Metering and the principal-agent problem in restructured energy markets

Abstract

Metrology services, commonly known as the provision of electricity and gas metering, have traditionally been the domain of monopoly distribution network operators. Logic dictates that it is more efficient for a single entity to physically attend each home and business to read electricity and gas meters. However, when we tested this thesis in Australia’s National Energy Market (NEM) by examining service quality and costs arising from the interaction between agent (monopoly distribution networks) and principal (energy retailers), we found a classic principal–agent problem. Service quality is poor, with one-in-13 meter reads being estimated or erroneous. We find NEM wide agency costs of $16 million per annum and deadweight losses of $118 million per annum being accumulated by principals, let alone what must be a much higher cost of consumer inconvenience. We establish that the regulatory framework, rather than asymmetric information, is the root cause of the problem and that a sound case exists for policymakers to review the entire metering framework to correct adverse implications for energy customers. This case is strengthened by the emergence of new metering and embedded generation technologies which are fundamentally changing the nature of consumer interaction with the energy industry.