Non-regulated Interconnectors NECA Seminar

1
Non-regulated InterconnectorsNECA Seminar

• Tuesday 8 December 1998

2
Opening Remarks

• Stephen Kelly
• NECA

3
Introduction

• Code provisions
• programme
• key issues

4
Obligations on promoter

• establish connection agreements with NSPs
• register as market participant
• provide an access undertaking to ACCC
• apply to NECA

5
Obligations on NECA

• establish rules for market participation
• within two years of market launch, develop
  provisions to address financial risk to promoter
  as a result of need for augmentation

6
Change in status

• provision to switch from non-regulated to
  regulated link, subject to conditions
• meets Code criteria and technical standards
• passes net public benefit test

7
Programme

• a role for entrepreneurial interconnectors?
• a proponents perspective
• introduction to working group proposals
• market participation
• structural and competition issues
• extensions and alternatives
• overall assessment
• conclusions and next steps

8
Key issues

• generator competitors or TNSP companions?
• regulated and non-regulated links can they
  co-exist?
• hermaphrodite links a freak of nature?
• access, market power how light-handed can we
  be?
• safe harbour provisions smothering at birth?

9
WHY NON-REGULATED INTERCONNECTORS ?An advocacy
statement ..

• Stephen Orr
• Hazelwood Power

10
A REGIONAL MARKET DESIGN

• NEM is regionalised - conscious choice
• Simplified version of full nodal pricing -
• few intra-regional constraints (in real regions)
• mechanism to redefine if constraints occur
• Inter-regional constraints create heavy risks for
  participants market awakening 25 Nov 97

11
NEMMCO IRH PROCESS

• Settlement Residue Auction (SRA) process
  developed as interim access to SR to underwrite
  inter-regional hedges and mitigate IR risk
• Also developed view of the future, issues being
• network performance drivers and standards
• firm inter-regional access - leading to IRHs
• regulatory risk for investing participant - hence
  non-regulated interconnectors

12
ISSUES FOR PARTICIPANTS

• Particularly generators, but others too
• Interconnectors look like wires, but ...
• They perform like competitors, ie -
• They introduce remote generation as new entrants
  into a region
• Conversely they add remote load to a region
• They also potentially redefine the region

13
INVESTMENT RISK

• Investment criteria for regulated interconnectors
  dont match market criteria, eg
• n-1 transmission reliability standard
• Demand with 10 probability of exceedance
• ACCC reviewing criteria for NEMMCO to approve
  regulated status for interconnectors

14
INVESTMENT RISK contd

• Regulated interconnectors see little investment
  risk - if transmission planner sees the need,
  customers pay until next optimisation
• Even if investment rules become
  market-commercial, regulated interconnector not
  at risk of failure
• Hence, some propose higher discount rates for
  regulated interconnector assessments

15
REASONABLE INVESTMENT CERTAINTY

• Regulated interconnectors threaten the price
  signals which underpin local generation and
  demand-side investment regulatory risk
• Generation/demand investor confidence up if
  interconnector faces equivalent market risk
• If you think its a good deal, you build
  it!If you dont, dont ask the market to
  underwrite your errors

16
NON-REGULATED INTERCONNECTORS

• Are competitively neutral
• Reduce the need for central intervention
• Require a change in thinking away from
  conventional interconnector perspectives
• Can be free-flowing and open like normal
  transmission lines, or alternatively
• Can be actively traded in the market through
  price-differential/volume offers

17
NON-REGULATED INTERCONNECTORS

• Potentially remove the need for regulated
  interconnectors at all, ie -
• if regulated rules changed to achieve competitive
  neutrality, no for regulated
• if commercial hurdles not met, governments and
  others can build NRIs, and take the risk

18
TODAYS SESSION

• Reflects the initial results of efforts of a
  diverse industry group to define the nature and
  operation of non-regulated interconnectors
• The group has diverse views on some key issues,
  but sufficient consensus on the fundamentals to
  encourage others to join the debate

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A Proponents Perspective

• Tony Cook
• TransÉnergie Australia

20
Outline

• Code requirements
• DirectLink
• Transmission in a competitive market

21
National Electricity CodeObligations of
Proponents

• Clause 5.6.6 (f) requires a connection applicant,
  in relation to a non-regulated interconnector,
  to
• apply to NECA in accordance with clause 3.10 to
  determine the rules that will apply in terms of
  the connection applicants participation in the
  market as a market participant in relation to
  that interconnector.
• TransEnergie Australia and NorthPower made
  application to NECA on 1 October 1998.

