End-User Advocacy in the National Electricity Market

Submission to a review by the ACCC of proposals by the National
Electricity Code Administrator to fund advocacy groups to
represent consumer views to the electricity regulatory authorities

1 SUMMARY

1.1 THE PROPOSALS

NECA proposes to ensure greater consultation with bodies claiming to represent end-users in administering the National Electricity Code.  It proposes to do so by increasing the scope for consultation and by levying suppliers, and hence consumers, so that bodies claiming to represent the latter can be funded.

1.2 INCREASED CONSULTATION

There is much in the NECA proposal with which few could find reason to object.  More consultation, the use of draft reports and having these reports specifically address matters raised is a useful discipline on regulatory agencies.  Such disciplines in one sense amount to homilies -- consultation can not be legitimately opposed.  On the other hand if consultations are allowed to spin out over indefinite, or even long, periods they prevent rapid decision taking.  Often, proposals to increase consultation are euphemisms to afford increased influence to the parties seeking it.

Limits on who may be afforded "standing" were traditional means by which the judicial process has avoided excessive delays and interference in decision making processes by busybodies.  Some of these limitations have been markedly eroded over recent decades -- in a process that has coincided with the growth of social activism, advocacy groups seek to use judicial and quasi-judicial avenues to promote their goals, (see Huber ⁽¹⁾).

There is presently considerable opportunity for almost any organisation or individual to comment on proposals regarding the National Electricity Code.  Several of the bodies that were originally behind the initiative are particularly vocal in this process.  Accordingly, we do not support the proposal that the bodies claiming to represent consumers be afforded rights, in excess of those they already have, to be involved in the decision making process.

The National Market is a means by which rules are set to allow the efficient production, dispatch and sale of electricity within a rivalrous framework.  Regulatory agencies are the arbiters of price and service levels for monopoly components.  There is a danger that increased consultation will amount to shifting the market rules in favour of "social equity" or to prevent "excessive" profits.  Such shifts would degrade that market, ultimately to the disadvantage of consumers.

1.3 IMPLEMENTING A TAX OR LEVY ON CONSUMERS TO FUND CONSULTATIVE BODIES

We oppose the proposals to tax the market participants (in the final analysis, the consumers) and allocate the sums raised to groups that claim to represent consumers.  It considers that:

• It is improper for a regulatory agency to assume taxation rights, rights that were not specified by jurisdictions in the adoption of the National Electricity Law and which are properly only available to Parliaments.
• Any residual responsibilities for ensuring markets meet consumer needs fall to agencies of government like departments of consumer affairs, the ACCC and the Productivity Commission.  Within the limits of their budgets and legislative and ministerial guidelines, such agencies may seek advice from any bodies they consider to be useful.  The proposal to fund outside bodies would, de facto, increase the funding to these bodies including the ACCC and other members of the Utility Regulators Forum.  It would be egregious for a regulatory body to supplement its own funding in this way.
• There will be any number of bodies claiming to represent consumers, most of which represent only their sponsors and are keen to obtain revenue through compulsion rather than by demonstrating their ability to provide value.
• It will not be easy to control the cost, and the coalition of interests necessary to agree a budget is likely to ensure a progressive increase year by year.
• In well-functioning markets, like the emerging national electricity market, it is retailers that represent the interests of consumers;  they do so not out of benevolence but out of necessity, since the retailer failing to supply goods and services that meet consumers' needs will lose market share and eventually be forced out of business.
• Many bodies claiming to represent consumer interests do not do so.  They do not have the appropriate accountability or governance structure and are often dominated by and express the views of a small clique.  If those groups are given preferred access, this could undermine consumer interests.

2 BACKGROUND

In its 22 December 1999 authorisation, the ACCC required that

C6.2 NECA is to provide a report by 30 June 2000 into the feasibility and resourcing of an end-user advocacy group to participate in NEM decision making, with a view to making recommendations for consideration in the next NEM budget cycle.  The report is to include a review of 8.3.4(c) and related clauses with a view to improving the involvement of non-Code Participants in NEM decision making.

