The next step in the reform process involves examining whether protections for vulnerable customers are needed throughout the reform process. Transitional mechanisms, such as price freezes or lifeline tariffs, can be implemented to limit customer exposure to potential price volatility.
Extensive consultation is crucial to ensuring that stakeholders are aware of and understand the objectives of the unbundling process, and are not left with the impression that unbundling and liberalization will result in lower electricity prices. While a properly designed unbundling process should result in prices being lower than they otherwise might have been, this may not mean that they are lower in absolute terms after restructuring than they were before. There are a variety of reasons for this:
- artificially suppressed prices: the biggest reason is often that electricity prices may have been artificially suppressed prior to unbundling, either by not incorporating an appropriate cost of capital, or by failing to account for the need for new investment in the sector;
- cross-subsidization may also contribute to distortions in electricity rates;
- rising input prices, such as fuel costs; and/or
- in systems facing tight supply-demand conditions, the need to rapidly build new capacity that is more expensive than reflected in existing historical cost-based rates.
If any of these conditions exist, electricity prices are likely to rise for at least some consumers as a result of unbundling. While this should lead to more efficient usage of electricity, it inevitably leads to some disgruntlement on the part of affected customers.
Overall, the lesson is that policymakers need to be circumspect in the way that they discuss the price impacts of unbundling, and if price increases are expected, find ways to mitigate (but not unduly delay or eliminate) the increase during a transitional period. In this sense, design of transitional mechanisms is critical, so that customers are exposed to price volatility gradually. This includes vesting or transitional contracts, as well as the use of deferral accounts to spread costs over time. Small customers should only be exposed to price volatility, if at all, after the market has significantly matured.