22
National Electricity CodeObligations of NECA

• Clause 5.6.6 (g) provides that, if an application
  is made to NECA under clause 5.6.6 (f) (4), NECA
  must determine those rules within a reasonable
  time after receipt of the application.

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DirectLink Features

• 180 MVA capacity between Qld and NSW.
• DC technology.
• 1 January 2000 commissioning date.
• Non-regulated interconnector
• Recoup costs through trading in financial
  instruments tied to the interconnector capacity.

24
Geographic Location
25
Transmission in Competitive Markets

• Objective
• Provide sufficient transmission capacity to
  ensure a competitive energy market, while fairly
  and efficiently pricing the use of that capacity.
  
• Outcomes
• Facilitate competition in
• generation,
• transmission (as an alternative to local
  generation).

26
Transmission in Competitive Markets

• Commercial framework for transmission expansion
• Top Down projects for reliability and
  competition - determined by NEMMCO
• Bottom Up projects in response to energy price
  differentials - proposed by developers.

27
Transmission in Competitive Markets

• Top Down Projects
• Competitive tendering e.g. Victoria
• Bottom Up Projects
• Entrepreneurial interconnectors.

28
Benefits to Consumers and Generators

• Effective competition in generation.
• Lower transmission costs.

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Introduction to the Working Groups Proposals

• John Howarth
• VPX

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WGs Terms of Reference

• One of the groups terms of reference is -
• recommend rules to govern the participation of
  entrepreneurial interconnectors in the national
  electricity market and advise on implications for
  other aspects of the market design such as
  network augmentation criteria.
• this is a problem - how can you write rules for
  an unregulated interconnector?
• need to define the boundary of acceptable
  behaviour without being prescriptive

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WGs Terms of Reference

• Addressed in three stages
• identify safe harbour provisions
• define the degree of discretion used in other
  approvals
• define scope for future extensions and variations
  to the safe harbour provisions
• This workshop is a result of the first stage and
  some progress has been made on the other stages
• The work presented today is new and requires a
  change in thinking - there are still many
  challenges
• inter-regional hedging
• completion of other stages etc

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Other Terms of Reference

• Remaining Tasks
• if possible recommend a practical and effective
  implementation path for introducing firm
  link-based inter-regional hedges, i.e.
  inter-regional hedges that are underwritten by
  settlements residues and are as firm as
  practicable against residual risks such as those
  associated with network availability.
• advise on the scope and appropriateness of
  aligning the inter-regional and intra-regional
  hedging provisions with frameworks such as the
  transmission congestion contract concept and
  others. This should include identifying the
  implications for other aspects of the market
  design.

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What are Safe Harbour Provisions

• Safe harbour provisions.
• A set of provisions conformance to which would
  ensure an applications approval. There is no
  implication that non-conforming applications
  would necessarily be rejected, although they
  would not be assured of receiving approval.
• not code requirements but a set of criteria to
  judge automatic acceptability.
• because we are naturally risk adverse the
  provisions are conservative.

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What are Safe Harbour Provisions

• Obligations
• Configuration limits
• Must be scheduled
• Must have controllable flow
• Pay network service charges
• Enter into connection agreements
• Exposure to costs and benefits of interconnector
• NEMMCO to have power to direct
• Subject to competition
• Sunset clause
• Subject to market power provisions
• Ring-fencing provisions
• Must make an access undertaking

35
What are Safe Harbour Provisions

• Rights
• Entitled to the spot market revenue
• Can enter into Reserve Trader contracts
• Option to convert to regulated status
• Having fulfilled the obligations, the
  entrepreneurial interconnector has access to spot
  market revenue

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Status of Working Group Paper

• The WG has not endorsed all the provisions
• There are still differing views
• However the WG has agreed that it is time for
  wider consultation and exposure of the proposal
• WG may need to review provisions in the light of
  feedback from this workshop

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Post - implementation Review

• WG recommends post - implementation review
• gt one application but,
• lt 3 years
• Needed due to keep pace with innovation!
• Needed because the concepts are new and quite
  different from other approaches - therefore need
  to consider developments

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Definitions

• Interconnector. A network element that connects
  networks located in different regions of the
  National Electricity Market (NEM).
• Entrepreneurial interconnector. An
  interconnector for which there is an entitlement
  to derive income through its participation in the
  spot market.
• Non-regulated interconnector. An entrepreneurial
  interconnector for which there is no entitlement
  to recover any revenue through regulated network
  service charges.

