Commerce Commission
Draft 2015 electricity distribution price-path reset
Briefing for financial market analysts
4 July 2014
Sue Begg
Overview
Introduction
Today we published our reasons paper setting the default price-quality
paths for 16 electricity distributors for the 2015-2020 period
• The final decision will be released on 28 November 2014
• The new price-quality paths apply from 1 April 2015
2
Overview
Electricity distributors subject to this reset
Alpine Energy
Aurora Energy
Centralines
Eastland
Electricity
Ashburton
Electricity
Invercargill
Horizon Energy
Nelson Electricity
Network Tasman
OtagoNet
Powerco
The Lines
Company
Top Energy
Unison
Vector
Wellington
Electricity
Orion is currently on a customised price-quality path until 2019, after which it is intended
that they will move on to the default path.
3
Overview
Process up to today
2010
2010
2012
2013
2013
2014
4
Prices set based on previous Part 4A regime
Input methodologies determined
Prices reset based on input methodologies
Orion customised price-quality path set
High Court input methodologies merits review
Process and issues paper, draft model released
Overview
Contents
• Changes in the price limits
• Features of the decision
• Process from here to the final decision
5
Changes in the price limits
Changes in the price limits
•
•
•
•
6
Price limits for this reset
Impact of claw-back
Alternative rates of change
Reasons behind shifts in price limits
Changes in the price limits
Calculating the price limits
We set price limits for each distributor across a five-year regulatory
period
• Price limits are calculated using current and projected profitability
• They align revenues with forecast costs, and allow the expectation
of a normal return
• The reset allows past improvements in efficiency and the benefits
of updated forecasts to be passed on to consumers
7
Changes in the price limits
Calculating the price limits (cont)
• Adjustments are made for claw back
• A limit to increases can be applied to reduce price shocks
• Reduction of price shocks require alternative rates of change
8
Changes in price limit
Claw-back
• After the 2012 reset, a number of companies faced very large price
increases to enable revenue to cover costs
• We limited increases to avoid price shocks for consumers
• As a result, these distributors’ prices did not cover their costs
during the 2012-15 period
• These distributors need further price increases to ensure they
recover their costs in the next period, as well as costs not recovered
in the previous period
9
Changes in the price limits
Weighted average cost of capital (WACC)
• The WACC used for this draft decision is 7.60%
• The WACC used for the 2012 reset was 8.77%
• The WACC will be updated for our final decision based on changes
to the input parameters we use, and our decision on whether to
continue using the 75th percentile of WACC
• A draft decision on the WACC review will be made on 22 July
10
Changes in the price limits
Forecast profitability if price limits were not reset*
Vector
$62m
Wellington Electricity
$27.0m
Network Tasman
$14.0m
Aurora Energy
$12.0m
OtagoNet
$9.6m
The Lines Company
$9.6m
Unison
$9.5m
Nelson Electricity
$0.4m
Horizon Energy
-$2.9m
Centralines
-$5.7m
Electricity Invercargill
-$6.9m
Eastland
Electricity Ashburton
Results in a reduction in prices
with a net total impact of -$9.6m
-$11.7m
-$16.7m
Top Energy
-$25.3m
Alpine Energy
-$25.4m
Powerco -$40m
*Forecast revenues minus forecast costs for the whole of the 2015-2020 period
11
Changes in the price limit
Price limit change 2014/15 to 2015/16 without claw-back
Alpine Energy
+18.1%
Top Energy
+16.7%
Centralines
+13.0%
Electricity Invercargill
+12.4%
Eastland
+12.3%
Electricity Ashburton
+11.7%
Powerco
+3.1%
Horizon Energy
+2.5%
Nelson Electricity
-2.2%
Unison
-2.6%
-5.0%
Vector
Aurora Energy
-5.8%
The Lines Company
-5.8%
Wellington Electricity
-6.5%
OtagoNet
Network Tasman
12
-9.6%
-10.8%
Changes in the price limit
Price limit change 2014/15 to 2015/16 with claw-back
Alpine Energy
+33.9%
Top Energy
+23.0%
Centralines
+19.3%
Eastland
+12.1%
Electricity Ashburton
+7.6%
Electricity Invercargill
+6.2%
Horizon Energy
+5.7%
Powerco
+0.6%
Unison
-0.6%
Vector
-1.1%
The Lines Company
-5.8%
Aurora Energy
-6.5%
Nelson Electricity
Wellington Electricity
OtagoNet
Network Tasman
13
-8.6%
-13.2%
-13.4%
-18.1%
Changes in the price limit
Change 2014/15 to 2015/16 with alternative rates of change
Rate change (CPI+X)
Alpine Energy
10%
Top Energy
7.0%
Centralines
6.0%
Electricity Invercargill
0.5%
5.2%
Eastland
3.5%
4.9%
Horizon Energy
0.5%
4.7%
Electricity Ashburton
14
13.5%
8.4%
7.1%
3.5%
2.0%
Powerco
0%
Unison
0%
-0.6%
Vector
0%
-1.1%
The Lines Company
0%
Aurora Energy
0%
0.6%
-5.8%
-6.5%
Nelson Electricity
0%
Wellington Electricity
0%
-13.2%
OtagoNet
0%
-13.4%
Network Tasman
0%
-8.6%
-18.1%
Changes in the price limit
Reasons behind increases
• Distributors facing increasing costs (opex and capex)
• Large changes are predominantly driven by claw-back
• We mitigate these large changes by applying alternative rates of
change
15
Changes in the price limit
Reasons behind decreases
• Updated forecasts
• Sharing of benefits of increased operational efficiency with
consumers
• Removing or reducing the impact of past inaccuracies
16
Changes in the price limit
Alternative rates of change and claw-back
• The Commission may cap large increases to avoid price shocks
• The balance of the increase is then spread over the regulatory period
• The alternative rates of change we have set allow full recovery
between now and the next reset
• This will be likely to result in price reductions at the 2020 reset
