TRANSMISSION AND DISTRIBUTION PRICING REVIEW
FINAL REPORT
Volume I
Report and appendices
July 1999
National Electricity Code Administrator Limited
ACN 073 942 775
Contents
Introduction 1
Executive summary 7
Chapter 1: Evaluation framework 17
1.1 The need for an evaluation framework 18
1.2 Existing guidance in the Code 18
1.3 Key objectives and principles 21
1.4 Interrelationship between network pricing and the broader 23
energy market structure
1.5 Evaluation framework 25
Chapter 2: Who should pay transmission use of system charges? 27
2.1 The review’s approach 28
2.2 Paying for new investment in the network 29
2.3 A framework for sharing the costs of new investment 31
2.4 Paying for the costs of the existing network 34
Chapter 3: How should transmission and distribution use of system
charges be levied? 43
3.1 Aims of network pricing 45
3.2 Deficiencies in the current arrangements 46
3.3 New arrangements for network pricing 49
3.4 Refinements to the network pricing methodology 54
3.4 Structure of distribution network charges 56
Chapter 4: Unbundling transmission and distribution charges 57
4.1 Benefits of unbundling 58
4.2 A practicable way forward 58
Chapter 5: Service standards 61
5.1 Services requiring standards 62
5.2 Specifying standards 64
5.3 Current regulatory initiatives 68
5.4 Incentives to maintain standards 70
5.5 Scheduling of transmission maintenance outages 72
5.6 A negotiating framework 73
5.7 Transparency 79
Chapter 6: Network bypass 81
6.1 An unrestricted right to bypass 81
6.2 Discounts on network charges 82
6.3 Regulatory treatment of negotiated discounts 83
Chapter 7: Embedded generation 87
7.1 Passthrough of TUOS savings to embedded generators 88
7.2 Charging for standby services 90
Chapter 8: Non-regulated (entrepreneurial) interconnectors 97
8.1 Treatment of non-regulated interconnectors in the Code 99
8.2 Market participation rules for non-regulated interconnectors 100
8.3 Beyond the safe harbour provisions 105
Chapter 9: Inter-regional hedges and transmission congestion contracts 107
9.1 Potential enhancements to the inter-regional hedging market 108
9.2 Transmission congestion contracts: the PJM model 109
9.3 New Zealand financial transmission rights 111
9.4 Transmission congestion contracts: key attributes 111
Chapter 10: Summary of conclusions 113
Appendix 1: Terms of reference 121
Appendix 2: The electricity industry 125
A2.1 Electricity supply industry structure 125
A2.2 Generation 126
A2.3 Supply and demand trends 127
A2.4 Interconnectors 128
A2.5 Transmission 130
A2.6 Distribution and retail 131
A2.7 The electricity value chain 131
A2.8 Role of Government and regulators 132
A2.9 Key statistics 136
A2.10 Development of the national electricity market 145
A2.11 Key features of the national electricity market 148
A2.12 Performance against market objectives 150
Appendix 3: The Australian experience 155
A3.1 Structure and determination of network charges 155
A3.2 South Australia 156
A3.3 Victoria 157
A3.4 Australian Capital Territory 157
A3.5 New South Wales 159
A3.6 Queensland 161
Appendix 4: The overseas experience 163
A4.1 Argentina 163
A4.2 California 168
A4.3 England and Wales 170
A4.4 New Zealand 173
A4.5 Pennsylvania / New Jersey / Maryland 175
A4.6 Norway 178
A4.7 Sweden 180
Appendix 5: Summary of written comments on the draft report 183
Introduction
This is the final report on NECA’s review of transmission and distribution pricing in the national electricity market.
The review addresses the transmission and distribution pricing arrangements set out in Parts C and E respectively of the National Electricity Code. It does not extend to the regulation of transmission revenue requirements, or the general level of distribution service prices and/or aggregate annual revenue requirements for distribution services, governed by Parts B and D respectively.
The need for the review was identified, and its core terms of reference set out, in the Code itself. Those core terms of reference require the review to report on the appropriateness of the pricing requirements applying to transmission networks and their associated connection assets, and the methodologies and regulatory principles for the determination of prices for use of the distribution networks.
