Electricity Retailing in Ontario – A Success Story

With a few downturns along the road, the market has evolved to a point where consumers are enrolling with retailers in substantial numbers over a sustained period of time and new retailers are entering the market. The market is still relatively new (about five years now), but by North American standards, both the variety of retailers and the switch rate demonstrate that retail competition has been effective and profitable. At the end of the first quarter of 2007, about 20% of the customer accounts in the province were enrolled with electricity retailers.

To better understand what has made Ontario a success, it is important to understand the landscape. There are 4.5 million customer meters in the province serviced by approximately 90 local distribution companies (LDCs) and approximately 15 active retailers (including residential and commercial/industrial). Over a dozen different LDC Customer Information Systems (CISes) and approximately the same number of different retailer billing and settlement systems are deployed throughout the province.

Within Ontario both supply and the willingness to open the market were critical success factors, however, it is the business processes and technical factors that have made electricity retailing relatively easy. These factors are:

Effective and Enforced Standards

Standards for business processes and technology were clearly defined at the onset and are currently enforced so that retailers can leverage their business and technology investments across the entire market. All 100 plus market participants adhere to the same set of rules that are enforced by the OEB. The Retail Settlement Code documents the rules by which retailers enrol and bill their customers and financially settle with the LDCs for commodity charges. The Electronic Business Transaction (EBT) standards document the representation and communication standards for the transactions that implement the business rules in the market.

It was crucial in Ontario for market activities to be standardized. Given the number of LDCs and CISes operating in the province, a lack of enforced standard business processes and data representation and communication standards would result in retailers having to support a large number of business rules and technical standards. Having one set of standards across all LDCs allows the retailers to leverage upfront costs across the entire market, reduces their unit operating costs, improves operational quality, and thereby reduces the barrier to entry into the market by retailers. It also opens the market to a wide variety of vendors whose products can easily interoperate, simply by adhering to the same standards.

Industry Participation in Working Groups

Effective industry working groups are an important part of the overall operation of the electricity market in Ontario. While the OEB provides regulatory oversight of the market, the working groups are the forums in which important issues, such as rule interpretations and standards changes, are debated and solutions are proposed. The working groups are self-organized, with the OEB having final authority over any proposed changes to the market. The SPi Group has been involved with these working groups since prior to market opening in May 2002, and has chaired the EBT Standards Working Group since 2003.

The working groups were an important part of the market opening process in 2002. They developed the market’s technical standards, the test scenarios and the implementation plans to ensure a successful rollout of the deregulated market, coordinating the activities of retailers, LDCs and third-party solution providers. Since then, the working groups have overseen an average of one major standards change every year.

In September 2006, when the market hit a negative spot market price, the working groups were instrumental in implementing an emergency change to the market standards. The change, which impacted over 100 participants and vendors, was successfully implemented within a week.

Hub-based Market Architecture

The hub-based architecture employed in Ontario was also a critical component given the number of market participants. This architecture leverages existing back-office investments, reduces integration costs, and enables participants to broaden their reach across the entire market.

The data representation and communications standards in the Ontario electricity market enable the electronic communication between the retailers’ back office systems and the LDCs’ CISes. This communication of transactions is necessary in order to enable retailers’ business processes, such as enrollment, billing, settlement, and customer management, etc. Considering the number of LDCs and CISes used, the back-office integration problem for a retailer could be immense.

In Ontario, every market participant is required to subscribe to the services of an EBT hub. Transactions between market participants are routed by the hubs from the sender to the appropriate recipient. The hubs support the EBT standard for data representation and communication, and provide secure, reliable, and auditable data transport between market participants.

The advantage of this hub-based system (versus a point-to-point system) is that a market participant only has to integrate its back office system once with its EBT hub service provider, instead of integrating it with all of its trading partners’ back offices individually, thus reducing the time to market for retailers and broadening their reach within the jurisdiction. This market architecture is especially important in Ontario with its large number of LDCs and variety of LDC CISes. In addition, the hubs provide a centralized location from which a data transport audit trail can be used to resolve disputes between market participants, thereby increasing the quality and efficiency of market operations.

Distributor Consolidated Billing

Possibly the most crucial element of any energy retailer’s operation is billing. Given the large cash flows that energy retailers manage, accurate and timely calculation, issuance, and collection of bills is crucial to the financial success of energy retailers. Unlike some markets, the availability of the Distributor Consolidated Billing (DCB) model has proven beneficial. Under the market rules, retailers are required to prepare a standardized Retailer Service Agreement with the LDC. The Agreement structures terms for payment among other things with the LDC. The LDC is required to settle with the retailer in a specified period of time, typically in the range of 20 days. In addition, the collection risk rests with the LDC.

