2007 – 10 retail price review - ipart · executive general manager, retail. outline ... /mwh week...

2007 – 10 Retail Price Review

Presentation to IPART Public Forum8 September, 2006

Tim O’GradyExecutive General Manager, Retail

OUTLINE

• Outline

• Understanding Minister’s Terms of Reference

• Current issues

• Appropriate cost allowances

• Form of regulation

• Protecting vulnerable customers

• Final remarks

Outline

Understanding Terms of Reference

Current framework issues

Appropriate cost allowances

Form of regulation

Protecting vulnerable customers

Final remarks

UNDERSTANDING TERMS OF REFERENCE

• In setting regulated tariffs and charges, the terms of

reference require IPART to:

– Capture true cost of supply

– Move to cost-reflective tariffs by end of Determination

– Facilitate tariff rationalisation

– Consider impact on demand management.

• The Determination will then help to promote:

– Greater competition

– Investment in generation.

Outline




Form of regulation


Final remarks

CURRENT FRAMEWORK ISSUES

• Phase out of ETEF

– ETEF should reflect cost allowance underpinning regulated

retail tariff.

• COAG endorsement of removing retail price regulation

– Competition exists in the NSW market and…

– will increase with when regulated retail tariffs are set at cost-

reflective levels.

• CoAG agreement to roll-out time of use (ToU) meters

– EA supports ToU tariffs as a way to send price signals to

customers.

– Determination must continue to support moving regulated

customers onto ToU tariffs where an interval meter is in place.

Outline




Form of regulation


Final remarks

APPROPRIATE COST ALLOWANCES

Wholesale energy costs

Green costs

Network Charges

Market charges

Line losses

Opex

Margin• The terms of reference direct IPART to have

regard to a number of different costs allowances.

• These cost allowances are essentially ‘building

blocks’ that stack together to form an efficient,

cost-reflective price.

• EA will present the basis for assessing each of

these ‘building blocks’.

Outline




Form of regulation


Final remarks

WHOLESALE ENERGY COSTS


The WHOLESALE ENERGY COST allowance should be based on the cost of a hedge portfolio.

• Reflects the reality of retailing & purchasing

electricity.

• Assessing the cost of a hedge portfolio would

require consideration of:

– Contracting strategy

– Hedge mismatch

– Customer churn

– Credit risk

– Demand risk

– and so forth…

Outline




Form of regulation


Final remarks



• Retailer offers fixed price to small customers for

their future consumption which is uncertain.

• Retailer must purchase electricity for this

uncertain demand at an unknown price.

• The following slides highlight these load and

price uncertainties…

Outline




Form of regulation


Final remarks

EA NSLP Working Weekdays Winter 05

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EA NSLP 04/05 Summer Working weekdays

We know approximately what the load shape looks like

Winter Average

Summer Average

Outline




Form of regulation


Final remarks

WHOLESALE ENERGY COSTSEA NSLP Working Weekdays Summer 04/05

(nb. Weekdays between 24/12/04 and 17/1/05 have been excluded)

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EA NSLP 2005 Winter Working weekdays

But the world is full of surprises! Outline




Form of regulation


Final remarks

WHOLESALE ENERGY COSTSNSW Spot Prices

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W R

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e $/

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Week of 19Jun05

Week of 29Nov04

Week of 06Feb05

NSW Spot Prices $/MWh – 7 days

… and we are never quite sure how much it is going to cost … Outline




Form of regulation


Final remarks

WHOLESALE ENERGY COSTS… and we are never quite sure how much it will cost to hedge.

Cal07 swap, $33.50 in Jul03

Cal07 swap, $41.75 in Jul06

Outline




Form of regulation


Final remarks



• Retailer attempts to limit demand and price risk

by entering into contract arrangements.

• Not feasible to hedge perfectly.

• Invariably there’s mismatch between sold

demand and hedge position.

• Additional risk where regulated price is set up

front before retailer has purchased.

Outline




Form of regulation


Final remarks



• LRMC is an artificial construct that bears little

resemblance to market-based costs faced by

retailers.

• Limitations associated with LRMC include:

– Lead time requirements

– Uncertainty of future fuel costs

– Uncertainty in operating costs for labour &

materials

– Ignores ability of generators to exercise mkt power

The WHOLESALE ENERGY COST allowance should not be based on Long Run Marginal Cost.

Outline




Form of regulation


Final remarks



• In last price review, IES provided an LRMC

amount ranging from ~ $35 / MWh to ~ $58 /

MWh.

• Broad range highlights difficulty and risk in using

LRMC.

Outline




Form of regulation


Final remarks

GREEN ENERGY COSTS

Green costs

• Two types of green costs

– Renewable Energy Certificates (RECs)

– National Greenhouse Abatement Certificates

(NGACs)

• Observable spot markets are available for these

certificates but …

… these markets are ‘thinly’ traded and so do not

have the capacity to support the bulk of retailers’

green energy obligations.

