Energy liberalization and unbundling – Your questions answered
Recently a Japanese customer wrote asking a series of questions about market liberalization. Here is a selection of some of those questions and responses.
“Looking at the situation in overseas and current situation in Japan, when segregating the vertical integration company into controlled and non-controlled division, please provide what kind of model is conceivable. What kinds of classification are there for segregation of energy business at the time of liberalization?”
Market liberalization occurs in two ways: (1) between power generation and network distribution and (2) between network distribution and retail supply. In what follows, we discuss the latter case.
At its simplest, retail separation creates a distributor (network) and a supplier (retailer) from the former entity. Sometimes the regulator will also require the metering function to be segregated. We will discuss the two part differentiation, though many other parts of the organization can be separated, sold or outsourced. These include field engineering, call center, and debt collection. However, these changes are usually not required by the regulator authority.
Segregation usually proceeds over a number of years, so as not to de-stabilize the organization and distract it from its core mission of providing quality utility services. At each stage the current state organization must function effectively. Therefore, segregation steps tend to be quite sudden and are fully completed fairly quickly. Thereafter, a period of bedding down of the changes follows, which can take place over many months. Normally the timetable for segregation will be set by an external regulatory entity taking the above norms into consideration.
Note too that liberalization usually follows distinct tranches, starting with a small number of the largest consumers and eventually reaching to all consumers.
The following lists out the actual steps for separation prepared for Germany and other European countries. A similar approach was adopted in United Kingdom and the many Commonwealth countries that followed.
Accounting Related Segregation: The supplier and distributor are separated accounting entities within a holding company. Accounting and Year-End closing of divisions are treated separately for the new entities, then rolled up to the holding company.
Information Related Segregation: Some systems and data clearly support processes of either the Supply or Distribution Business. Access is restricted to those employees engaged in the performance of those processes. In the case of warehoused data, users will only be permitted to access certain data. This is best done by abstracting appropriate views of the data for different lines of business.
Organizational Segregation: Departments must align to each division or can sit alongside, providing services to both. For example, the call center may not be in either division and continue to provide services to both. This has obvious benefits, but internal cross charging needs to occur for accurate accounting. At this point, the company can effectively operate for many years. However, this usually continues to evolve toward full separation.
Management Segregation: Management aligns to different divisions and function independently. Operations not held in either the Supplier or Distributor divisions effectively move into a customer-supplier relationship with these and detailed service level agreements are put in place.
Legal Segregation: Divisions are rolled into separate companies.
Property Rights Segregation: The holding company is dissolved, usually following sale of either entity.
We identify a number of market roles mentioned below. These market roles are engaged in one or more market processes. In practice, one or more market roles will be assigned to a single entity, the responsible party.
In some markets we can distinguish more than one supplier. A party that markets the difference between actual metered energy consumption and the energy bought with firm energy contracts by the party connected to the grid is the Balance Supplier. In addition the balance supplier markets any difference with the firm energy commitment of the party connected to the grid and the metered production. There is only one Balance Supplier for each metering point.
In some cases, in addition to buying supply from the (Balance) Supplier at their local Metering Point, some consumers (large industrial consumers for example) might also buy wholesale energy as a “band supply” from one or more Trade Responsible Parties (firm energy suppliers). In most energy markets there is just one Supplier for each metering point (service).
Usually the Supplier is in direct contact with the end-consumer and will often act on behalf of the consumer in the different business processes defined. In most cases, the Supplier has to communicate (to the Metering Point Administrator and/or to the Grid Access Provider) any change on the end-consumer’s side (name change, contract modification, etc.).
In the simplest market arrangement the Metering Point Administrator and the Grid Access Provider is just the Distributor.
The Supplier has a delivery contract with the Party Connected (Consumer) to the Grid. Sometimes the Consumer also has a grid usage contract with the Distributor.
The Supplier might request a contract with the Distributor for directly invoicing the grid usage to the Consumer. In most cases the Supplier has to pay the grid usage to the Distributor.
The Supplier informs the Distributor about acknowledged switches (change of supplier, start or end of supply, change of role at a Metering Point).
The following processes are linked to the Supplier role:
- Creates supply contracts / performs supply contract modification
- End-customer billing/invoicing/dunning (in case this is not done by a third party Billing Agent)
- Performs grid-usage payment (in case the balance supplier pays the Grid Access Provider for grid usage)
- Communicates customer data to other roles (e.g. customer name)