Electricity Industry Governance & Regulation

Transcription

1 Electricity Industry Governance & Regulation CEEM 2007 An electricity trading framework large generators Interchange to other wholesale market regions Primary energy markets transmission network Wholesale Market region risks to end-use energy service delivery Retail Market 1 most consumers embedded generators distribution network RM 2 distribution network distribution network large consumer Retail Market 3 Small consumers, embedded generators & storage should be supported by energy service advisers Wholesale & retail market designs should be compatible Both should include network models 2 Electricity Industry Governance and Regulation CEEM

2 Decision-making framework for a restructured electricity industry Governance decision-makers Regulators System & market operator(s) Regulated industry participants Competitive industry participants Underlying societal decision-making 3 Structure & ownership issues Structure: All stages in energy conversion chain matter: Primary energy, generation, network services, end-use Shared accountability for risks to continuous energy flow Retailers play an ambiguous role: Don t participate in the energy conversion chain thus may be redundant in their present role Ownership: Public owners can in principle aggregate risks & consider many issues in assessing the public good: But subject to capture by interest groups & weakly accountable Private owners focus on their own commercial outcomes 4 Electricity Industry Governance and Regulation CEEM

3 Infrastructure industries A definition of infrastructure: Essential elements forming the basis of a system Examples of infrastructure industries: Communications,electricity,gas,water,transport Provide inputs to products or services Often capital intensive with long asset lives An infrastructure industry is only essential if: Required to produce an important product or service No alternative product or service can be made without it 5 Natural monopoly industries Economist s (deterministic) definition: Most efficient if production undertaken by a single firm to meet demand when price=srmc Always true for increasing returns to scale, ie average cost decreases as production increases Some infrastructure industries may be both essential & natural monopolies: Electricity distribution networks may qualify However this may be less true than in the past 6 Electricity Industry Governance and Regulation CEEM

4 Traditional approach to infrastructure Regarded as natural monopolies & run by: State-owned enterprises (eg Australia, UK) Private monopolies (eg some in USA) In either case, once industry had matured: Often exhibited poor productivity, low rates of return, over-staffing or large calls on public funds Often proved difficult to regulate due to asymmetry of information & inappropriate incentives Often slow to innovate But difficult to avoid the distortion of ex-post evaluation - this may be the least-worst option 7 Traditional models for infrastructure industries Britain, Australia, etc: Statutory authorities supervised by a Minister: Usually vertically integrated monopolies Decision making political, behind closed doors : Politicians negotiate tradeoffs USA (in some cases): Regulated private monopolies Politically appointed regulatory boards Well-established, formal procedures 8 Electricity Industry Governance and Regulation CEEM

5 A US perspective on regulatory options for the electricity industry ( Regulating Regional Power Systems, CJ Andrews (Ed), 1995, p87) Advantages Disadvantages Traditional regulation Well-understood with predictable outcomes Poor incentives to minimise cost Ignores externalities Hazards of expost evaluation Integrated resource planning Increased public participation, better social & environmental outcomes Cumbersome Poor incentives to minimise cost Subjective values Incompatible with markets? Markets & incentives Can reduce cost & support innovation May have lower regulatory cost Unproven model subject to gaming Uncertain outcomes Worse social & environmental outcomes? 9 A US perspective on Federalism ( Regulating Regional Power Systems, CJ Andrews (Ed), 1995, p53) Even under the most favourable conditions, federalism is difficult. Dividing power between the center and the periphery is always complex, frequently unstable and often impossible Australia shares the strengths & weaknesses of federalism: ambiguity & instability in legal basis & policy context for industries with multi-state reach 10 Electricity Industry Governance and Regulation CEEM

6 Rates of return (%) on assets for Australian public & private enterprises (King & Maddock, Unlocking the Infrastructure, 1996, p7) Is this an argument for privatisation, or is there a legitimate reason for the difference? 11 Electricity industry ownership issues Some concerns about private ownership: Market power abuse, particularly of small end users Foreign domination of a key sector of the economy Vertical & horizontal concentration of ownership Lack of support for innovation, sustainability & workforce development Some concerns about public ownership: Focussed on conserving the traditional paradigm Confusion of State roles: equity holder versus regulator Not an option for distributed resources 12 Electricity Industry Governance and Regulation CEEM