The GREEN ENERGY COST allowance should be based on the cost of investing in relevant technologies.

Outline




Form of regulation


Final remarks

GREEN ENERGY COSTS

Green costs

• Retailers meet compliance obligations through

underwriting the construction of new plant

– Long-term deals of at least 5 years.

• Allowance should reflect reality of procurement

– RECs: latest technology wind generation.

– NGACs: latest technology combined cycle gas turbine

generation.

Outline




Form of regulation


Final remarks

NETWORK CHARGES

• Network charges are already subject to rigorous

regulatory oversight and price control.

• Imposing second-order constraints, such as total

bill price constraint, will:

– Undermine integrity of price Determination

– Dampen intended price signals by Network

business.Network Charges

NETWORK CHARGES should be directly passed through to the customer

Outline




Form of regulation


Final remarks

MARKET CHARGES

• NEMMCO-related charges or costs include:

– Pool fees

– Ancillary charges

– Reserve trader event

– Directions event

• Conceptually, all costs outside retailers

influence or control should be passed through

where possible and practical.

• EA believes NEMMCO pool fees, and costs

associated with reserve trader & NEMMCO

direction events fit this definition and should be

passed through.

MARKET CHARGES should be directly passed through where possible.

Market charges

Outline




Form of regulation


Final remarks

MARKET CHARGES

• Ancillary charges can be traded and so are, to

some extent, controllable.

• Therefore, allowance based on reasonable

assessment of future compliance burden

Market charges

Outline




Form of regulation


Final remarks

LINE LOSSES

• Line losses affect the:

– Distribution Network

– Transmission Network

• Again, all costs outside retailers influence or

control should be passed through where

possible and practical.

• EA believes costs associated with distribution

line losses fit this definition and should be

passed through.

LINE LOSSES should be directly passed through where possible.

Line losses

Outline




Form of regulation


Final remarks

OPERATING COSTS

• First, define what a MMNE is

– Terms of reference suggest “sufficient size to

achieve economies of scale”.

– EA has attempted to define MMNE.

Characteristics include

• Service NSW market

• Stand-alone, non-vertically integrated

• Customer base of approx. 250K

• Robust customer info system

• Facilitates flat and ToU pricing.

An OPERATING COST allowance should be based on benchmarking a mass market new entrant (MMNE).

Opex

Outline




Form of regulation


Final remarks

OPERATING COSTS

• Next, perform best-practice benchmarking

against key cost drivers such as:

– Billing and collection

– Call centre

– Advertising and marketing

– Legal and regulatory

• Finally, determine appropriate level of

sustainable operating costs.

• Need to be mindful of standard retailer left with

larger number of small-consumption customers.

Opex

Outline




Form of regulation


Final remarks

NET MARGIN

• Market evidence is likely to provide the best

available indication of the sustainable margin a

MMNE might reasonably expect to earn, which

might justify the decision to enter a market.

• Examples include:

– Independent expert reports

– Broker reports

• Jurisdictional benchmarks used as a

reasonableness test.

A NET MARGIN allowance should be based on market-based evidence.

Margin

Outline




Form of regulation


Final remarks

NET MARGIN

• Regulated tariffs include additional benefits not

always provided by the market:

– Benefit of a fixed price with flexible term

– Reversion opportunity.

• The allowance for margin should account for

these additional benefits.

Margin

Outline




Form of regulation


Final remarks

FORM OF REGULATION

• The form of regulation should be characterised by:

– minimal constraints on individual tariff movement to achieve

cost reflectivity;

– pass through of uncontrollable and unforeseen costs; and

– administrative simplicity.

• This is best achieved through the use of a ‘tariff-basket’

approach.

Outline




Form of regulation


Final remarks

PROTECTING VULNERABLE CUSTOMERS

• EA has developed a number of programs to help customers

who have difficulty managing the payment of their electricity

bills:

– EnergyAssist program

– CentrePay

– Energy Concessions

– No Interest Loan Schemes.

• EA’s targeted EnergyAssist scheme provides

comprehensive protection to vulnerable customers without

distorting price signals to the broader marketplace.

Outline




Form of regulation


Final remarks

PROTECTING VULNERABLE CUSTOMERS

• EA will continue to improve and build on these programs

• To ensure the programs meet the needs of vulnerable

customers, EA is keen to work closely with consumer

advocate groups.

Outline




Form of regulation


Final remarks

FINAL REMARKS

• We support a move towards retail price deregulation

– competition needs to be effective.

– regulated retail tariffs need to reflect true cost of supply.

• Only in this environment will competition thrive and

investment in new generation occur.

• IPART can facilitate move to ‘cost reflectivity’ by:

– Focus on ‘R’ and pass through separate ‘N’ charges

– Minimising regulatory involvement

– Passing through unforeseen & uncontrollable costs

– Cost allowances reflect reality of retailing

Outline




Form of regulation


Final remarks

2007 – 10 retail price review - ipart · executive general manager, retail. outline ... /mwh week...

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