Valuable Benefits Provided by your Traditional Electricity Supplier

(of which you're probably not aware)

Electricity has traditionally on the whole been consumed ‘unconsciously’ by uniformed users. State Government regulated (gazetted) tariffs have facilitated this by providing customers with an “anytime electricity supply at every-time prices”. Under this approach, a set pricing formula applies which on the average across the year seeks to recover the costs of the power system across the year. These formulae are published in the State Government Gazette and are known as Gazetted Tariffs. In practice electricity prices change according to the level of electricity demand with the lowest cost generators being ‘dispatched’ first followed by less efficient generators. The level of demand is driven by social patterns and climate, with demand being higher on business days and on extremely hot or cold days. Sometimes the higher efficiency generators are unavailable due to mechanical breakdown or routine maintenance. Sometimes their use is limited because of fuel constraints, such as gas shortages caused by production and transport problems.

Notwithstanding the variation of energy prices, regulated tariffs charge customers the same price on a mild spring weekend with ordinary system conditions as, for example, on the fourth consecutive 40 degree day during which gas producers in the North West have shut down due to a cyclone, and a bushfire has reduced the transmission of power from the power stations at the Collie Coalfields. There is also a further problem that the Gazetted Tariffs comprise fixed and variable components and there is an increasing problem that the fixed components are under-recovering the fixed costs. 

One of the key achievements of the wholesale market is to have unbundled the cost components of electricity supply and establish markets to ensure that their respective prices are minimized. Where there is insufficient competition for a market, the IMO instead uses administrative mechanisms which seek to set a fair price in a transparent and consultative manner.

On the basis of the wholesale market price signals, it has recently become clear that electricity retailers provide valuable benefits that have previously not been recognized. The following list of benefits are provided by the Gazetted Tariffs, but it should be remembered that retailers offer supply according to their own specific Electricity Supply Agreements, and may not all offer some or all of these benefits. That said, they would ordinarily apply to most of the smaller commercial and industrial customers, and the larger customers can make them a condition of tender.

The ‘unconscious’ benefits include (again, subject to the contractual terms):

  1. A set pricing formula that applies regardless of the actual cost of supply. If the cost of supply increases due to “Acts of God” and other unforeseeable events, the retailer will pay the extra (but again, do carefully read your force majeure clause as some retailers reserve the right to pass-through these costs).

  2. Retailers guarantee to Western Power and the IMO that if their customers default on their payment obligations, the retailer will pay them on the customer’s behalf. Moreover, both Western Power and the IMO require that the retailer lodge with them either a cash Security Deposit or a Bank Guarantee in the amount of around 2-months average costs. This equates to around 15% of the annual Gazetted Tariff. There is no negotiation around this; it applies equally to the State-owned enterprises and the humblest retailers alike. (That said, State-owned enterprises have a parent with very high credit standing.) This is a big risk for a retailer - assuming the 3.5% retail margin recommended by the ERA for Synergy, the break-even period for a defaulting customer is around 5 years. That said, this risk is spread across a portfolio of customers that collectively have a very low risk of default.

  3. Customers consume electricity before paying for it and are invoiced around 6 weeks in arrears. If a customer fails to pay the bill on time, it will be usually (depending on the retailer) be given another fortnight or so before being "encouraged" to pay. (This is where the 2 month period described above comes from.) If the customer still doesn’t pay, it can, perhaps, manoeuvre and stall payment for perhaps several days to weeks longer before being potentially disconnected for non-payment. Meanwhile, the retailer has to pay Western Power within 14 days of invoice and the IMO within 3 days. If a retailer is late in paying the IMO, the IMO will within days seize the retailer’s Prudential Guarantee. Depending on the circumstances, if the retailer doesn’t make good immediately, it will be suspended from the market and its customers allocated to the Supplier of Last Resort in accordance with regulations. If the retailer is late in paying Western Power, Western Power charges it penalties and interest.

  4. Depending on the specifics of the Electricity Supply Agreement, retailers often guarantee that the power will be available to most commercial and industrial customers if they quietly decide to increase their electricity consumption (but sometimes subject to permission from Western Power). Equally, if the customer decides to mothball some production or loses some of its own buyers, there’s often no penalty and your retailer has to find another use for the power that you are no longer using. (But again, check your supply contract as retailers sometimes require a minimum consumption and apply penalties.)

  5. If your retailer is owned by the State (Synergy) it is effectively backed by the credit standing of the State. Recent experience has demonstrated that the State will readily ‘bail out’ Synergy in the region of $500 million per year. The State, via Synergy, also provides valuable services to the market in general and competing retailers in particular through the Supplier of Last Resort provisions.
    While these have never, to our knowledge, been invoked and are not very well articulated, they appear to provide continuing supply to customers in the event of suspension from the market of their private retailer.

All these benefits are valuable, the retailer incurs a cost in providing them....... and ultimately the customer pays for them. And that is exactly as it should be...... conditional on the customer actually placing value on them, being charged a fair price and choosing to buy them.

Community Electricity believes that these unconscious benefits are expensive and that consumers should be properly informed how much they are being charged for them, and the alternatives available. Community's electricity product offers customers the alternative of accepting more responsibility, managing their consumption in response to price signals and paying lower prices.