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Definitions contd

• Regulated interconnector. An interconnector for
  which there is an entitlement to recover a
  determined level of revenue through the
  imposition of regulated network service charges.
  There is no entitlement to retain any additional
  revenues arising from the operation of the
  interconnector in the spot market.

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Definitions contd

• Hybrid interconnector. An entrepreneurial
  interconnector for which there is an entitlement
  to recover some revenue through the imposition of
  regulated network service charges. As with other
  entrepreneurial interconnectors, income may also
  be obtained through participation in the spot
  market.
• A mix of regulated and non-regulated has been
  identified but further work required. This and
  general areas where the safe harbour provisions
  can be extended in the future will be the subject
  of Rod Ward and Dave Roberts talk at 215pm

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NECA WORSHOP ON ENTREPRENEURIAL INTERCONNECTORS

• Introduction - End User Perspectives
• Roman Domanski
• Executive Director
• Energy Users Group
• Sydney Airport Sheraton
• 8 December 1998

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Entrepreneurial Interconnectors

• Supportive of Concept
• Why?
• virtual generator competition for generators
• competition for TNSPs - right to provide
• adds depth to NEM by strengthening links between
  regions
• can help augmentation become more competitive
• consistent with reform

43
Safe Harbours
44
Safe Harbors Concept

• Could go without rules, but
• Rules provide some certainty for a new concept
• certainty for investors, owners customers
• may improve chances of getting proposals up
• Rules should not hinder proposals
• Need to be flexible enough to foster change
• but firm enough not to stop investment

45
Need for Debate

• As rules are new and innovative, important to
  expose to broader debate and get feedback.
• Need to be prepared to modify SHP to take
  account of informed comment.
• Need to also consider links between this work and
  ACCC review of regulated interconnectors

46
Competition Issues

• Market Power
• considerable discussion about threshold market
  shares
• Access
• Ring Fencing
• Hybrids
• Conversion
• These issues need broader input

47
The Future

• Monitor and review
• Adapt to practical experience NEM/reform
  goalse.g.
• review requirement that flow must be
  independently controllable
• perhaps move to calculating the price difference
  with and without interconnector
• Should all future links be entrepreneurial
• intra- inter-regional?

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Market Participation

• Stephen Wallace
• Snowy Mountains Hydro-Electric Authority
• Michael Green
• Transend Networks Pty Ltd

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Overview

• Market issues
• bidding, dispatch and pricing
• spot market revenues
• system security
• contracting
• Network issues
• configuration and controllability
• connection agreements and network pricing

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Spot Market Participation

• Networks characterised by
• economies of scale
• short run marginal costs are insufficient to
  cover costs of optimally sized interconnector
• Three models for interconnector operation
• passive participation
• bids capacity
• bids price differential (above marginal losses)
  

51
Interconnector Market Model

• Passive participation - due to economies of scale
  is likely to encourage undersized links
• Bids capacity - subset of price differential
  model
• a capacity bid is equivalent to bidding two
  prices, 0 and VoLL, with the MWs bid at 0 the
  same as capacity offered
• Bids price differential - best model

52
Bidding Rebidding Price Differentials

• Similar to generators or customers
• 10 prices for each direction (monotonically
  increasing)
• For each price MWs of capacity offered for each
  half hour
• Total capacity offered each half hour is equal to
  link capacity
• Obliged to follow dispatch instructions and
  provide PASA information

53
Dispatch Pricing (SPD)

• Bidding model can be incorporated easily into SPD
  framework
• Objective function is maximise
• value of supply (demand bids dispatched)
• - cost of supply (gen offers dispatched)
• - cost of interconnector (link offers dispatched)
• - cost of ancillary services

