4. Powerco has also seen the Electricity Networks Association feedback, and supports its content.

Transcription

1 14 April 2014 Karen Murray Manager Regulatin Branch Cmmerce Cmmissin Wellingtn [Sent by t: Dear Karen, RE: Feedback n setting Orin s custmized price-quality path Intrductin 1. Pwerc welcmes the pprtunity t prvide feedback in respnse t the Cmmerce Cmmissin s letter, Feedback n setting Orin s custmised price-quality path, sent t EDBs n 4 March As an EDB under the DPP we fllwed the experience f Orin with interest, and agreed that a review f the prcess is a vital step given it was the first time the CPP input methdlgies had been applied. 3. The key issues t us are: a. A thrugh review f the CPP IMs takes place, driven by what infrmatin was actually used by the Cmmissin, and areas such as the financial mdel simplified where pssible. b. The prcesses fr verificatin and cnsumer cnsultatin are imprved, particularly arund timing. c. Any changes t the CPP IMs are published by the end f February 2015 at the very latest (with a draft decisin circa August 2014 giving a clear signal f changes that a supplier culd start wrking twards with sme certainty). 4. Pwerc has als seen the Electricity Netwrks Assciatin feedback, and supprts its cntent. The CPP applicatin shuld be as lw cst and as simple as pssible 5. The CPP has an imprtant rle in allwing EDBs t apply fr step changes in expenditure that are nt accmmdated under the DPP as lng as the expenditure is cnsidered t be in the lng run interests f cnsumers. While a CPP applicatin, by its nature, is always a significant task, it shuld be kept as simple as pssible. 6. Orin s experience demnstrated the current level f cmplexity and cst inherent in the CPP prcess will be a barrier fr sme suppliers. We supprt a cmprehensive review f

2 the CPP IMs, particularly the amunt f infrmatin that must be included in a CPP applicatin. Timing f any changes t CPP input methdlgies r prcess 7. The Cmmissin has nt detailed a timeline r deadline fr making any changes t the CPP input methdlgies and prcess. Our understanding is that the Cmmissin wuld be lking t make any amendments t the CPP input methdlgies in early 2015, with a draft decisin sme mnths befre this. This deadline is feasible, as it allws any applicant lking at the next applicatin windw (January/February 2016) t benefit frm the imprvements, and mre imprtantly, have enugh time t meet them. Any deadline beynd this wuld make it very difficult t make changes t the CPP applicatin t meet the next applicatin windw. 8. We als recmmend that transitinal prvisins are cnsidered, depending n what type f changes are made. Fr example, prvisins that a supplier culd perate under the ld rules fr a perid f time. This is n the basis that the length f time needed fr CPP preparatin is s lng, it wuld be unfair fr a supplier t have nly ne year t apply substantial changes t the CPP IMs. Pre applicatin engagement with cnsumers shuld be earlier 9. The Cmmissin is seeking feedback n hw well the pre-applicatin cnsultatin with cnsumers wrked. Pwerc s perspective is that the current IMs did nt prvide enugh guidance n the level f cnsultatin the Cmmissin expected. Fr example, in Orin s CPP draft determinatin the Cmmissin judged (n behalf f cnsumers) that Orin was trying t d t much, t sn and deferred sme f its expenditure prpsals. The Cmmissin als cnsidered price-quality trade-ffs at the level f specific prjects. 10. The current cnsultatin n the near-final prpsal is als t clse t the final CPP applicatin date t make any substantive changes t the CPP prpsal frm cnsumers feedback. This substantially reduces hw meaningful the cnsultatin is with cnsumers. 11. The rle f the near final cnsultatin seems t be mre abut seeking infrmatin frm cnsumers n the final prpsal t supply the Cmmissin, as ppsed t infrming pssible price quality ptins. We nte that the Cmmissin replicated this prcess with its wn Issues Paper cnsultatin. Pwerc recmmends that this cnsultatin nly ccurs nce either t be cmpleted by the supplier r the Cmmissin. 12. Pwerc is cnsidering hw an engagement prcess with cnsumers fr a CPP applicatin might wrk and wuld like t better understand the Cmmissin s expectatins. We recmmend that the Cmmissin specify in mre detail what they cnsider is needed r gd practice fr a CPP applicatin. This infrmatin wuld nt necessarily need t be in the IMs, but culd be in a guidance dcument. 13. Fr example, an utline f a suggested prcess might be: April (circa. 10 mnths befre applicatin): The supplier publishes an AMP, which is likely t signal a future CPP applicatin, and culd prvide mre guidance n price-quality trade ff ptins that are being cnsidered. An estimate f the WACC culd be used t prvide estimates f price changes f ptins. The AMP wuld prvide a detailed evidence base t supprt cnsultatin. September (circa. 4 mnths befre applicatin): The CPP WACC is published and the final price change can be calculated. Octber/ Nvember (circa. 3 mnths befre applicatin): The supplier publishes its preferred price-quality ptin, with an accurate price change f the prpsal. This

