida

In the last two decades many major regulatory issues in Florida have been resolved by means of stipulated settlements between the utilities and interested parties, notably the Office of Public Counsel, instead of by the traditional method of hearings and litigation before the Public Services Commission. This paper investigates the extent, nature and effects of these stipulations in the electricity sector there. They have now largely superceded the litigated process. Their purpose is not to save costs, which are orders of magnitude less than the revenues at stake. Stipulations have brought reductions in electricity revenues worth over $3 billion, mainly during the last decade. These reductions are greater than would have otherwise occurred: about three quarters might never have occurred at all. In some cases a change in the method of rate reduction favoured industrial consumers but other customers are nonetheless likely to have benefited despite this. Some benefits were outside the scope of the commission to confer. Other benefits reflected a more flexible accounting policy. Most importantly, there has been a shift from conventional rate of return regulation, and from earnings sharing schemes with profits caps, to prices fixed for specified periods of time with revenue-sharing incentive arrangements. Stipulations have transformed the regulatory landscape in the Florida electricity sector, and their use seems worth considering elsewhere.stipulations, settlements, consumer advocate, regulation.

The Process of Negotiating Settlements at FERC

Interstate gas pipelines and their customers presently settle about 90% of the rate cases set for hearing before the Federal Energy Regulatory Commission (FERC). In recent years, the median time for negotiating settlements and having them approved is about 11 months, compared to several years to complete litigated hearings. This paper explores how this is achieved. FERC has a tight schedule for the hearing process. In contrast to other jurisdictions, FERC Trial Staff play an active role in facilitating negotiation and settlement. They propose a first settlement offer 3 months after a pipeline files for a tariff rate increase. An analysis of the 9 cases over the last two years where full and uncontested settlement was reached shows that discussions led by Trial Staff led to agreement in principle in a median time of 2 ½ months after this first offer, just before testimony would otherwise need to have been filed. It took a further 2 ½ months for the parties to finalise the wording of the settlement and to obtain the judge’s certification that it was uncontested, and 3 months for FERC formally to approve it. FERC’s settlement process has worked successfully and essentially unchanged for over 35 years. It suggests a more active role for the regulatory body than was previously apparent

Promoting or restricting competition?: Regulation of the UK retail residential energy market since 2008

Since 2008 UK energy regulator Ofgem has imposed increasingly severe restrictions on suppliers to the domestic (residential) retail market. Initially, non-discrimination conditions aimed to “remove unfair price differentials”, particularly between suppliers' prices between regions, totalling £0.5 bn. This actually envisaged increasing prices to other customers by £0.5 billion, to maintain revenue neutrality. In the event, competition reduced, customer switching fell by half, and profits of major suppliers increased by nearly £1 billion, at the expense of customers. Later, restrictions on the number and types of tariffs aimed to encourage customers to engage in the market. However, there is no empirical evidence to justify this, and the policy prohibits many discounts and tariff types that customers value, especially vulnerable customers. Perhaps Ofgem felt pressed to Do Something in the face of an unprecedented increase in energy prices. Successive Governments have supported its interventions, but cannot be blamed for designing them. The decline of economists in senior positions at Ofgem removed an important 'sanity check'. But Ofgem itself bears responsibility for its change in policy since 2008. It may have been well-meaning, attempting to protect the interests of vulnerable customers, but inappropriate restrictions have made customers worse off. Should other regulators follow suit? No. Hopefully the CMA market investigation will reveal this and bring to an end one of the most misguided episodes in the modern history of UK regulation

The competition assessment framework for the retail energy sector: some concerns about the proposed interpretation

The framework proposed by Ofgem, OFT and CMA invokes a well-functioning market, but the Competition Commission has not always used such a concept, and when it has done so it has been problematic. Here, the well-functioning market is Ofgem's vision of a successful market, not anchored in any actual market. Ofgem's indicators of a competitive market have changed since 2002: tariff variety and products tailored to different customer groups are now a harmful complexity rather than a potential benefit of competition. The proposed “theories of harm” ignore regulatory policy and coordinated conduct facilitated by regulation. The analysis of weak customer response fails to distinguish between competition as an equilibrium state and as the Competition Commission's rivalrous discovery process over time. The framework thus reflects Ofgem's perspective, but the assessment needs to be independent because regulation is at issue, and because Ofgem is no longer capable of a competition assessment