C6.3 NECA is to establish a committee made up of market participants and end-users, or their representatives, to assist it in undertaking the review specified in condition C6.2.  End-users and end-user representatives are to comprise at least 50% of the membership of the committee.

This followed intensive lobbying by advocacy groups, lobbying to which the ACCC to its discredit gave apparent comfort ⁽²⁾.  Indeed the second part of the decision appears calculated to ensure that the advocacy groups were assured a majority.

The NECA report argues:

"Small and medium end users, in particular, currently generally do not have access to sufficient human and financial resources to ensure adequate representation whatever those arrangements.  They should not be left out of the decision-making process solely because of lack of resources."

This, and the lack of overseas precedent, leads NECA to the view that a voluntary process would not work.

NECA argues that "the case for end-use customers to be appropriately involved in national market decision-making is unarguable."  And so it is.  The issue is how to ensure that participation.  In this respect we oppose the views set out by NECA.

3 CONSIDERATION OF THE FUNDING ISSUES

3.1 REGULATORS ASSUMING A TAXATION ROLE

The ACCC's funding is determined by the Commonwealth Parliament.  NECA (and NEMMCO) have funding levels determined by provisions in the Code.  These provisions can be modified in the light of changing circumstances.  However, the introduction of the end-user advocacy function is, in effect, a major new body.  Its recommended funding level on the proposal that the ACCC addressed is almost half that of NECA.  Had the jurisdictions who agreed to the Code wished, they could have created such a body from the outset.

We note that only one Government agency, the NSW Department of Minerals and Energy, appears to have acquiesced in the proposed course.  That position was registered in a very brief email.  No other jurisdiction has given similar support.

It is our view that imposts like the ones proposed are not the prerogative of agencies independent of the Parliament.  Should governments wish to fund an activity by hypothecating a tax to it, they are at liberty to do so and are answerable to the electorate.  A regulatory agency can never be answerable in such ways.

It has been said that levies to fund consumer representation are common.  According to NECA, such funding is available in the UK and in 46 of the 50 US states.  However, these arrangements pre-date the existence of electricity markets.  Where monopolies are in place it is not unreasonable that the monopolist funds some voice from the users (though this would not obviate the normal problems of capture either by radical consumerists or by sectional user groups).

We are now in the process of shifting to a full market where all customers are contestable and where retailers will be anxious to win sales by acting in the customers' interests.

Some suggest that the levy will be funded out of profits.  This is not possible.  If it were to occur resources would leave the industry to seek out better avenues for income.  In effect, such activity would take place in the electricity industry through retailers reducing the resources they allocate to the industry.  This would frustrate the development of the efficiency the industry is capable of achieving.  Hence, the levy is quite clearly a tax on the retailers, the effects of which must be passed back onto the customer.

One Australian industry which is in an analogous situation is telecommunications.  Under the previous monopoly Telecom used to fund independent representation and research.  An Australian Democrat initiative led to the introduction of and Parliamentary agreement to section 593(1) of the Telecommunications Act (1997).  This makes provision for Parliament to appropriate and the Minister to disburse funds for consumer representation and research.  The funds are recouped from carrier licence fees.

The telecommunications model has a number of differences from the present proposal:

• an annual appropriation is made by the Parliament and the Minister determines how much of this shall be actually spent;
• the final decision on each disbursement is made by the responsible Minister, assisted by advisory panels;
• there is a strict requirement for any consumer funded representation to demonstrate its consumer ties (and for this reason the Communications Law Centre is not significantly funded).

Most of the funding, around $800,000 last year, actually goes to three organisations:  the Consumers' Telecommunications Network, the Small Enterprise Telecommunications Centre and the National Federation of the Blind Citizens of Australia.

3.2 GOVERNMENT AGENCIES AS CONSUMERS' REPRESENTATIVES

It is our view that the proposed consumer advocacy body would assume functions which are already being undertaken.  NECA itself and the ACCC are bodies charged with ensuring efficient outcomes and taking into consideration all interests.  Consumer interests are paramount in this process.  In other words, the regulatory bodies act as honest brokers between conflicting interests and must necessarily provide their own input where they consider a party is insufficiently represented.