3 cnsultatin wuld infrm cnsumers f hw earlier cnsultatin has been taken int accunt by the supplier. The respnse t this frms the basis f final cnsumer feedback n the final prpsal t the Cmmissin. January CPP applicatin windw: CPP Applicatin includes the final cnsumer feedback n the near-final prpsal. 14. If the Cmmissin intends t publish an Issues Paper during its determinatin prcess, we recmmend there is n requirement fr near-final cnsultatin in Octber/Nvember as essentially the tw cnsultatins have the same purpse. 15. In terms f the level f cnsumer engagement that the Cmmissin expects, sme f the challenges Pwerc has faced in previus cnsumer cnsultatin are detailed belw. These issues are particularly relevant fr residential cnsumers. Stakehlders and cnsumer representative grups lack knwledge f Pwerc and its rle in prviding electricity. This leads t a lack f participatin and feedback. The difficulty f engaging n different ptins due t the cmplexity f ptins f deferring investment and the indirect link t measures such as SAIDI. Negative perceptins abut the wider industry and the verall price f electricity. Unrealistic expectatins amngst cnsumers, fr example, expecting lwer prices and imprved quality. Widespread cnsumer apathy. Pre applicatin engagement with the Cmmissin 16. The Cmmissin has asked fr feedback n the prcess t engage with the Cmmissin befre a CPP applicatin. We will leave it fr Orin t cmment n hw well they fund the engagement prcess with the Cmmissin wrked. 17. Our expectatin if we were making a CPP applicatin is that we d be able t meet with the Cmmissin as needed and gain any relevant guidance. Fr example, this culd include: the Cmmissin s view n prpsing a variatin t an IM, and having sme degree f certainty that an IM change in a CPP applicatin will be allwed by the Cmmissin (recgnising the Cmmissin will seek wider cnsultatin); interpretatin f CPP IMs; discussin f issues that arise specific t the cmpany, fr example, where histric infrmatin may nt be available; feedback n a prpsal f hw t engage with cnsumers n cnsultatin; and hw t prvide infrmatin in a manner that helps the Cmmissin understand the CPP prpsal. Custmised price-quality path applicatin: Infrmatin required 18. The Cmmissin is seeking views n the prcess fr making an applicatin fr a CPP. This includes the extent and the relevance f the infrmatin that was required. 19. As a general cmment, it lks like Orin had t prvide a lt f infrmatin that was nt used by the Cmmissin, r culd have been prvided by Orin when meeting with Cmmissin staff after the Prpsal was submitted. Fr example, a large amunt f written material abut the applicatin f the building blcks financial mdel had t be prvided. It lks like this culd be simplified.