54
Dispatch Pricing (Ctd)

• Link energy balance
• export import link losses
• (this brings in dynamic marginal losses for flows
  over link)
• SPD essentially the same as now but current
  interconnector violation penalties approach is
  extended to transport capacity bids

55
Spot Revenue (energy)

• Similar to other participants
• Metering at each terminal
• Prices at each terminal determined much the same
  as for other participants
• Since flows may change direction or be highly
  variable there is an issue concerning choice of
  marginal loss factors

56
Spot Revenue (energy)

• export
• Buys F1 energy in region 1 at spot price adjusted
  for marginal losses, SP1 x MLF1
• import
• Sells F2 energy in region 2 at spot price
  adjusted for marginal losses, SP2 x MLF2
• revenue import - export
• Rev F2 x SP2 x MLF2 - F1 x SP1 x MLF1
• Note There are problems with flows and prices
  on 5 minute dispatch interval vs half hour
  averages

57
Marginal Loss Factors (Prices for Energy at
Connection Points)

• Many possible models for marginal loss factors
  (MLFs)
• fixed
• variable with time of day/day of week/season etc
• variable with direction of flow and 1 or 2 above
• dynamic
• nodal pricing of connection point (dynamic
  intra regional constraints)

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Ancillary services

• Co-optimisation approach allocates interconnector
  capacity between energy and ancillary services
• Interconnector receives spot market and ancillary
  services income like other participants
• Interconnector pays for ancillary services
• If optimal SPD will schedule ancillary services
  to enhance flow

59
System Security

• Same as for generators other participants
• NEMMCO has power to direct for system security
  reasons
• When directed interconnector is compensated in
  the same way as for other participants (fair
  market value -ACCC)
• May be involved in Reserve Trader contracts

60
Contracting

• Actively operates in contract market
• Offers inter-regional hedges (IRHs)
• May have firm access compensation arrangements
• Basically like any other participant

61
Conclusion

• Market operation is much like a generator
• bidding
• requirement to be scheduled and provide
  information
• spot market revenue
• ancillary service income and charges
• subject to direction etc
• What about network connection, TUOS etc?
• Mike Green will reveal all

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(No Transcript)
63

• TRANSEND NETWORKS PTY LTD
• MICHAEL GREEN

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CONFIGURATION NO. 1
Existing Interconnection
Region 2
Region 1
Proposed Interconnector
65

• CONFIGURATION NO. 2
• Two Terminal Between Regions
• Regional Definitions
• Network Service Charges
• Bidding Scheduling

66

• CONFIGURATION NO. 3
• 30MVA Minimum Capability
• In Line with Scheduled Generator, Clause
  2.2.2
• Cross Zonal Boundary Windfalls
• Regulator Shopping

67

• NEED FOR CONTROLLABILITY
• Follow Dispatch Instructions
• Avoid Adverse Impacts on other Network
  Elements
• Forms a Clear Basis for Settlements

68

• FREE FLOWING
• Interconnector Actual Flows Depend Upon
• Generator Dispatch
• Customer Demands
• Network Characteristics

69

• ISSUES IF NOT CONTROLLABLE
• Safe Harbour Does NOT Preclude This Option
• Need to Develop Basis of Settlements
• Need to Develop Basis of Compensation

70

• CONNECTION AGREEMENTS
• Service Levels
• Connection Fees
• Arrangements Subject to Negotiation

71

• CONNECTION AGREEMENTS
• CONNECTION FEES
• Dedicated Entry/Exit Assets - Payable by
  Proponent
• Attributable Agreed Deep Augmentation -
  Payable by Proponent
• Transmission Use of System - Matter for
  Resolution

72

• CONNECTION AGREEMENTS
• ISSUES NO. 1
• Is there a need for a level playing field
  between
• regulated non-regulated
  interconnectors?
• Regulated Face Stringent Regulatory Tests
• Non-regulated Face Connection Fees?
• Must Provide for Efficient Investment
• Interface with NECA Incidence Allocation
  Review

73

• CONNECTION AGREEMENTS
• ISSUES NO. 2
• See Appropriate Forward Looking Costs
• See Appropriate Forward Looking Benefits
• Difficulty With Identifying
• Magnitudes of Costs/Benefits
• Duration of Costs/Benefits
• Funding of Benefit Rebates

74

• CONNECTION AGREEMENTS
• ISSUES NO. 3
• Should non-regulated interconnectors result
  in
• financial transfers between Network
  Service Providers?
• Many Factors Drive Financial Transfers.