The deemed existence of monopoly elements in the electricity supply industry (the poles and wires) gives rise to the need for regulatory oversight and regulatory bodies at the state and national levels.  The price and service controls that the regulatory bodies possess are designed precisely to prevent monopoly elements exploiting their positions in the marketplace.  To the degree these bodies with the designated responsibilities consider they need to solicit additional views that canvas a consumer perspective, they are funded to do so.  In fact NECA itself has announced funding to ensure it is fully appraised of views that take this perspective.

These matters add a further complicating element in the decision making role the ACCC may assume on this matter.  If the ACCC requires the market to furnish additional funding for this purpose, it is, in effect, legislating to increase budgets, including the budget of itself and its sister organisations in the Utility Regulators Forum.  The regulatory agency would therefore not only be assuming a taxation power but it would be doing so for its own direct benefit.  For this reason alone, it would be quite improper for the ACCC to support the proposal.

3.3 CONTROLLING THE COSTS AND DETERMINING WHO SHOULD BE THE FUNDED BENEFICIARIES

The proposals incorporate rather vague disciplines to ensure the costs are closely controlled and justified by need.  As the foregoing explains, the only rationale for any funding or regulatory control is the existence of natural monopoly.  Already we are seeing entrepreneurial interconnects undermining monopoly in transmission and developments like Powercor's Docklands grid impacting on the monopoly of local distribution.  Distributed energy in the form of co-generation will further diminish the need for regulation.

In these circumstances, even if there were a justification to do so, it is not advisable to introduce yet another rate-payer funded body into the electricity supply industry.

In addition, deciding the aggregate level of funding for the group will be difficult.  As footnote 2 indicates, the starting bid for those seeking funding was $2.7 million per annum, most of which was to be spent on their own remuneration and travel (the Pareto Economics report sought per diem remuneration levels similar to those of the NECA Board).  The Energy Users Group, while not requiring that it determine for itself the quantum of funds available, said in its submission on the matter "Determining funding priorities is a matter best left to end-users themselves through the National End-User Council, which end users have already moved to establish".

The Public Interest Advocacy Centre (PIAC) has drawn attention to the likelihood of a coalition of advocates carving up the bird between themselves (and presumably leaving too little for PIAC).  Indeed, the balanced panel that NECA advocates (an independent Chairman, two retailers, one business user and one residential end-user) is certain to result in coalitions emerging to divide the spoils.

PIAC argues that there is nothing to be gained from research financed by a levy that simply benefits business and other large users who should be capable of funding their own research.

We see merit in the arguments PIAC raises.  We also maintain that if an organisation is to have claims on public funding it should demonstrate it is truly representative.  We know of no organisation that purports to represent consumers that has a mass support base of consumers.  The most widely known of those signing the "Joint Consumer Submission" is the Australian Consumers Association (ACA).  This organisation, with which former ACCC Deputy Chairperson Allan Asher had a strong association, has just 650 members.  ACA claims it does not accept money from governments at least on an "on-going" basis.

In fact, we have better credentials for public funding than those seeking the funding.  People claiming to speak for consumers without having a mandate from them may no more represent their views and interests than did East European socialist parties who made a similar claim on behalf of workers.  Assertions that a group is the "vanguard of the consumer" may be as baseless as other agitators' declarations that they were the "vanguard of the proletariat".

3.4 RETAILERS AS CONSUMER REPRESENTATIVES

The rationale for the proposed levy is sweeping.  The analysis used to justify the proposal is that consumers are diffuse, inclined to "free ride" and individually gain little to make it worthwhile for them to fund a lobby organisation.  On this basis, it would be possible to argue for a levy to finance such bodies for almost every activity.  After all, do not the same issues arise with motor cars and houses, to say nothing of small item and "impulse" purchases?  We do not have such bodies generally because markets that comprise many buyers and many sellers ensure adequate disciplines on suppliers, who are required to give good value and respond to consumers' needs.

