| Fragment- Electricity Network Regulation Draft Report – Productivity Commission
(Review by Selven)
The Productivity Commission is conducting an inquiry into aspects of national electricity network regulation. The Commission has been asked to provide a Final Report to Government in April 2013. The purpose of the inquiry is to firstly inform the Australian Government about whether there are any practical or empirical constraints on the use of benchmarking of network businesses for regulation in the National Electricity Market (NEM). Secondly, to examine if efficient levels of transmission interconnectors are being delivered, to inform whether the regulatory regime is delivering efficient levels of interconnection to support the market in the NEM. The review focuses on the NEM and excludes Western Australia. A draft report was released on 18 October 2012 which stated that the review should be a broader exercise and found that regulation and ownership arrangements for electricity networks required overhaul to address surging electricity prices issue.
Main takeaways:
• Recommend Western Power does not make a submission as report deals with NEM and does not apply to Western Australia.
• There are some references to Western Power and the SWIS in terms of reference to past benchmarking studies comparing states. Suggest no need to respond except to check if these references are accurate and in context.
• However, some of the key messages and proposals do provide affirmation of Western Power’s policy positions on issues especially such as cost reflectivity and price signaling and customer supporting measures to address peak demand. Given that the report received quite prominent media coverage here, Western Power should consider referring to these proposals/messages, where appropriate, to advance some of its policy positions.
• The proposal in the draft report for the move towards privatisation to address conflicting objectives of state-owned enterprises provides opportunity for Western Power to advocate that Government ownership can still provide efficiency if Governments’ ensure that any intervention occurs at the highest level possible to give the market the greatest freedom to find efficient solutions and not incur unnecessary cost.
• The proposal for regulatory regime reforms to discourage over-investment, including ex post review of capital spending, provides Western Power the opportunity to highlight that Western Power is already regulated by the ERA based on the proposed including ex post review of capital spending. Hence, Western Power faces additional efficiency regulations compared to Eastern counterparts.
Main proposals/messages relevant to Western Power
Electricity prices have risen by more than 50 per cent in real terms over the past five years. Spiralling network costs are the main contributor to these increases, partly driven by inefficiencies in the industry and flaws in the regulatory environment.
Comment:
This price in WA, set by the Government, was frozen for a number of years and remained the same from 1997 to 2009 (other than the rise associated with the GST in 2000). Of course the cost of supply throughout this period continued to grow so the gap between cost and price widened. Network costs amount to 40% and generation costs also make up the bulk of electricity prices, due to rising gas prices.
Though the price has risen 57 per cent over the last 14 years (excluding GST), which equates to an average annual increase of 3.97 per cent, most retail tariffs remain below the total cost of supply.
• Some 25 per cent of retail electricity bills are required to meet around 40 hours of critical peak demand each year.
– Avoiding this requires a phased and coordinated suite of reforms, including consumer consultation, the phased removal of retail price regulation, and the staged introduction of smart meters, accompanied by time-based pricing for critical peak periods.
– This would defer costly investment, ease price pressures on customers, and reduce the large hidden cross-subsidies from (often lower-income) people who do not heavily use power in peak times, to those who do.
Comment: This proposal is in keeping with Western Power’s position on cost reflectivity as stated during the Strategic Energy Initiative policy development consultations. Western Power supports the move towards price signalling measures and supporting customers with the tools needed.
• Reliability is critical to electricity networks, but some consumers are forced to pay for higher reliability than they value.
– Reliability decisions should be based on what customers actually want, rather than by prescriptive (sometimes politically influenced) standards.
Comment: Western Power’s reliability measure is about 99.88%. Notwithstanding this, we understand that some customers experience longer annual interruption times, particularly those in remote locations served by long feeder lines. In addition, customer’s on life-support machines require continuous uninterrupted power supply and this require stringent standards and protocols. We continue to implement innovative ideas to address reliability in these areas and make the necessary network improvements.
To improve the way we plan, build and operate our aging electricity network we must maintain a delicate balance between affordability, reliability and safety. For example, from a safety and reliability point of view it might be desirable to replace all our assets over a certain age. This would, however, result in large increases in the cost of supply. Conversely, postponing investment in new assets might delay cost increases but would result in increasingly long power interruptions and potentially dangerous asset failures. Getting this balance right is the number one challenge for Western Power and has been the focus of our business. (From annual report 2012)
State-owned network businesses have conflicting objectives. There is no evidence that these businesses outperform their private counterparts in terms of efficiently meeting the long-term interests of their customers. Indeed, there appears to be evidence to the contrary. Conflicting objectives also frustrate the effectiveness of incentive regulation for these businesses.
– State-owned network businesses should be privatised.
Comment: Government ownership can still provide efficiency if Government’s ensure that any intervention occurs at the highest level possible to give the market the greatest freedom to find efficient solutions and not incur unnecessary cost. (From SEI paper submissions)
• The incentive regulation regime encourages businesses to build too much. Eliminating some obvious flaws would encourage more efficient investment, including:
– ensuring the allowed rate of return on regulated assets is not excessive
– ex post review of capital spending, when businesses overspend
– no requirement that the regulator consider every detailed aspect of the businesses’ spending proposals.
Comment: Western Power is already regulated by the ERA based on the proposed ex post review of capital spending. Hence, Western Power faces additional efficiency regulations compared to Eastern counterparts.