75

• SUMMARY
• MARKET ISSUES
• Spot Market Revenue
• Ancillary Services Revenue
• Required To Be Scheduled
• Able To Offer Into Market
• Subject To NEMMCO Direction

76

• SUMMARY
• NETWORK ISSUES
• Configuration
• Controllable Flow
• Must Enter Into Connection Agreements
• Subject to Efficient Network Connection Fees
  

77
STRUCTURAL AND COMPETITION ISSUESConversion to
Regulated Status, Sunset Clause, Market Power
Issues

• Stephen Orr
• Hazelwood Power

78
CONVERSION TO REGULATED STATUS

• Safe harbour should allow interconnector owner to
  apply for conversion to regulated status at any
  time
• Revenue entitlement assessed at the time
• Recognises uncertainty regarding non-regulated
  design at present - hence may encourage investment

79
CONVERSION TO REGULATED STATUS

• Also supports utilising economies of scale, eg
  hybrid converts to fully regulated when justified
• Proponent must not be shielded from commercial
  risks, eg mis-assessment of demand or price
• Hence apply rules at the time
• No scope for strategic alternation

80
CONVERSION TO REGULATED STATUS

• Note -
• If rules for regulated interconnector investment
  change to match commercial conditions,
• Then why would the non-regulated interconnector
  owner want the change to regulated status?

81
SUNSET CLAUSE

• Conversion to regulated status offers protection
  to the non-regulated interconnector investor
• The sunset clause approach protects the market as
  a whole from unexpected outcomes
• Suggest 15 years minimum reasonable approval for
  long life, high cost interconnectors
• ACCC Code authorisation may limit approval period
  to 2010

82
MARKET POWER ISSUES

• Active trading models create potential for
  exercise of market power
• Economies of scale, easements etc may limit scope
  for competitive interconnectors
• Cross ownership potential
• Hence we have considered control to maximum of
  35 of either interconnected areas as limit for
  safe harbour

83
MARKET POWER ISSUES

• Concentration of control could be limited by
  divesting rights to the revenue stream, if
  operational control ring-fenced
• Cross-ownership with regulated interconnector
  should be OK, provided ring-fencing in place

84
MARKET POWER ISSUES

• However this proposal is arbitrary
• It excludes, for example, Delta and Macgen
  immediately
• There is a serious question whether the market
  rules should endeavour to anticipate and
  constrain market power
• Perhaps safe harbour provisions should not be
  specific - let ACCC decide case-by-case?

85
EXPOSURE TO COMPETITION

• No restriction on entry of competing regulated
  and non-regulated interconnectors
• Providing they meet the criteria at the time
• This assumes level playing field through the
  rules governing approval of regulated
  interconnectors

86
Entrepreneurial Interconnectors
Hugh Gleeson (United Energy) Ken Brunette
(Integral Energy)
87
Exposure to competition

• No restrictions on the entry of competing
  inter-connectors (regulated or unregulated)
• Aim to achieve a level playing field to ensure
  comfort of consistency in regulation
• Various views
• (Generators) desire to force regulated
  augmentations to be based on the same investment
  criteria as unregulated.
• (Retailers) preference to see a stable playing
  field, not restrict regulated decision making.
• (Customers) desire to see most efficient (lowest
  cost) generation used first irrespective of
  geographic location in NEM.

88
Sunset clause

• Initial approval to operate as a non-regulated
  inter-connector and actively participate in the
  market may be limited to a specific interval
• safeguard against undesirable unforeseen
  outcomes.
• proposed right to apply to convert to regulated
  status and receive regulated revenue assessed on
  the deprival value upon reaching the sunset
  date.
• fifteen year minimum approval proposed (by some
  of group) as appropriate to match level of
  investment.
• May in practice be shorter horizon as the ACCC
  Code authorisation expires in 2010.
• No protection from effect of Code changes
  intended by this clause

89
Ring fencing

• Isolation from the operations of any co-owned
  regulated network business
• Ensure the operation is not influenced by
  consequential profit or loss from the
  non-regulated business.
• Concern regarding potential to influence timing
  of outages (by related regulated network
  business) for unreasonable financial advantage.