We extended those core terms of reference to encompass a range of related issues to do with the specification and negotiation of network charges and corresponding levels of service, the unbundling of transmission and distribution charges, network bypass and the treatment of embedded generators. We also folded into the review our obligation elsewhere under the Code to develop a framework for the market participation of non-regulated (entrepreneurial) interconnectors.
We did this for two reasons. First, we recognised from the outset the need to take an holistic, whole-of-market approach to transmission and distribution pricing. This can only properly be achieved as part of a much broader, coordinated strategy that seeks to secure optimal outcomes in terms of efficiency, effectiveness and equity for the national market overall. This includes across the spot, ancillary services and financial markets. It also encompasses broader issues of quality of supply as well as the efficient maintenance and operation of, and investment in, the network and the scope for distributed generation to substitute for network services.
Second, in consultation with the ACCC and as part of its acceptance of the Code as an access undertaking under Part IIIA of the Trade Practices Act, we and the ACCC jointly identified the need for the review to encompass the same wider range of issues in order to ensure that the access undertaking provides a genuinely level playing field across the five regions of the national market; between remote and embedded generators; and between the generation, transmission and distribution, and demand-side sectors of the market.
Those same objectives are also reflected in the priorities for electricity and gas market convergence set out in the Prime Minister’s post-Kyoto statement, “Safeguarding the Future: Australia’s Response to Climate Change”. Consistent with that broader thrust towards convergence, we have been concerned to ensure that the review’s proposals do not represent potential barriers to the emergence of a coordinated energy market.
We established a steering group to assist us in the conduct of the review. The steering group was composed of:
Mr John McMurtrie Chairman, NECA
(chairman)
Mr Alan Asher Deputy chairman, Australian Competition and
Consumer Commission
Professor Tom Parry Chairman, Independent Pricing and
Regulatory Tribunal, NSW
Professor Don Anderson previously chairman, Queensland Electricity Reform Unit
Dr John Tamblyn Regulator-General, Office of the Regulator-
General, Victoria
Dr Cliff Fong Technical regulator, South Australia
Mr Andrew Reeves Commissioner, Government Pricing Oversight Commission, Tasmania
Mr Paul Baxter Commissioner, Independent Pricing and Regulatory Commission, ACT
Mr Stephen Kelly Managing director, NECA
We conducted the review in as open and consultative a way as possible. The main milestones included:
¨ a conference to identify the key issues in transmission pricing in September 1997;
¨ consultation on draft terms of reference for the review in December 1997;
¨ publication of final terms of reference and an issues paper, as the basis for inviting written submissions to the review, also in December 1997. We received over 50 written representations by the deadline of the end of March 1998;
¨ publication of preliminary options and further background papers in July 1998. Those preliminary papers were discussed at a one-day seminar, also in July;
¨ the creation of three working groups, immediately following the July seminar, to take forward further detailed work on the specification and negotiation of network charges, unbundling of TUOS and DUOS charges and a framework for non-regulated interconnectors. Those working groups reported in November/December 1998;
¨ a series of half-day workshops with representatives of each sector of the industry, cogenerators and end-use customers in October/November 1998; and
¨ publication of a draft report on 10 March 1999.
All the documents referred to above, including the written representations to the review, the reports of the three working groups and our draft report are available on our website (www.neca.com.au).
Following publication of our draft report, we undertook a further three months of extensive consultation including:
¨ the opportunity to make written comments on the draft report. We received 33 written comments. The main points made in those comments are summarised in appendix 5 of our final report;
¨ a second series of the industry and end-use customer workshops conducted in April/May 1999; and
¨ a debate on who should pay TUOS charges and a public forum to discuss the draft report on 25 and 26 May 1999.
Simultaneously with consultation on the draft report, we commissioned Ernst & Young to develop detailed proposals to implement the cost-sharing arrangements for new network investment and to give effect to the principles to form the basis for the refinements to the existing CRNP methodology recommended in our draft report. We also established a reference group to work with Ernst & Young in developing those detailed proposals. The issues papers presented to the reference group, and the minutes of its meetings, are available on our website.