The retailer becomes the customers' agent in most markets, discovering consumer needs, matching these with the producers' offerings and in the process bringing about revisions to these needs and offerings.  Competition and the wish of all parties to maximise their welfare brings efficient outcomes from this interaction.

Some have argued that retailing activity in electricity adds so little to the final value that it could be dispensed with and a spot pass through could be used.  Such a line of reasoning (which has surely been deflated by the Californian outcomes) could apply equally to many areas of retailing.  Most lines in supermarkets have margins of only a few percentage points of the final price, yet are major interpreters of the consumer needs and hence value-drivers.

Littlechild ⁽³⁾ identifies and describes the valuable functions that electricity retailers undertake.  Once the retail function ceased to be regulated, retailers asked their customers what price system they wanted:  uniform time of day, interruptible and so on.  At the same time they asked generators what could be supplied and went about matching these requirements and offerings.  Customers for their own part shopped around to get the best deals and they, retailers and generators can make better informed decisions about what is available, in the process raising the performance of suppliers and re-shaping the demands of users.

Littlechild stressed the similarities in electricity and other retailing, noting that a monopolist will be far less concerned to ensure prices and supplies sculpted to the producer and customer needs.  Indeed, in a footnote he criticises Joskow's use of the word "peculiar" to describe electricity saying,

Conceding too much to "peculiar" attributes of an industry can unnecessarily open the door to special pleading.  After half a century of nationalisation and/or regulation because electricity is said to be different, there are advantages in stressing the similarities between electricity and other products, rather than the differences.

4. CONCLUDING COMMENTS

As far as supporting the consumer is concerned, we subscribe to Adam Smith's view "Consumption is the sole end and purpose of all production, and the interests of producers ought to be attended to, only insofar as it may be necessary for promoting that of the consumer."

Some of the bodies campaigning most vigorously for this funding are represented by experienced people with useful analytical perspectives on the electricity industry.  We question whether any of them have any legitimate representational claims.  Some may draw attention to a high readership of their literature, but on that basis the Sydney Daily Telegraph could mount much more powerful claims to be representative.

We have no objection to regulatory and quasi-regulatory bodies, consistent with their charters, financing the provision of advice from able people.  However to introduce a new charge for this would be an unjustified impost on the consumer.  And to set up a body at arms length from the accountability process is not acceptable.

We are conscious of the ability of taxpayer funded advocacy groups to obtain influence out of all proportion to their representation and, once established, to perpetuate themselves indefinitely.  We therefore urge the ACCC to reject this application to change the Code.

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ENDNOTES

1.  Huber, P. Liability, the Legal Revolution and its Consequences (Basic Books 1988)

2.  In addressing the issue, the ACCC said,

The Australian Consumers' Association, EUG and ACA have jointly submitted a proposal for demand side participation in the NEM.  The proposal contends that, at present, participation in the NEM is dominated by the supply side and that consequently it is arguable that the benefits of introduction of the NEM have flowed through to major participants at the expense of end-users.  The proposal further contends that supply side participants are able to marshal significant resources to argue for market outcomes to suit them with little countervailing demand side participation.  The joint submission argues that adequate resourcing is necessary in order to facilitate effective demand side participation in the market.

The joint submission proposes that a research and advocacy function be established, to be supervised and directed by an advisory board representative of consumers, end-users and new entrants.  It is proposed that the new body would conduct market research and analysis, participate in the debates on market arrangements and outcomes and play an advocacy role for the demand side where appropriate.  The aim of the body would be to provide a better balance in regulatory and market outcomes.

The proposal estimates that $2.7 million per year would be required to fund such a body and propose that the body be funded via a levy of 0.15 percent on contestable market electricity sales.  The association contend that such a levy would amount to total cost to end-users of between 20c and 40c per household and that savings to households from effective demand side participation would amount

3.  Stephen C Littlechild Why we need electricity retailers:  A reply to Joskow on wholesale spot price pass-through, The Judge Institute of Management Studies, University of Cambridge, 22 August 2000