90
Submission of an access undertaking

• Access undertaking to be in the form specified in
  the Code
• Must be available in accordance with the Code.
• Applicable Code provisions will likely differ
  from standard (as exist for regulated assets).
• Right to trade (as determined) in the spot market
• No right to receive regulated revenues (Chapter
  6)
• ACCC acceptance of access undertaking to protect
  the asset from declaration under the Trade
  Practices Act.

91
Beyond the Safe-Harbour

• Rod Ward - Delta Electricity

92
Beyond the Safe Harbour - Overview

• Purpose of Safe Harbour Provisions
• Key Limitations of the Safe Harbour Provisions?
• Trading non-controlled interconnectors
• The Way Forward?

93
Purpose of Safe Harbour

• Conformance to safe harbour provisions should
  guarantee approval.
• There is no implication that non-conforming
  applications would necessarily be rejected

94
Beyond the Safe Harbour

• Further work required to
• explore the scope for further extensions and
  variations
• define the degree of discretion for other
  applications (within and beyond safe harbour)

95
Key Limitations of the Safe Harbour Provisions -
case examples

• The provisions do not cover
• intra-regional interconnectors
• non-transmission interconnector capacity upgrade
  
• free flowing AC links - loop and parallel flows
• participant or an interconnector controlling more
  than 35 of the capacity in either of the supply
  regions
• hybrid of regulated and non regulated
  interconnection

96
Key Limitations of the Safe Harbour Provisions -
case examples

• The provisions do not cover
• intra-regional interconnectors
• non-transmission interconnector capacity upgrade
  
• free flowing AC links - loop and parallel flows
• participant or an interconnector controlling more
  than 35 of the capacity in either of the supply
  regions
• hybrid of regulated and non regulated
  interconnection

definition of capacity and access to the
market (if controllable or switchable could be
considered)
97
Key Limitations of the Safe Harbour Provisions -
case examples

• The provisions do not cover
• intra-regional interconnectors
• non-transmission interconnector capacity upgrade
  
• free flowing AC links - loop and parallel flows
• participant or an interconnector controlling more
  than 35 of the capacity in either of the supply
  regions
• hybrid of regulated and non regulated
  interconnection

Impact on the capacity of incumbents and
competitive trading solutions
98
Interconnector Trading

• energy supplied to a region does not have to be
  delivered by that interconnector -
  inter-regional capacity can be shared
• an interconnector flow does not have to be
  controlled - inter-regional transfers is
  controlled by generator loading in merit order

99
Concept of Notional Capacity

• Parallel interconnectors treated as a single
  notional interconnector
• revenues are split according to relative
  capabilities and bids (notional dispatch)
• However, complexities arise when the capacity of
  an incumbent is affected or loop flows occur.

100
Concept of Notional CapacityBidding

• Similar to generators
• 10 prices for each direction (monotonically
  increasing)
• for each price MWs of capacity offered in each
  half hour (total capacity equal to the link)
• Any regulated capacity bid at zero
• dispatch algorithm will dispatch lowest merit
  order bids up to the notional capacity of all
  interconnection capacity
• However, residual capacity could be constrained
  off

101
Concept of Notional CapacityCase Study -
Capacity rights affected

• Examples
• New interconnector impacts the capacity of
  another remote interconnector e.g the capacity of
  SA/NSW interconnector is limited by flows on the
  NSW/VIC interconnector.
• Total capacity of two parallel interconnectors
  less than sum of individual capacity.
• Issues
• Prior capacity rights - incremental capacity only
  recognised?
• No prior capacity rights - full competitive
  bidding and residual capacity effectively
  constrained off?
• Technical prerequisites?
• Firm access to network?