We are very grateful to all those who provided written comments to the review or who contributed in any way to the consultation process. We offer special thanks to the members of the working and reference groups for the generous and unstinting gift of their time, often at very short notice. Responsibility for the report, however, including any errors in it, and for our proposals remains entirely NECA’s.
It would be surprising, given the extent of work and the degree of consultation that preceded publication of our draft report, if there were to be significant changes between the draft and final reports. Nonetheless following consultation on the draft report and the further work we have just referred to, we have made a number of changes to our proposals. Most importantly, we have:
¨ developed the principles on cost-sharing for new network investment set out in our draft report into a practical and pragmatic framework for determining the allocation of those costs; and
¨ set out specific proposals for refinements to the existing CRNP methodology set out in the Code in order to achieve the key objectives for network pricing enunciated in our draft report.
This final report is in three volumes. Chapter 1 of volume I sets out the evaluation framework we have adopted for the review. Chapters 2 and 3 set out our conclusions on the two key structural issues for the review: who should pay use of system charges and how those charges should be allocated.
Chapter 4 addresses the unbundling of transmission and distribution charges. Chapter 5 establishes those areas of NSPs’ performance we believe should be covered by service standards and outlines a negotiating framework, including access to the Code’s alternative dispute resolution arrangements, for agreeing levels of service above those basic levels. Chapter 6 discusses network bypass. Chapter 7 proposes new arrangements for the treatment of embedded generators. Chapter 8 sets out a framework for the market participation of non-regulated (entrepreneurial) interconnectors. Chapter 9 discusses inter-regional hedges, transmission congestion contracts and nodal pricing. The review’s conclusions are summarised in chapter 10.
Appendix 1 sets out the terms of reference for the review. Appendix 2 outlines the structure of the electricity supply industry and sets out some key facts and figures. Appendix 3 summarises the existing transmission and distribution pricing arrangements within Australia. Appendix 4 summarises the key structural aspects of the electricity markets in Alberta, Argentina, California, the Pennsylvania/New Jersey/Maryland market, New Zealand, Norway, Sweden and England and Wales. Appendix 5 summarises the main comments that were made on the draft report. Where genuinely new points are raised in those comments as opposed to restatements of existing priorities, albeit sometimes with new information or emphasis, we have also addressed those new points in the body of the final report.
Volume II of the report contains the detailed reports by Ernst & Young on the cost sharing arrangements for new regulated network investment and on refinements to the existing CRNP methodology set out in the Code.
Volume III sets out the detailed changes to the Code necessary to implement our proposals.
Introduction 6
Executive summary
There have been enormous recent reforms to the structure and operation of the electricity industry. Those reforms led, amongst other things, to the separation of:
¨ regulatory and commercial functions;
¨ natural monopoly and potentially competitive activities; and
¨ potentially competitive businesses into a number of smaller, independent units.
The generation market has been restructured to put it on a competitive basis. The retail market is increasingly being opened up to competition. All the States in the national market, and the ACT, are well advanced on phased programmes of contestability that will give all customers a free choice of supplier.
Only the transmission and distribution network service providers remain as regulated monopolies. The National Electricity Code consistently stresses the overriding importance to the national market of competitive, market-oriented outcomes. If the reforms are to be as thorough-going as they should be they must address the achievement of those market outcomes within transmission and distribution. They account for 10 per cent and 30 per cent respectively of the delivered price of electricity.
The fundamental guiding principles adopted in the review, therefore, are that:
¨ competition in network services should be promoted wherever practicable;
¨ the commercial environment should be transparent and stable, and should not discriminate between users; and
¨ for non-competitive services, regulation should seek outcomes that mirror so far as possible those that would apply in competitive markets.
There will be increasing convergence between the electricity and gas markets. The review has been concerned to ensure that its proposals are consistent with the broad thrust of energy market evolution and do not represent potential barriers to convergence.
Evaluation framework
The Code sets out a large and disparate number of overlapping, and sometimes conflicting, objectives and principles for network pricing. From a practical perspective, they need to be distilled into a more succinct set of core objectives. There also needs to be an evaluation framework to ensure that the review’s conclusions and recommendations can be linked by common themes and can adopt a consistent approach.