• At this stage, benchmarking — which compares the relative performance of businesses — is too unreliable to set regulated revenue allowances. Nevertheless, greater and more effective use of benchmarking could better inform the regulator’s decisions
Comment: No action now but to keep watching brief on the development of benchmarking for regulation.
• The gains from a package of reforms are significant. Indicative estimates suggest:
– In New South Wales alone, $1.1 billion in distribution network capital expenditure could be deferred until the next five year regulatory period by adopting a reliability framework that took into account consumers’ preferences for reliability. The actual savings are likely to be larger.
– Adopting a different reliability framework for the high-voltage part of the network (transmission) could defer investment around $2 to 3 billion of investment across the national electricity market over the next five year regulatory period
– Critical peak pricing would produce savings of around $100–$250 per household each year (after accounting for the costs of smart meters).
Comment: No reference to WA but worthwhile to check internally what would be effect on Western Power’s capex on changes in reliability framework.
• While the gains from these reforms are large, they will not happen overnight — long-term investments and regulatory decisions have already been made. But future cost savings rely on reforms made now.
• In considering the benefits for consumers, it is important not to blame network businesses for the current inefficiencies. Mostly, they are responding to regulatory incentives and structures that impede their efficiency.
References to Western Power in draft report of Electricity Network Regulation (Vol 1 & 2)
Economic Regulation Authority (ERA WA) compared actual opex between Western Power and all other Australian distribution networks for 2007-08. The results were used to assess the base year expenditure for 2007-08.
(pg 153)
The use of partial productivity indicators is also sensitive to specification. For instance, In their report to the WA Economic Regulation Authority, Wilson Cook (2009, p. 86) made several partial productivity comparisons between Western Power and network operators in other states. Three comparisons were made of distribution opex, separately accounting for customer numbers, line length (km), and electricity consumption (kWh). While these comparisons produced consistent rankings at a state level, they did not provide consistent measures of opex efficiency.
(pg 169)
Efficiency gaps identified by recent studies
Several studies examined partial indicators of efficiency:
• Wilson Cook (2009) made several partial productivity comparisons between Western Power and the distribution network operators in several other states. Comparisons were made of opex ratios, although the comparisons did not offer a consistent conclusion on the size of efficiency gaps between networks. Victoria had a similar level of opex per customer as South Australia, which was around one third less than Western Power, New South Wales/ ACT, and Queensland. However, when comparing opex per circuit km, Victoria was close to on par with Queensland, and more than one third higher than South Australia.
(pg 224)
Meyrick (2005) undertook comparisons between Western Power and all other Australian distribution networks who remained unidentified. Meyrick used a number of partial productivity measures, although mainly reported rankings. Opex productivity indexes ranged from around 0.6 to 1.8, while capex productivity ranged from around 0.6 to 1.5.
(pg 224)
Meyrick (2005) undertook multilateral TFP comparisons, where Western Power is ranked sixth out of thirteen, and is 6 per cent below the group average.
(pg 224)
Table 2.4 Projected network costs 2010-11 to 2013-14 Network costs Network share of total residential electricity costsa Contribution to price increases from 2010-11 to 2013-14b
2010-11 2013-14 Increase 2010-11 2013-14 Distribution Transmission
Cents/kWh % % % % %
Qld 11.35 15.33 35.1 54.9 52.4 40.3 6.1
NSW 12.51 16.54 32.2 55.0 51.3 36.2 6.2
ACT 7.11 8.48 19.3 43.9 37.0 14.2 6.1
Vic 7.09 8.23 16.1 31.0 27.1 15.3 0.0
SA 10.67 15.06 41.1 44.5 46.2 40.3 10.8
Tas 9.94 11.91 19.8 47.9 45.9 22.5 15.4
WAc 7.87 11.99 52.4 35.7 38.4 34.2 10.4
Pg 104
In addition, technological change and the potential for lower costs provide scope for DG to increase its share of generation:
A rapid cost reduction in some distributed generation technologies — in particular Solar PV — has the potential to dramatically re-shape the Australian energy landscape. (Clean Energy Council 2012, p. 8) DISTRIBUTED GENERATION 443
Table 13.2 DG projects reported by responding Network Service Providersa
Number of DGs and capacity, April 2010 Organisation Residential Commercial Industrial Other
No. MW No. MW No. MW No. MW
ActewAGL 3 051 5.9 - - - - - 6.73
CountryEnergy 16 500 43 2 60
Energex 40 224 77
Energy Aust 25 000 45 - - - - 43 268.5
Ergon Energy - - 3 3.36 - - - -
Horizon Power 1 1.46 1 0.5 - - - -
Integral Energy - - 1 1.3 - - - -
SP AusNet - - - - 1 - - -
Western Power 4 2 1 0.012 - - - -
TOTAL 84 780 174.36 26 37.17 3 60 43 275.23
(pg 443)
References
Meyrick Associates 2005, Benchmarking Western Power’s Electricity Distribution Operations and Maintenance and Capital Expenditure, prepared for Western Power Corporation, February.
(pg 760)
—— 2009, Review of Western Power’s Expenditures for Second Access Arrangement, prepared for the Western Australia Economic Regulation Authority, May.
(pg 771)
Layman, B. n.d. ‘CGE Modelling as a Tool for Evaluating Proposals for Project Assistance: A View from the Trenches, Department of Finance and Treasury, Government of Western Australia.
Western Australian Department of Treasury and Finance 2002, The use and abuse of input-output multipliers, Economic research articles, March 2002.
(760)
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