The Hunter Valley Access Undertaking: elements of a negotiated settlement

On 29 June 2011 the Australian Competition and Consumer Commission (ACCC) accepted an access undertaking from Australian Rail Track Corporation (ARTC) in relation to the Hunter Valley rail network. The ACCC encouraged ARTC and its users (principally coal producers) to discuss and negotiate the detail of the undertaking. At the final stage the parties were able to resolve their differences and put an agreed undertaking to the ACCC. Compared to the undertaking that the ACCC would likely otherwise have accepted, this agreement was for a shorter term and embodied other provisions preferred by the users, in return for a higher rate of return requested by ARTC. The paper discusses the nature and lessons of this settlement process

The Creation of a Market for Retail Electricity Supply

In September 1989, as part of its privatization program, the Government laid down an eight year timetable for opening up to retail competition the entire electricity market of England and Wales, phased over the period 1990-1998. It might be assumed that the Government was in a position to specify all the arrangements, and that this was part of a considered policy to facilitate the introduction and implementation of competition. But previous accounts suggest that the outcome was part of a deal between generators and regional companies to limit competition (Henney 1994), or was intended to set targets to force companies, regulators and government to come up with practical solutions (Helm 2004). The Department of Energy’s internal History of Electricity Privatisation, only now available, shows that there is merit in these last two suggestions. However, it also documents the significantly evolving views within Government as the implications of retail competition became clearer, not least for electricity contracts and for privatization of the coal industry. Initially, retail competition was hardly worth mentioning, later it was a mild concern that could be met by a small tranche of spot-price contracts, by July 1989 the plan was to introduce full competition immediately with short-term instead of long-term contracts. But the industry resisted, and in September 1989 the Government accepted the industry proposal of a franchise monopoly to enable a mix of short, medium and long-term contracts, though it insisted that the franchise should have an eight year limit. The approach may not be a model for others, but it may not be atypical of how governments actually behave in balancing conflicting objectives and practical constraints, save perhaps for the distinctive commitment to competition exhibited by the leading actors here

The Process of Negotiating Settlements at FERC

Interstate gas pipelines and their customers presently settle about 90% of the rate cases set for hearing before the Federal Energy Regulatory Commission (FERC). In recent years, the median time for negotiating settlements and having them approved is about 11 months, compared to several years to complete litigated hearings. This paper explores how this is achieved. FERC has a tight schedule for the hearing process. In contrast to other jurisdictions, FERC Trial Staff play an active role in facilitating negotiation and settlement. They propose a first settlement offer 3 months after a pipeline files for a tariff rate increase. An analysis of the 9 cases over the last two years where full and uncontested settlement was reached shows that discussions led by Trial Staff led to agreement in principle in a median time of 2 ½ months after this first offer, just before testimony would otherwise need to have been filed. It took a further 2 ½ months for the parties to finalise the wording of the settlement and to obtain the judge’s certification that it was uncontested, and 3 months for FERC formally to approve it. FERC’s settlement process has worked successfully and essentially unchanged for over 35 years. It suggests a more active role for the regulatory body than was previously apparent

Merchant and Regulated Transmission: Theory, Evidence and Policy

Economists acknowledge the problems of regulated transmission but take different views about the likely efficiency of merchant transmission. This paper examines the evidence on alleged market failure and regulatory failure as experienced in practice in Australia and Argentina. In these examples, merchant transmission (broadly defined to include private initiatives) has generally not exhibited the standard examples of market failure but regulated transmission generally has exhibited the standard examples of regulatory failure. Imperfect information – more specifically, in the form of lack of coordination – has often been a challenge whatever the approach. Policy should therefore seek to improve the regulatory framework and to remove barriers to merchant transmission and private initiatives. An important role for regulation is to facilitate coordination between potential providers and users of transmission lines

Regulation, customer protection and customer engagement

The UK utility regulation framework developed in the 1980s was intended to improve on the restrictive, inefficient and burdensome regulatory approach in the US. But the UK regulatory process has itself now become increasingly burdensome. Meanwhile, utilities and customer groups in the US and Canada have developed methods of negotiating and settling regulatory issues that more directly reflect the interests of customers, often embody incentive price caps as in the UK, and avoid unduly burdensome regulatory processes. There is now scope for UK regulators to learn from overseas. This paper summarises these developments. It then examines how three UK utility regulators – the CAA, Ofgem and Ofwat - are responding to them. Briefly, the CAA has moved firmly in this direction, but Ofgem and Ofwat have nominally rejected it while seeking to secure many of the benefits of the approach via a less committed process. There is scope for governments to encourage a regulatory approach that offers the prospect of better outcomes for customers and a less onerous process for all concerned