• We are interested in views on alternative approaches
17
Changes in price limit
Claw-back and the need for alternative rates of change
Level of revenue to recover costs plus claw-back
Area indicates claw-back
Reveune $
of 2013-15 under-recovery
Level of revenue to recover costs
Large price change
with industry wide X
Level of revenue to recover costs
Area indicates under-recovery in the current regulatory period
2013
2014
2015
2013 - 15 price path
18
2016
2016 - 20 price path with alternative rates of change
Changes in the price limit
Reasons for differences between price limits for distributors
and retail prices
•
•
•
•
19
Electricity distribution accounts for approximately one third of an
average customer’s electricity bill
Some costs that are beyond distributors’ control are passed
through to consumers
Distributors choose how to structure their prices
Distributors may price below the limit if they wish to
Overview
Contents
• Changes in the price-path
• Key features of the draft decision
• Process from here to the final decision
20
Key features
Key features of the draft decision
•
•
•
•
21
Our low cost forecasting approaches
Revenue linked quality incentive scheme
Energy efficiency incentives
Approach to catastrophic risk and other uncertainties
Key features
Low cost forecasting approaches
• Largely based on the approach that we used for the 2012 reset
• Operational expenditure forecast using econometric approach from 2013 base
year
• Distributors’ capital expenditure forecast based on their asset management
plans with a cap placed on overall expenditure increase
• Changes in revenue due to changes in demand forecast using an econometric
approach
22
Key features
Operational expenditure
base year
• We have chosen to use 2013
as the base year for opex
• This was due to large changes
from 2013 actuals to
Distributors estimates for
2014
• We invite views on why
either year would be atypical
Estimated 2014 expenditure relative to 2013 actual
expenditure (constant prices)
23
Key features
Capital expenditure increase with caps
• For network capital expenditure
• Either 110% or 120% of the historic average, depending on past reliability of
distributor forecasts we relied on for last regulatory period
• For non-network capital expenditure
• A cap of 200% of the historic average
• Except where non-network expenditure is more than 5% of total expenditure
24
Key features
Quality incentive scheme
• Previous scheme was a pass/fail regime
• New scheme will link quality of service with revenue
• Performance target set based on the frequency and duration of
power outages
• Rewards and penalties
• Caps and collars
• 1% of distributors’ revenue is ‘at risk’
25
Key features
Quality incentive scheme
26
Key features
Energy efficiency incentives
We are proposing an incentive for distributors to increase energy
efficiency
• Compensates distributors for revenue forgone as a result of
decreases in volume due to energy efficiency measures
• Neutralises the incentive not to invest in assets with shorter lives
• Covers energy efficiency, demand management, and reduction of
energy loss measures
27
Key features
Catastrophic risk
• Our proposed approach to catastrophic risk is consistent with the
approach taken in the Orion customised price-quality path
• No allowance for ex-ante compensation
• Ex-post compensation for costs
• Forthcoming High Court decision on price path reopeners for
catastrophic events
28
Overview
Contents
• Changes in the price path
• Key features of the draft decision
• Process from here to the final decision
29
Process from here
Indicative dates
18 July 2014 Release of draft determination
22 July 2014 Draft decision on cost of capital
25 July 2014 Q&A session on models
2 August 2014 Information gathering request (s53ZD)
15 August 2014 Deadline for submissions of the draft decision
29 August 2014 Deadline for cross-submissions on the draft decision
Late 2014 High Court direction on price-path reopeners
10 October 2014 Release of revised draft determination
28 November 2014 Release of the final decisions
1 April 2015 New price-quality path takes effect
30
Process from here
Documents being released today
• Reasons Paper outlining and explaining the default price-quality
path.
• Forecasting paper explaining our low cost forecasting approaches.
• Models used in determining the price path.
• Sector productivity report by Economic Insights.
• Econometrics report by Jeff Borland.
31
Process from here
Documents being released on Friday 18 July
• Draft determination text
• Quality targets paper with details of the quality scheme
• Compliance paper with details of what would be necessary to
comply with the draft determination
• Draft input methodologies amendments redline drafting
• Input methodologies amendments reasons paper
32
Process from here
Related work
Other Commission work will have an impact on the final price-path
decision
• Incremental rolling incentive scheme
• Input methodology amendments
• Review of the weighted average cost of capital
• High Court decision on price-path reopeners
33
Process from here
Consultation process
• We welcome your views on this draft of the default price-quality
path decision. You can provide feedback by email to
John McLaren (Chief Advisor, Regulation Branch)
c/o [email protected]
• Submissions are due by 5pm Friday 15 August
• Cross-submissions are due by 5pm Friday 29 August
34
Any questions?
35
Contact us
Call:
Write:
Email:
Website:
36
0800 943 600
Contact Centre, PO Box 2351, Wellington 6140
Attn: John McLaren
John McLaren, Chief Advisor
c/o [email protected]
comcom.govt.nz