Using the DCB model, LDCs send consumption information to retailers in each billing cycle, and the retailers calculate the retailer bill amount (RBA) for the bill and then send this information back to the LDCs. The LDCs are responsible for billing the consumer, collecting money from the consumer, and settling with the retailer for the net between the retailer bill amount and the hourly spot market commodity cost. The advantage of the DCB model is that retailers can leverage the LDCs’ existing bill printing, collection, and credit risk management infrastructure instead of having to develop it themselves.
Retailer Consolidated Billing (RCB), is also supported within Ontario but is not widely in use. In this model, retailers are responsible for bill printing, collection and credit management. Compared with the RCB model, the DCB model offers retailers the benefit of conducting business with far less infrastructure development, risks, and credit requirement as they are not collecting money on behalf of LDCs.

Managed Billing and Settlement Services

Like many competitive electricity markets, the Ontario market supports the bill-ready model for calculating electricity bills. This model supports many different and innovative contract types, which provide extensive choice for both bulk-metered and interval-metered consumers.

The bill-ready model places the bill calculation burden on the retailers, requiring them to develop or license and operate complex billing and settlement systems to support their operations. In addition, the large number of LDCs in the province means that operating such systems requires retailers to train staff to deal with the extensive variety of LDCs and the peculiarities of their individual operations.

In Ontario the complexity and burden of the bill ready model is effectively eliminated through the availability of turnkey managed billing and settlement services. These services have also allowed retailers to enter the market with little upfront investment in billing systems and staff training. Retailers can essentially enter the market on a pay-as-you-go basis, which enables them to focus on their core competencies of customer acquisition, customer management, and supply procurement. The availability of managed billing and settlement services have been a key enabler in rapidly increasing both the number of active retailers in Ontario and the number of retailer-enrolled customers since 2005.

Customer Mobility Rules that Protect Retailers

Electricity consumers in Ontario have the freedom of moving between competitive electricity retailers. The market rules support this mobility while respecting contractual relationships between retailers and consumers by defining a process through which contests for customers are decided.

Customers are able to switch retailers so long as they respect the termination terms of contracts that they have with their existing retailers. When consumers want to switch retailers, a contest process occurs in which all parties (both retailers and consumers) are made aware of the costs of transition (e.g., liquidated damages), which results in fewer customer surprises and complaints.

When a retailer signs an agreement with a consumer and that consumer’s intent is reaffirmed, the retailer will submit a request to the appropriate LDC to enroll that consumer. In the event that the customer is already enrolled with a different retailer, a contest will begin. Under the rules of contests, both the prospective and the incumbent retailers are informed of the contention for the customer, and both parties are encouraged to contact the customer to clarify his/her intent and ensure that the customer is fully informed of his/her obligations and rights. The customer is allowed to choose either retailer. The incumbent retailer, however, may be contractually protected by requiring an early termination fee from the customer, which is typically liquidated damage to cover the retailer’s supply arrangements for the customer and other costs.
The customer mobility rules effectively protect retailers in Ontario. By participating in an open contest process in which all parties are fully informed, retailers have the opportunity to retain consumers and to avoid complication and poor market perception resulting from the collection of contract termination charges. The entire market also runs more smoothly with less consumer dissatisfaction over contractual issues.

A Case Study for Success

All of the factors discussed above have served to lower the barrier to entry for energy retailers into the Ontario electricity market. Upfront and ongoing operating costs are reduced, risks are reduced, operational quality is increased, and Ontario now provides a stable environment for retailers to conduct an electricity marketing business.

The results tell the story. About 20% (or 800,000) of the customer accounts in Ontario are being serviced by retailers, of which 250,000 were enrolled in 2005/2006 alone. During the same period, five new residential retailers have entered or announced plans to enter the Ontario electricity market. There are now a wide variety of solution vendors in the market with over a dozen different LDC CISes deployed in Ontario, all supporting the Ontario retail market rules. Moreover, three providers of EBT hub services and about a dozen retailer billing and settlement systems are deployed in the province, including four commercial systems and a number of custom systems.

The success of the Ontario retail electricity market has inspired other markets. Recently, the standards developed and used in the Ontario electricity market have been applied to the Ontario gas market and used as a basis for its standardization (the Gas Distribution Access Rule, or GDAR). The same EBT standards (for data representation and communications) are now used in the gas market, with uniform retailing business rules applied in all of Ontario’s gas jurisdictions.

Ven Seshadri, Chief Executive Officer, The SPi Group Inc.

The SPi Group Inc. (SPi) is a Toronto based provider of services and solutions primarily to the utility and energy industry. SPi’s technology portfolio includes secure, reliable and auditable data transport solutions, and a wide variety of billing and settlement solutions, based on portable and open standards. SPi was instrumental in the successful opening of the Ontario electricity market and is currently the primary provider of EBT hub services in Ontario serving over 85% of the total market. SPi also provides the most widely deployed billing and settlement solution for energy retailers within Ontario.