102
Loop Flows

• Example
• Additional complexity on parallel interconnectors
  where a connection to a region at two remote
  points create loop flows.
• Issues
• current regional model inadequate - more regions
  or progression to nodal model approach
• prior rights to capacity become increasing
  complex
• complexities of notional capacity allocations
  would have to be modelled, continuous assessed
  and resolved in dispatch

loop flows could resolve to parallel flows
103
Key Limitations of the Safe Harbour Provisions -
case examples

• The provisions do not cover
• intra-regional interconnectors
• non-transmission interconnector capacity upgrade
  
• free flowing AC links - loop and parallel flows
• participant or an interconnector controlling more
  than 35 of the capacity in either of the supply
  regions
• hybrid of regulated and non regulated
  interconnection

anti-competitive conduct, control, timing of
problem
104
Market Power

• Why is an interconnector different to generation?
• When is it likely to be material?
• Is it ownership, control or cross-subsidy between
  competitive businesses?
• Does it safe harbour anti-competitive behaviour
  of a substantial interconnector - ACCC issue
• Possible Solutions
• provisions of the TPA appropriate to apply to all
  owners of interconnectors
• Transition requirement
• assets ring-fenced with separate reporting
  requirements
• defined reasonable level of capacity contracts in
  the market
• Alternative - safe harbour applies to small
  interconnectors only, regardless of ownership

105
The Way Forward

• Determine the principles to define capacity and
  the market trading mechanisms for non-controlled
  interconnectors
• Understand the application and merit of capacity
  rights and develop firm access where one
  interconnector affects the operation of another
• Better appreciate the market power implications
  of interconnectors without unnecessarily
  restricting their development

106
Key Limitations of the Safe Harbour Provisions -
case examples

• The provisions do not cover
• intra-regional interconnectors
• non-transmission interconnector capacity upgrade
  
• free flowing AC links - loop and parallel flows
• participant or an interconnector controlling more
  than 35 of the capacity in either of the supply
  regions
• hybrid of regulated and non regulated
  interconnection

David Roberts Presentation to follow
107
Hybrid Interconnectors

• David Roberts
• Basslink Development Board

108
Purpose

• Endorsement for the Concept
• Highlight Issues to be Resolved
• Commitment to Progress

109
Outline

• Reasons for Hybrid Interconnectors
• Relevant Situations
• Examples
• Principles
• Issues to Resolve
• The Way Forward
• Summary

110
Reasons for

• Economies of Scale
• Increase in Load Demand does not Automatically
  Increase Value
• Beneficiaries not Necessarily Obvious
• Approval of Regulated
• Transition between Non Regulated and Regulated

111
Relevant Situations

• Initial Trading may be Limited
• Most Trading is One Way
• No Market History to Support Non Regulated
• Regulated Asset Owner unwilling to Develop
• Non Regulated applies to become Regulated

112
Examples

• X Regulated Y Non Regulated
• Enhancement to Existing Interconnectors
• Regulated One Way Non Regulated the Other
• Regulated at Certain Times Non Regulated at
  Others
• Combinations

113
Principles

• Regulated Portion of an Interconnector can be
  Defined
• Regulated Portion Subject to Rules for Regulated
  Interconnectors (Including Approval,
  Availability, Dispatch, Network Pricing
  Revenues, Settlements Residues IRHs etc)
• Remainder Subject to Rules for Non Regulated

114
Issues to Resolve

• Who Defines Regulated Portion and How
• Which takes Precedence
• Partial Outage
• Dispatch at Zero Price
• Ring Fencing
• Required for Network Businesses
• Some Complexity with Hedge Contracts

115
Issues to Resolve

• Non Linear Allocations
• Adjustment of Settlements Residue for Allocation
  of Losses
• Required if Regulated and Non Regulated contracts
  treated differently
• Network Charges/Revenues
• Regulated Portion
• Non Regulated Portion

116
Issues to Resolve

• Approval Criteria
• Look Ahead or Based on Market Results
• Who bears the Market Risk
• Review of Regulated Portion
• Discretion for Adjusting up or Down

117
The Way Forward

• Depends on Arrangements for Regulated
  Interconnectors (Approval, Settlements Residue
  and Hedging)
• Also Dependent on the Rules for Non Regulated
  Interconnectors
• Common Factors Needed

118
Summary

• Hybrid Interconnectors needed as a Bridge between
  Regulated and Non Regulated Interconnectors
• Simple Arrangements should be Possible which
  could be Adapted to Different Situations
• Commitment to Progress Arrangements

119
Next Steps

• Stephen Kelly
• NECA

120
Next steps

• working group supplementary comments
• transmission and distribution pricing review

121
Review timetable

• publication of draft report Jan / Feb 1999
• consultation with key stakeholders Feb/March
  1999
• publication of final report end-March 1999