Title: Paul Fearon
1Victorian Energy Market Developments 15-16
November 2006 Essential Services Commission
(ESC) Distribution and Retail Regulation Update
Paul Fearon Chief Executive Officer Essential
Services Commission Victoria
2Presentation Agenda
- 2006-10 Distribution Price Review
- Summary of outcomes
- Appeals amendments to the determination
- Ongoing emerging issues with building blocks
- Productivity indexing (TFP) research
- Electricity Regulatory Accounting Guidelines
- DUoS Credit Support Review
- 2008-12 Gas Access Arrangements Review
- Small Scale Licensing Review
- Early Termination Fees (ETFs)
- Transfer of energy functions to AER
- VRET ESCs Work Program
3 2006-10 Distribution Price Review(EDPR)
Summary of outcomes
- Price reductions (Duos Metering)
4EDPR Key Features
- Investment Maintenance
- 2.9B Capex 2B Opex i.e.
- 30 more capex approved than spent during
2001-2005 (43 including meters) - 21 more opex approved than spent during
2001-2005 - Greater accountability for service performance
and reliability - More detailed reporting esp. for worst served
directed at reliability, quality and service as
well as longer-term network planning - New Guaranteed Service Level Payments e.g. up to
300 for cumulative duration of unplanned
interruptions gt20 hours. Previously 80 for each
event gt12 hours. - Greater service reliability incentives/penalties
- Tighter performance thresholds i.e. locking in
current levels as the target - value of incentive equal to VCR of 30,000MWh
up from around 5000
5Appeals amendments
- 9 appeals on 13 grounds - 3 withdrawn, 4
rejected, 2 upheld (1 being remitted to ESC, 1
required alternative MAIFI targets) - ESCs determination largely confirmed
- Key issues emerging from Appeal Panel
- Underspending removes argument for step-ups later
- ESC is entitled to access to underlying cost
information - ESC not required to accept the cost of outsourced
contracts
6Emerging Ongoing Issues with the Building Block
methodology
- Increasingly distorted incentives (manifestations
of cost of service regimes) - DBs are price makers not price takers
- Inefficient tariffs
- Rate base focused
- Challenges in measuring costs actual,
benchmarked, notional, made-up - Complex corporate structures major outsourcing
- Ringfencing seriously problematic
- Information gathering complex and fraught
- Regulatory reporting
- Allocation issues
- Economic historical accounting concepts
- Reconciliation with statutory accounts
- Price instability
7Victorian DB Industry Trends (Real)
8Industry Tariff Revenue
9Industry O M
10Industry Capex
11Major Outsourcing
OM margin
OM Contract Passed through margin
Actual OM passed through no profit element
Return ON and OF Asset
Return ON and OF Asset
Ownership and OM one entity
Ownership and OM Split
12Productivity Indexing (TFP)
- What is TFP?
- How is it different to BBs?
- What is the advantage of TFP?
- Better incentives DBs now price takers not
price makers - More light handed overcomes issues with
outsourcing cost allocation - Better pricing and other meeting other energy
market objectives (environmental etc) - Where else is it done US, South America,
Canada, NZ, Netherlands, Germany. - The ESCs Research Projects on TFP
- TFP trends in Victoria
- National TFP
- Cost allocation (the problem solved)
- TFP the National Framework
13Electricity Regulatory Accounts Guidelines -
Major Changes
- Related party transactions
- Related party actual costs to be reported
- Directors responsibility statement
- Assert that systems are adequate to segregate
distribution business transactions from other
activities of the distributor and its related
parties - Reports balancing
- Balancing balance sheet reconciled to income and
cash flow statements - Comparative year
- Prior year values to be reported based on current
year policies and methodologies - Labour and non-labour costs
- Operating, maintenance and capital expenditure
disaggregated into labour and non-labour costs
14Electricity DUoS Credit Support Review
- Reasons for the review
- ESC required to resolve/determine a dispute in
2005 - Re-assess a minimum default arrangement
- Major changes to the arrangements
- Credit support triggered when distribution
service charges liability exceeds credit
allowance (reflecting turnover of distributor
and credit rating of retailer) - Distribution service charges liability based on
weighted average of monthly and quarterly billed
distribution service charges relating to the
customers of the retailer - Alternative credit support arrangements can be
agreed
15Gas Access Arrangement Review
- GAAR Timelines
- May 2006 Released Consultation Paper No.1
- Oct 2006 Released Consultation Paper No. 2 Final
Guidance - March 2007 Revised Access Arrangements submitted
- July 2007 Draft Decision
- Sept 2007 Final decision
- Dec 2007 Final Approvals
16GAAR
- ..costs are only those costs that would be
incurred by a prudent Service provider, acting
efficiently, in accordance with accepted and good
industry practice, and to achieve the lowest
sustainable cost of delivering the service
17Information provision - GAAR
- Contractual and Corporate Relationships
- Extent of market testing
- Benchmarking
- Incentive arrangements
- Fees associated charges
- Regulatory Accounts
- Information Templates
- Corroboration/ Verification Statements
- Section 41 Powers
- Alternative sources of information
18Small scale licensing framework
- Purpose of the review
- Process to date
- Key issues
- Early position
- Advanced interval meter rollout
- Implications for review
19Early Termination Fees (ETFs)
- Regulation allows retailers to impose an ETF on
customers who exit contracts early - Examination of ETFs in 2005 showed significant
variance in the marketplace - Energy legislation amended to provide reserve
powers to prohibit fees - ESC undertook compliance review and consulted on
Draft Decision earlier in 2006 - Draft decision linked ETFs to foregone net margin
- Stakeholder submissions necessitated a revised
approach - Simpler and more straightforward approach
- ETFs no greater than incremental administrative
costs, hedge book imbalance costs and unamortised
inducement costs - Revised Draft Decision issued in late October
2006 and Final Decision to be released in December
20Transfer of ESC energy functions to AER
- Consistent with legislative timetables and AEMA
obligations - ESC to complete GAAR 2008-2012 and continue to
meet existing statutory objectives - Will participate in the consultative processes
established under MCE to develop rules - Practical transfer will occur during 2008
- Currently focused on
- Staff transfer issues (terms conditions)
- Assisting AER developing an understanding of the
distribution (economic non-economic) and retail
(non-price) functions
21Victorian Renewable Energy Target Scheme
- ESCs roles and responsibilities in administering
VRET Scheme - Registering and accrediting eligible generators
- Determine eligibility of R/E Sources
- Establish registries
- Review returns and statements
- Conduct audits and monitor compliance
- VRET Rules
- Consultation on draft rules mid December 2006 -
implementation by February 2007 - VRET registries being developed for operation in
early 2007 - Guidelines, processes and updates will be posted
on website.