Setting retail electricity prices in the ACT

Transcription

1 Setting retail electricity prices in the ACT Luke Meehan Director of Economic Regulation Independent Competition and Regulatory Commission September 2017 AJRC and RIETI workshop 2017

2 The regulator with fewer instruments than objectives typically will be unable to achieve all of his objectives, regardless of how well informed he is about the regulatory environment. Recent Developments in the Theory of Regulation, Mark Armstrong and David Sappington, Handbook of Industrial Organization, 2007

3 ICRC Objectives to promote effective competition in the interests of consumers to facilitate and appropriate balance between efficiency and environmental and social considerations to ensure non-discriminatory access to monopoly and near-monopoly infrastructure

4 ICRC pricing principles 1. Economic efficiency in use Tariff structures and prices should promote the economically efficient use of Icon Water s water and sewerage services infrastructure, and should also encourage economically efficient use of the water resource itself. 2. Economic efficiency for investment and operation Tariff structures should facilitate the efficient recovery of the prudent and efficient costs of investment and operation. The finance recovery aspect of this principle is often described as revenue adequacy or ensuing financial viability. Costs also need to be efficient which is primarily addressed by auditing and incentive mechanisms.

5 ICRC pricing principles 3. Environmental considerations Tariff structures, prices and complementary mechanisms should ensure environmental objectives are effectively addressed. 4. Community impact adjustment 5. Community impact equity for low income households Any change to the structure of tariffs and prices that will have substantial customer impacts should be phased in over a transition period to allow reasonable time for customers to adjust to the change. Adverse impacts on households with low incomes need to be limited or moderated by phasing and other compensating mechanisms or limits on changes to the tariff structure.

6 pricing principles 6. Simplicity Tariff structures should be simple for customers to understand and straightforward for the utility to implement. 7. Transparency Tariffs should be set using a transparent methodology and subject to public consultation and scrutiny.

7 2017 context 140 ASX futures market data for wholesale electricity 1 July 2015 to 31 May ASX AU Electricity Futures Price ($) Base Strip Fin 2018 Base Strip Fin

8 Problem statement How can the Commission set an equitable price for retail electricity that encourages efficient investment and compensates risk during a period of structural change?

9 Model and methodology review During the regulatory period the ICRC intends to re-evaluate the method by which it establishes a pricing model for the supply of electricity by the Utility to customers on its regulated retail tariffs. The ICRC intends to conduct this model and methodology review to ensure the method by which the allowed prices arrived at remains current, accurate and consistent with the ICRC s obligations under its Act.

10 Current form of regulation : A price cap The ICRC sets the electricity price cap such that; / (., - )., $+, 1 + Y $ P () $ Q () / - (., )., P $+, () Q () where the Utility has n standing offer tariffs with m price components. Y $ is the maximum percentage change in average standing offer prices determined in accordance with the cost-index model. P $ () is the price the Utility proposes to charge for component j of standing offer tariff i for year t. Q $+, () is the reference quantity for component j of the standing offer tariff i defined as the actual quantity (in both customer numbers or megawatt hours) in year t 1. $+,

11 The current* model for Y t The Commission s pricing model determines the maximum average percentage change (Y $ ) that the Utility can apply to its suite of regulated tariffs on an annual basis. It does so by estimating the individual cost components that would be incurred by an efficient incumbent retailer when providing electricity supply services to customers on the regulated tariff. *unfortunately the denryoku model doesn t quite make sense

12 Cost components Total cost components Wholesale energy costs + Network costs + Retail costs + Retail margin allowance (% Retail margin X total costs) Energy purchase cost Retail operating costs LRET & SRES Energy losses ACT Energy Efficiency Scheme Energy contracting costs NEM fees The percentage change in total costs is calculated relative to the previous year and applied to the weighted average price cap

13 Questions for investigation, 1 The price cap relies on cost benchmarking. But benchmarks are not readily available. What are the options? Simulation Econometric estimation Business-level evaluation Roll-forward estimation

14 Questions for investigation, 2 The price cap allows for hedging costs, currently: Cost of hedging($ per MWh) = FP [LS 1 M + LR M] FP: Forward price LS: Load shape LR: Load ratio M:Forward premium Does this conservative model based on precautionary principles remain appropriate? What would an optimal incentive hedging model look like?

15 Questions for investigation, 3 The current retail margin is set to 5.3 % How should this margin be estimated? On the basis of assumed systematic risk? On the basis of the PV of expected cash flows? By benchmarking against listed retailers? On the basis of community expectations? What are the cost and competition implications for ACT consumers of changes to retail margin estimation models?

16 Questions for investigation, 4+5 Price cap: Weighted average price cap formula Is there an evolving academic literature on the form of regulation, particularly in retail electricity? What can a regulator do to encourage competition in a market with sticky customers? Competition headroom incentives Tariff-specific controls

17 Contact: Independent Competition and Regulatory Commission

18 Cost category 1: doing business The first category is the estimated costs that would be incurred by an efficient incumbent retailer in the same position as the Utility: retail operating costs, Energy Efficiency Improvement Scheme compliance costs retail margin. These costs make up per cent of the total costs for , which the retailer needs to recover. These costs can typically be controlled by the Utility

19 Cost category 2: network costs The second category is network costs: transmission distribution The ACT Government s Renewable Energy Scheme Network costs make up per cent of the total costs for These costs typically cannot be controlled by the Utility.

20 Cost category 3: wholesale costs The third category of costs is wholesale electricity costs: energy purchase costs, National Renewable Energy Scheme costs, energy losses, energy contracting costs and electricity market fees hedging costs. These costs comprise per cent of ActewAGL Retail s total costs for These costs typically cannot be controlled by the Utility