Victorian 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
Presentation 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 (ETF’s)
Transfer of energy functions to AER
VRET – ESC’s Work Program
2006-10 Distribution Price Review
(EDPR) Summary of outcomes
 Price reductions % (Duos & Metering)
DB
2006
2007-10
AGLE
3.1
1.2
CitiPower
7.7
1.5
SP
AusNet
7.8
.8
United
Energy
15.6
1.4
Powercor
16.4
1.1
EDPR – 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 >20 hours. Previously $80 for each
event >12 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
Appeals & amendments
 9 appeals on 13 grounds - 3 withdrawn, 4 rejected, 2
upheld (1 being remitted to ESC, 1 required
alternative MAIFI targets)
 ESC’s 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
Emerging & Ongoing Issues with the
Building Block methodology
 Increasingly distorted incentives (manifestations of cost of service
regimes)
– DB’s 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
Victorian DB Industry Trends (Real)
1,500
1,400
1,300
1,200
$M 1,100
1,000
900
800
700
1
2
3
4
5
6
7
8
9
10
Years : Actuals 2001-04 , Forecasts 2005-10
DB Submission 2001-05 Building Blocks Rev Req.
DB Tariff Revenue 2001-10
Benchmark Building Blocks Rev Req. 2001-05
DB Building Blocks Rev Req. 2001-10
Final Tariff Revenue 2001-10 (Real $ 1/7/2004)
Final B Blocks Revenue Requirement 2001-10
Industry Tariff Revenue
1,500
1,400
1,300
1,200
$M 1,100
1,000
900
800
700
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Actuals 1996-2004, Forecasts 2005-10
DB Tariff Revenue
Benchmark 1996-2005 Tariff revenue
Final Tariff Revenue (Real $ 1/7/2004)
Industry O & M
900
800
700
600
500
$M
400
300
200
100
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Actuals 1996-2004, Forecasts 2005-10
DB Submission 2001-05 O & M
DB O & M
Benchmark 1996-2005 O & M
Final O & M (Real $ 1/7/2004)
Industry Capex
900
800
700
600
$M 500
400
300
200
100
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Actuals 1996-2004, Forecasts 2005-10
DB Submission 2001-05 Capex
DB CAPEX
Benchmark 1996-2005 CAPEX
Final CAPEX (Real $ 1/7/2004)
Major Outsourcing
O&M margin
Actual O&M
passed
through – no
profit element
O&M
Contract
Passed
through +
margin
Return ON
and OF
Asset
Return ON
and OF
Asset
Ownership
and O&M
one entity
Ownership
and O&M
Split
Productivity Indexing (TFP)
 What is TFP?
 How is it different to BB’s?
 What is the advantage of TFP?
– Better incentives – DB’s 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 ESC’s Research Projects on TFP
 TFP trends in Victoria
 National TFP
 Cost allocation (the problem solved)
 TFP & the National Framework
Electricity 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
Electricity 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
Gas Access Arrangement Review
GAAR – Timelines
May 2006
Oct 2006
March 2007
July 2007
Sept 2007
Dec 2007
Released Consultation Paper No.1
Released Consultation Paper No. 2 Final Guidance
Revised Access Arrangements submitted
Draft Decision
Final decision
Final Approvals
GAAR
“…..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”
Information 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
Small scale licensing framework
Purpose of the review
Process to date
Key issues
Early position
Advanced interval meter rollout
– Implications for review
Early 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
Transfer 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
Victorian Renewable Energy Target
Scheme
 ESC’s 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.