7 Comparison of ownership options It would be a mistake: To retain public ownership merely to protect the status quo To privatise an electricity industry just for the proceeds from asset sales In either case require: Methods separate risks that can be allocated to specific industry participants from those that cannot An effective, independent regulatory regime Protection against concentration of ownership Enhanced demand side participation Measures to improve sustainability & to address equity concerns ( essential good ) 13 Current ownership status of the Australian electricity supply industry Public ownership Most in NSW, Tasmania, WA & NT Private ownership Victoria: all privately owned South Australia: all leased Queensland: private retailers There are privately owned retailers in most states: Qld recently sold Energex retail & part Ergon retail There are concerns about existing or potential concentration of ownership in most states: Snowy sale was cancelled Tallawarra NSW 400MW CCGT will be privately owned End-use is largely privately owned. 14 Electricity Industry Governance and Regulation CEEM

8 NEM generator market shares by annual energy & spot market revenue (NECA, Performance of the NEM, June 02) 15 Issues & choices in regulation Desirable characteristics for regulation: Independent, unbiased, knowledgeable, consistent, accountable Incorporate externalities Support competitive processes, not act as a central planner: Monitor, advise, reward, threaten rather than directly intervene Align participant & social interests: Incentives may be more effective than penalties 16 Electricity Industry Governance and Regulation CEEM

9 Choices in regulatory arrangements Industry-specific or generic? Industry-specific more knowledgeable, but: More likely to suffer regulatory capture More likely to engage in heavy-handed intervention Narrow or broad regulatory objectives? Narrow focus on financial regulation: Simpler to implement, but ignores important issues Achieving other regulatory objectives: Monetarise (e.g. taxes or tradeable permits) Licence regime (e.g. customer service, QOS) 17 Choices in regulatory arrangements Single regulatory body or multiple bodies sharing regulatory responsibility? Shared responsibility: promotes innovation & robustness requires good communication & cooperation Single regulator or multi-member tribunal? Tribunal members must negotiate & share accountability External regulation or self-regulation? Self-regulation can be more flexible & subtle if all stakeholders are adequately represented 18 Electricity Industry Governance and Regulation CEEM

10 Australian electricity reform process Industry Restructuring National Electricity Law National Electricity Market National Electricity Rules Retail Electricity Markets Jurisdiction level Regulation 19 National Electricity Law (NEL) Supports the operation of the NER and NEM: Creates NEMMCO Only NEMMCO may operate a wholesale market Generators & Network service providers must register with NEMMCO Retailers & customers may only purchase wholesale from NEMMCO Passed by participating jurisdictions: Proclaimed December 1998, amended in 2005 Changes require jurisdictions unanimous approval 20 Electricity Industry Governance and Regulation CEEM

11 National Electricity Rules Defines National Electricity Market (NEM): Terms of participation Rules for market operation Security arrangements Network regulation and access arrangements: Network pricing, metering, connection requirements Code administration & enforcement Dispute resolution, rule change, derogations 21 Jurisdiction-level laws & regulation Determine retail market arrangements: Determine customer eligibility for wholesale market access and retail contestability: Set retail prices for franchise customers Distribution network access regime: To be transferred to AER Issue distribution and retail licences: Regulatory requirements in licence conditions: e.g. Reliability of supply, customer service Enforce safety and environmental standards Penalties rather than incentives 22 Electricity Industry Governance and Regulation CEEM

