Economic Regulation in Energy

Transcription

1 Economic Regulation in Energy

2 Economics for Sustainability Water Efficiency K Peter Kolf General Manager & CEO Economic Regulation Authority 20 June 2007 Institute for Sustainability & Technology Policy

3 Overview The Economic Regulation Authority Analytical Framework Water Pricing for Sustainability

4 The Economic Regulation Authority Functions Administers Access to Infrastructure Licenses Service Providers Monitors & Regulates Markets Inquiries (Referred by Government) Features Independent of Government, Industry & Consumer Groups

5 Economic Regulation Authority Governing Body General Manager Planning & Executive Support Executive Director Competition Markets & Electricity Director Gas and Rail Access Executive Director Licensing, Monitoring & Customer Protection Director References and Research Manager Finance & Administration

6 Inquiries in the Water Industry 1. Annual Urban Water & Wastewater Pricing May Harvey Bulk Water Pricing May Country Water & Wastewater Pricing July Esperance Kalgoorlie Bulk Water Supply Nov Urban Water & Wastewater Pricing Nov 2005

7 Future Inquiries in the Water Industry 1. Competition in the Water & Wastewater Services Sector 2. Developer Charges

8 Analytical Framework Economic Efficiency Singularity: Productive efficiency Allocative efficiency Dynamic efficiency

9 Hope for the Future: The Western Australian State Sustainability Strategy Sustainability is defined as: Meeting the needs of current and future generations through an integration of environmental protection, social advancement, and economic prosperity.

10 Objective Function Maximise: Needs of current and future generations Subject to: Environmental protection Social advancement Economic prosperity

11 Economic Prosperity Max W Optimum Environmental Protection

12 Matters to which the Authority must have regard: Promote the public interest Consider the long-term interests of consumers Encourage investment Consider the interests of investors & service providers Promote competition & fair market conduct Prevent abuse of monopoly power Practice transparent decision making Section 26 Economic Regulation Authority Act 2003

13 Objective Function Maximise: Long term interests of consumers Subject to: Social advancement Environmental protection Economic prosperity Interests of investors & service providers Re-elect Minister

14 Objective Function Maximise: Re-elect Minister Subject to: Social advancement Environmental protection Economic prosperity Interests of investors & service providers Long term interests of consumers

15 Economic Prosperity Interests of Investors Election of Minister Long Term Interests of Consumers Environmental Protection

16 Supply of Goods & Services Common Property Fisheries, Water resources etc Private Goods Bread, Butter etc Public Goods Free to air, Defence etc Mixed Goods Pipelines, Wires etc

17 Monopoly Other monopoly factors: Economies of scale Economies of scope Barriers to entry infrastructure legislative (legal)

18 Externalities Environmental Social Technical

19 Price Inclining & Declining Costs MC 1 AC 1 AC 2 MC 2 Quantity

20 First Principles of Intervention There is a demonstrated need for intervention It creates the right incentives It s least restrictive on consumer sovereignty It s benefits outweigh its costs It s administratively simple, user friendly & It actually works

21 Types of Intervention (Regulation) Public sector ownership & control Price control of private sector Market based regulation: Open access Structural separation Markets in contestable elements Artificial markets where possible Price or revenue cap if all else fails Monitoring / transparency

22 Water Pricing for Sustainability Maximise Welfare Short run marginal cost? Long run marginal cost? Trade-off

23 Cost of Water Average Cost Long Run Marginal Cost Bore water & tanks South West Yarragadee Water trading Recycling Desalination 2 ($0.80/kL) ($1.40/kL) ($ $3.00/kL) ($1.40/kL) (Harvey $0.6/kL) ($0.5 - $1.80/kL) ($1.75/kL)

24 Price Tariff Structures MC A + C = B T2 C Excess π = 0 T1 A B AR q1 q2 Quantity

25 Aggregate Consuption GL Distribution of Residential Water Consuption Ave Household Consumption = 283 kl Total Consumption = 165 GL Household Consuption Kilolitres Estimated 2005/06

26 $/kl 1.60 Urban Residential Tariffs 1.20 Original Tariff Kilolitres per annum

27 $/kl 1.60 Urban Residential Tariffs Proposed Tariff 1.20 Original Tariff P ЄD Service Charge (Original) $ pa Service Charge (Proposed) $ pa Kilolitres per annum

28 Number of Connections Water Company Optimum Max W Max π Excess π = 0 Water Consumption GL

29 S1 S6 S11 S16 S21 S26 S Profit Number of Connections Water Consumption

30 1 Welfare Number of Connections Water Consumption

31 Concluding Remarks Is water a special case? Is there water scarcity? Does water suffer an allocation problem? Can water pricing assist? Are there institutional problems? Can competition assist? Can markets assist?

32 Economic Regulation in Energy