4 20. We recmmend the Cmmissin review what infrmatin it did nt use, r was nt essential t the CPP applicatin and remve this frm the requirements. It can then lk at the AMP structure, and see if mre infrmatin can be cmbined int this t create the main basis f a CPP applicatin. We als nte that Transpwer submitted a much shrter IPP prpsal that we fund easier t navigate. This may als prvide a useful starting pint. Custmised price-quality path applicatin: Assurance prcesses 21. The Cmmissin is seeking feedback n the assurance prcesses required. Audit prcess 22. The CPP audit prcess lks very arduus and we understand that this was the case fr Orin. We understand Orin has prvided feedback n hw this can be streamlined and imprved, and we supprt thse recmmendatins. Directr certificatin 23. We nte that the CPP Directr s certificatin is mre detailed than the Transpwer IPP certificatin. We recmmend the CPP Directrs certificatin is aligned with the Transpwer IPP certificatin where apprpriate. Cmmissin s apprach t expenditure evaluatin and the verifier 24. The Cmmissin is seeking feedback n its apprach t its evaluatin f Orin s prpsed capital and perating expenditure levels. It is asking fr views n the value f the verifier prcess and hw the evaluatin prcess might be imprved in the future. 25. The main issue Pwerc has with the verificatin prcess is the duplicatin between the verificatin and the Cmmissin s expert review during the determinatin prcess. We nly supprt the verificatin prcess if the Cmmissin uses the same verifier fr its wn review. 26. If the Cmmissin des nt think this is pssible, we think that it is mre useful fr the supplier t have their wn internal verificatin, which they can manage t their wn timeline and wrklad. 27. If the Cmmissin cnsiders that it is pssible t make the prcess wrk s that the same verifier is used, we recmmend the timing f the verificatin is mved earlier in the prcess. This wuld allw the supplier t react t the verifiers feedback befre submitting the applicatin. At the mment the verificatin can nly ccur after the CPP WACC is published. This hwever is nt relevant t what the verifier is cnsidering. A mre apprpriate timing is allwing the applicant t engage the verifier at any time they cnsider useful. Financial mdels 28. The Cmmissin is seeking feedback n the way financial mdels were used in the cnsultatin prcess and hw well the financial mdels were presented and understd. 29. Understanding the Orin CPP mdel was difficult as the Excel versin f the financial mdel was nt published, and instead there were mre than 1,600 pages f PDF. With n specific details arund hw a CPP mdel is t be presented, future mdels culd take different frms and culd make understanding the mdels difficult. Als the Cmmerce

5 Cmmissin s CPP mdel fr Orin was presented at a different level t the DPP price reset mdel (with the DPP mdel primarily taking a MAR befre tax view, where the CPP mdel was presented in MAR after tax terms. 30. We recgnise that Orin s mdel held sme cmmercially sensitive financial infrmatin abut the cmpany, with gd reasns why it shuld nt be made public. We fully supprt this apprach. 31. We wuld like t see the Cmmerce Cmmissin publish at least the frnt end f the financial mdel (with numbers remved if they needed t be cnfidential) t be used that brings tgether the building blcks. We wuld als like that mdel t present the building blcks in such a way as t make them easily cmparable t the DPP mdel used. Cnsultatin with interested persns 32. The Cmmissin has asked if we felt we culd engage with the prcess as an interested persn. Bradly Pwerc fund it easy t engage in that: The decisin dcuments were clearly written and able t be understd, There were enugh pprtunities t put frward views with an Issues Paper and a Draft Decisin stage, The length f timelines t respnd seemed t balance the limited timeline the Cmmissin has t assess the applicatin and enugh time t cnsider the issues. (Nting, that this is the perspective f an interested persn. We cannt cmment n if Orin had adequate time t respnd t the Issues paper and Draft Decisin.) We generally did nt have any queries, s cannt cmment n if the Cmmissin was available fr queries and cncerns. Suitability f input methdlgies 33. The Cmmissin has asked hw the input methdlgies might be imprved t prduce better decisins r utcmes fr CPP prpsals in the future. Generally, the IMs need t change t take accunt f the cmments abve. We nte that the ENA submissin details a range f changes t the IMs, and we supprt these. 34. The Cmmissin has asked if the input methdlgies cater adequately fr setting a CPP in the circumstances f a catastrphic event. We will leave Orin t cmment n this, but frm ur perspective, the CPP seems a pr mechanism t respnd t a catastrphic event in the shrt t medium term. Mechanisms such as a DPP re-pener seem much mre suitable fr immediate respnse. The CPP is a better mechanism t address an issue nce a cmpany has a majr event under cntrl. Prcess updates 35. The Cmmissin has asked fr thughts n the prcess updates. We fund the infrmatin the Cmmissin published useful and cvered the key pints we wuld expect. We als nte that the Cmmissin s regulatry calendar n prvides updated dates f key publicatins. As a general pint, this is smetimes nt updated, with dates missed and n further explanatin prvided. Draft and final decisin briefings 36. The Cmmissin has asked fr views n the frmat and timing f the briefings fr Orin s draft and final decisins. We fund that the briefings wrked well. Hlding the briefings as

