1. Retail market competition 1 st ATE Symposium, Massey University, Auckland 12 December 2013 Carl Hansen

2. Overview  Brief overview of current regulatory arrangements for electricity  Competition in the NZ retail electricity market  Initiatives to enhance retail market competition in NZ

3. Statutory Objective For the long term benefit of consumers Promote Competition Promote Reliable supply Promote Efficient operation Reducing barriers Providing efficient price signals Fit-for- purpose market services How Facilitating consumer participation Promoting flexibility & resilience Increasing compliance with the rules Our objective is specified in s15 of the Act

4. Big lift in perceptions of wholesale competition but no change for retail competition  Survey statement: prices in [this] market reflect the outcomes expected in a workably competitive market 2013 Survey 2011 Survey Retail Spot Futures

5. Structure  Seller and buyer concentration indicators  Barriers to entry indicators Conduct  Price vs. cost indicators  Output withholding indicators, curious bids and offers  Competitive marketing activity Performance  Static efficiency indicators  Dynamic efficiency/innovation indicators Metrics for monitoring competition

6. Competition in the NZ retail electricity market 6

7. New Zealand has 13 independent electricity retailers Market share of connections 7 Any chance one of these will be a disruptive force? Or will it be one of the 9 potential new entrants?

8. Small retailers have expanded rapidly since 2008

9. Retail market concentration (HHI) has declined significantly

10. Sharp reductions in HHI are clearly possible in NZ

11. Significant reduction in market share of largest retailer per region … driving the reduction in HHI

12. Big increase in pitching to customers since 2011

13. Before WMN After WMN Retailer advertising now more price-focused?

14. C&I prices rose considerably over 2001–2009 period Prices in 2013 dollars 2001-2009 FRC starts Choice starts

15. C&I price rises due to rises in LRMC of generation 2001-2009

16. But residential prices have risen faster than C&I prices since 1985 and since 2001 – why? Prices in 2013 dollars FRC No Residential Competition

17. Residential demand is very peaky: eg Pauatahanui

18. Modelled cost-to-serve for three customer types

19. Long-dated futures prices fallen sharply since July 2012 – will they flow into lower residential prices? Blue line shows average prices for long duration contracts – large fall in prices due to flat demand and over investment in generation capacity Red line shows average prices for short duration contracts – largely driven by hydro conditions

20.  QSDEP: posted residential prices increased 3.3% (annual)  Energy component contributed 2.5%  Distribution and transmission contributed 0.8%  But QSDEP (and Stats NZ prices) don’t capture many discounts  Ad-hoc discounts to attract residential customers range $80 - $300  A $150 upfront discount = 6% price reduction for an average consumer  This amounts to 1.7c/kWh off 28c/kWh  Comparable to dollar value of discounts for C&I customers  Anecdotal evidence that C&I receiving 2.5c/kWh off 11c/kWh  Reduction in futures prices flowing to some residential consumers  Implies strong competition for some residential consumers Posted prices increase in 2013 but also significant discounting to attract new customers/retain shoppers 20

21. Cost drivers for stand-alone retailer since Sept 2010

22. Costs facing stand-alone retailers rose faster than residential prices for Dec 2010 – Mar 2013 Is this an indictor of a workably competitive retail market?

23. Initiatives to further enhance retail market competition 23

24.  Is this due to poor visibility of retail prices (and prices vs. costs)?  Until very recently consumers rarely saw mass advertising of residential retail price discounting  Complex pricing structures make it difficult for consumers to know their average effective price (c/kWh) for electricity  There don’t appear to be accurate and timely measures of aggregate residential retail prices  There has been no measure of prices relative to the cost-to-serve residential customers  There is a lack of authoritative reporting about drivers of price changes Retail market not widely seen as workably competitive 24

25.  Or is it that we don’t yet have strong enough competition for residential consumers?  Too risky for new entrant retailers to ‘take on’ the incumbents?  Are there barriers inhibiting expansionary retailers from easily finding the profitable customers?  Are residential consumers easily segmented?  Strong competition for ‘active shoppers’ but weak competition for inactive consumers?  Hence competition for marginal consumers doesn’t discipline pricing for all consumers?  Evergreen contracts allow consumers to avoid decision-making?  Complex retail pricing structures making decision-making difficult for consumers?  Barriers to competitive provision of switching services for residential customers?  Barriers to group switching initiatives? Retail market not widely seen as workably competitive 25

26. Initiatives to reduce barriers to retailer expansion Ancillary Services Spot Hedge Retail Transport 3. Review ‘saves’ to ensure level playing field for new entrants 2. Improve retailer access to consumer information 4. Revise prudential rules to reduce retailer risks 5. Introduce pivotal pricing rules to reduce retailer risks 6. Review of distributor contracts potentially inhibiting retailer access 1. Review of barriers to retailer competition on embedded networks 8. Extend FTR market to more locations to assist retailers to manage risks 7. Introduce peak load futures to assist retailers to manage risks

27. Initiatives to enhance consumer choice Ancillary Services Spot Hedge Retail Transport 5. Continue WMN campaign? 4. Review of barriers to group switching and mass market aggregation 2. Improve consumer ability to compare retail pricing offers 1. RAG project: improve transparency of consumer electricity charges 3. Review impact of low user fixed charge regulations

28. Discussion 28

29. Our latest enquiry is on ‘saves’ and ‘win-backs’