12 Concerns about joint distributor/retailers (eg: ACCC FRC Determination, 2001; IPART Ring Fencing Guidelines, 2003; Metrology Review, 2003) Potential barriers to entry: Discriminatory charges or requirements Network data, metering & control equipment Ownership of customer data, customer inertia Economies of scale & cross-subsidies Ring-fencing options for distribution & retail: Legal, accounting or operations separation: Legal separation clearly the strongest requirement Metrology issues paper 2003: Meters to be owned by the distributor? 23 Concerns about legal accountability (based on work of Dr R Stillman) Trade Practices Act: Goods must be merchantable or fit for purpose Electricity is continuous flow industry: Fitness determined by quality & availability: Only assessable at point of use & at or after time of use Accountability for availability & quality: Shared between all industry participants Legal accountability is ambiguous: National Electricity Law clauses 77A & 78 try to limit accountability of electricity supply industry participants But Trade Practices Act may override this 24 Electricity Industry Governance and Regulation CEEM

13 Conclusion: difficult compromises required Structure: Vertical separation difficult due to shared accountability & overlap of functions Horizontal separation can be hampered by shared network or primary energy resources Ownership: Private ownership hampered by ambiguity of property rights and large externalities Public ownership creates tension between equity & regulatory roles Legal framework (blurred by federalism): Legislative basis for the industry is ambiguous & unstable 25 Legal & regulatory framework Trade Practices Act & other federal legislation National Electricity Law National Electricity Rules National Electricity Market Design & Regulation Jurisdiction-specific laws Retail Electricity Market Design & Regulation Network Technical Regulation Network Economic Regulation Supply Authority Restructuring Environmental externalities 26 Electricity Industry Governance and Regulation CEEM

14 COAG restructuring process since Parer (Ministerial Council on Energy Communiqué, 1/8/03) MCE recommended the establishment of: A single energy market governance body A new national legislative framework Two new statutory commissions from 1/7/05: (electricity (& later gas) wholesale market & transmission) Australian Energy Market Commission (AEMC): Rule making & market development, replacing NECA Australian Energy Regulator (AER) Wholesale market & transmission regulation & possibly distribution & retail; partly taking over ACCC role MCE recommended a comprehensive review of transmission planning (to be undertaken by AEMC) 27 COAG restructuring process since Parer (Ministerial Council on Energy Communiqué, 1/8/03) MCE to be the single energy policy body Examine options for greater end-user participation: uniform retail market design & interval metering Respond to Productivity Commission review of National Gas Access Regime Review upstream gas arrangements Address greenhouse emissions from energy sector on a national basis 28 Electricity Industry Governance and Regulation CEEM

15 Governance & institutions:- as seen by Allens Arthur Robinson, December Energy regulatory task allocation ACCC (Federal TPA) Anti-competitive conduct Mergers & acquisitions Consumer protection AER (Federal TPA) Transmission econ. regulation Distribution econ. regulation (1/1/07) Licence regime? AEMC (SA law) NEM rule making & development Gas market rule making & devel. Complying with MCE directives 30 Electricity Industry Governance and Regulation CEEM

16 (ERIG discussion papers, 2006) 31 Current MCE reform agenda Governance and Institutions, Gas Market Development, Transmission. Economic Regulation Establish national Dx and retail framework (1 January 2007). Transfer Dx functions to the AER and AEMC (1 Jan. 2007), other functions to be transferred (1 Jan. 2008) Retail Pricing Phase out energy retail price regulation where effective competition can be demonstrated (reviews start 1 Jan. 2007) End-user Participation Implement new consumer advocacy arrangements (mid 2006, end 2006). Consider demand side response options (late 2006) Energy Efficiency Implementation of the NFEE (Stage 1) (end 2007). Response to PC Inquiry, Consideration of the NFEE (Stage 2) (mid 2006). Renewable and Distributed Generation Issues paper on options available in NEM to max. benefits of DG (early 2006) Development of code of practice for embedded DG (end 2006). Development of policies to facilitate increased penetration of wind (end 2006) 32 Electricity Industry Governance and Regulation CEEM