6 the decisins were released helps prvide a useful cntext t the infrmatin. Pwerc always welcmes the ability t dial int the briefings valuable as it saves time and expense f travel t a shrt meeting. Recvery f csts f applicatin 37. The CPP IMs nly allw a small amunt f the substantial csts f cmpiling a CPP t be recvered (being the audit fees, verificatin fees and independent engineer fees). The Cmmissin s ratinale was that it cnsidered mst CPP csts t be part f business as usual expenses. 38. Orin s experience shwed that the csts f a CPP applicatin g far beynd what a wellrun EDB wuld d in nrmal peratins. Examples f CPP additinal csts experienced by Orin (and wuld be experienced by all ther CPP applicants) are: The csts f cnsumer cnsultatin: Orin incurred csts f running events, advertising in newspapers and prducing cnsumer-friendly dcumentatinthe Cmmissin judged that Orin had nt dne enugh cnsultatin. Pwerc has cnsidered the Cmmissin s feedback t Orin s cnsultatin prcess and we estimate cnsumer cnsultatin fr a Pwerc CPP wuld be much higher than Orin and a significant expenditure item. This is due t a range fr factrs. Firstly, Pwerc needs t advertise in at least six newspapers due t the area we cver. We als cnsider that t fully engage with cnsumers n price-quality trade-ffs wuld require fcus grups, a quantitative survey and a step-up in engagement with larger cnsumers and retailers. This is very much beynd ur business as usual cnsultatin prcess. The csts f develping the financial mdel: Orin s experience shwed the significant wrk required t build the CPP financial mdel, including the very detailed calculatins that went int the back end f the mdel. Suppliers are unlikely t have the skills and resurce in huse t d this wrk. We nte that Orin cntracted the task ut t a cnsultancy service. Cnsultant reprts: A range f cnsultant expert reprts are ften submitted with an applicatin. This can include demand/ vlume frecast infrmatin, infrmatin n escalatrs and indexes, insurance advice, benchmarking reprts and a range f ther matters. These are all reprts that a supplier is unlikely t require as business as usual. Cmpiling the dcument and supprting infrmatin: Orin s CPP applicatin and prpsal (with appendices) was mre than ne thusand pages. Writing and prducing a dcument f this size has significant cst and wuld nt be part f business as usual. Prject management: Prject management and administratin f a majr prject, such as a CPP prpsal, is ften cnsidered arund 10-15% f ttal csts. Additinal time f engineers, accuntants, executive team and Bard members: Orin s experience demnstrated the significant time required acrss the business in feeding int CPP material, answering questins frm the auditrs, verifier, independent engineer, Cmmissin and the Cmmissin s reviewers. 39. We cnsider that the ttal f these csts is substantial and clearly beynd business as usual. Therefre they shuld be recverable. 40. We nte that the csts f submitting regulatry prpsals t the Australian Energy Regulatr are recverable in Australia. The mechanism used is that nn-reccurring csts, such as making a regulatry prpsal, are remved, and step changes added n when determining future pex allwances fr the next regulatry prpsal. Fr example, the AER requires suppliers t disclse the csts f preparing a regulatry prpsal in years 3, 4 and 5 f the regulatry perid. When frecasting pex fr the frthcming

7 regulatry perid, the AER deducts these csts frm the baseline. The AER then separately assesses the prpsed step change in csts in years This prcess wuld nt wrk fr the CPP, but a supplier culd either apply in advance f a CPP applicatin fr a cst allwance frm the Cmmissin, r the Cmmissin culd apprve csts after the prpsal is submitted. Thank yu fr the pprtunity t prvide feedback and we lk frward t engaging with the Cmmissin further n ptential ptins. Yurs sincerely Richard Fletcher General Manager, Regulatin and Gvernment Relatins