17 2006 additions to agenda (COAG Communique, Feb. 2006) 2.2: Improve price signals for energy investors and customers by committing to progressive roll out of electricity smart meters to allow time of day pricing + for users to respond to prices and reduce demand for peak power; MCE to agree on common technical standards for smart meters and implement roll out as may be practicable from 2007 in accordance with an implementation plan that has regard to costs and benefits and takes account of different market circumstances in each State and Territory; implementing MCE work program to establish effective DSR mechanisms in mkt, including network owner incentives, effectively valuing DSR, regulation and pricing of distributed and embedded generation, and end user education. 2.4: Reaffirmed commitment to implement mkt structures that foster competition endorsing ongoing structural separation of the competitive generation and retailing activities from the natural monopoly Tx functions in the NEM; requesting MCE to develop specific recs under NEL to maintain such separation considering operation + structure of government-owned businesses wrt ensuring equivalence between them and private sector for policy, legal + mkt arrangements; committing to maintain and increase reliance on market-based risk mitigation and hedging measures, and to remove barriers to full retail competition 2.5. COAG to establish high-level Energy Reform Implementation Group 33 Electricity transmission: Principles adopted in MCE report to COAG The transmission system provides transportation from generators to loads, facilitates competition and ensures secure & reliable supply Central & ongoing role for regulated transmission with some scope for competitive (market) transmission Transmission investment decisions should be timely, transparent, predictable & nationally consistent, at the lowest sustainable cost Regulatory framework should maximise the economic value of transmission, including through the efficient removal of regional price differences in the operation of the NEM. Energy Access Pricing Panel Report to MCE 34 Electricity Industry Governance and Regulation CEEM

18 Electricity transmission: ANTS An integrated overview: Future constraints on major transmission paths Information on augmentation options Incorporated into SOO & complimentary to projection of supplydemand balance ( 35 Electricity transmission - boundary review: A new process to be developed for assessing wholesale market regional boundaries, while maintaining jurisdictional boundaries for retail customer pricing Challenges in meeting this objective: Must manage power system security as well as provide commercial signals with risk management instruments Security constraints easier to apply between rather than within market regions Location risk is commercialised across boundaries between regions Different wholesale & retail market boundaries could make it difficult to manage risk commercially 36 Electricity Industry Governance and Regulation CEEM

19 Electricity transmission - regulatory test The aim of the regulatory test is to identify: The least-cost augmentation if required for reliability reasons The augmentation that maximises (>0) the present value of the market benefit in a majority of reasonable scenarios, when compared to a number of alternative projects Distributed resource options are to be considered as well as network augmentations Practical application of the regulatory test has sometimes been contentious 37 interval metering & end-user participation Interval metering should record: Energy & key measures of availability & quality of supply for each market period Interval metering would facilitate end-user participation: Accountability for end-user decision-makers Operation and investment End-user provision of ancillary services The transition towards nodal pricing 38 Electricity Industry Governance and Regulation CEEM

20 Energy Reform Implementation Group Review: initial thinking ( Proposed overarching goal: Economic efficiency (productive, allocative, dynamic) Proposed government role: Adopt a nationally consistent approach Set supply standards, including reliability Design governance regime to deliver overarching goal Eliminate barriers to entry in competitive industry sectors Emulate competitive market outcomes in regulation End direct government participation in the industry 39 Energy Reform Implementation Group Review: initial thinking continued Market structure: Prefer private ownership; not concerned about vertical re-integration; retain energy-only market Fully remove retail price caps & expose end-users to volatile spot prices Transmission: Don t over-invest to remove all flow constraints Introduce a formal national network development plan Integrate reliability & economic investment tests Energy financial market concerns: Retail price caps; govt. ownership; lack of carbon price 40 Electricity Industry Governance and Regulation CEEM

21 Transmission planning options (ERIG discussion papers) Note: These options may not overcome the high level of uncertainty inherent in network planning 41 Conclusions The electricity industry is complex & risky: Governance & regulation are also complex The central issues are: Identification & specification of risks Efficient delegation of decision making, risk management & risk accountability: Appropriate mix of market & regulatory mechanisms Disciplined, stable and wise policy settings Careful management of boundary issues High level of professionalism in government & industry 42 Electricity Industry Governance and Regulation CEEM

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