There is a lot at stake for electricity consumers of all sizes awaiting the final decisions over the review of Input Methodologies and the review of the Transmission Pricing Methodology. Ralph Matthes, executive director, Major Electricity Users’ Group.
WE WENT INTO 2016 expecting intensive consultation on two main areas. First the Commerce Commission review of Input Methodologies (IM); and second the Electricity Authority review of the Transmission Pricing Methodology (TPM). At the time of going to press for Energy Perspectives the outcomes of both reviews were not known.
The IM review
The IM are the building blocks for regulating Transpower, the 29 electricity distribution businesses and also gas line monopolies and certain airports. There are IM for, amongst other things, the regulated asset base, cost of capital and cost allocation of overheads between regulated monopoly services and unregulated services.
The first building block IM was put in place at the end of 2010 following bi-partisan passage of amendments to the Commerce Act in 2008 for a regulatory regime under Part 4 of the Act. That regime was and still is at the light-handed end of the spectrum of standard international regulation of line monopolies.
There has been one major specific review two years ago that resulted in the cost of capital decreasing. That review followed on from an unsuccessful merit review claim to the High Court by the Major Electricity Users’ Group (MEUG) of the 2010 IM settings. In particular the percentile or uplift above the mid-point estimate of the cost of capital specified in the IM. While the High Court declined the claim by MEUG, the decision cast sufficient doubt on the Commerce Commission decision that the regulator felt compelled to review its decision in order to give certainty to the market. The change in cost of capital reduced electricity and gas line charges by approximately $45 million per annum.
The review of IM in 2016 has been all encompassing and cost of capital has again been a topic for detailed submissions. This time retailers, primarily Contact Energy, have provided expert evidence on asset beta, another variable used in estimating cost of capital. There are several tens of millions of dollars per annum at stake awaiting the final decision of the Commission. The IM review covered a lot of items that are sensible changes given experience with the inaugural IM.
There are also some new flash points. One of those is the cost allocation IM with retailers concerned distributors are cross-subsidising entry into what they see as retail services involving emerging and new lower cost technologies such as photovoltaics and batteries. The Electricity Retailers Association of NZ, formed in late 2015, has been at the forefront of that debate.
The review of TPM
In May 2016 the Electricity Authority published its second issues and proposal paper. This superseded the first issues and options paper of October 2012 following the Authority considering submissions on that paper and consultation in 2014 and 2015 on several specific topic working papers culminating in an options working paper in June 2015.
The process for changing TPM requires the Authority issuing TPM guidelines to Transpower, that company then develops details of the TPM that are either approved or modified by the Authority and then implemented. Consultation steps are required throughout this process. TPM guidelines are expected to be decided at earliest in April 2017. An estimate by the Authority of when transmission prices might change given a new TPM being approved is uncertain though at earliest probably April 2019.
The review of TPM has been controversial and that came to a head at the end of 2016 with Trustpower making a judicial review claim on the TPM decision process along with a claim in relation to the Distributed Generation Pricing Principles. Further court action on future decision steps in 2017 is a possibility. With the next general election to be held no later than November 2017 some parties in the sector may politicise the TPM decision-making process and decisions. That would be a dangerous path to take.
For the average household, transmission charges are approximately 11 percent and distribution charges 30 percent of their annual delivered power bill.
In sum 41 percent of a household power bill is governed by the Commerce Commission setting total revenues for Transpower and most distributors. The Electricity Authority regulates how Transpower allocates total regulated revenue by deciding the TPM. For distributor pricing the Authority monitors how each distributor sets tariffs with the possibility of regulating if needed.
In 2016 changes to distributor pricing structures were discussed by the Authority, distributors, retailers and consumers because of concerns consumers making decisions to buy photovoltaics, batteries, electric vehicles and home energy management systems do not face cost-reflective and service-based line tariffs.
So far distributors and the Electricity Networks Association have taken the lead to facilitate changes in distributor tariff structures. There will be intensive work on this in 2017. In deciding what tariff structure is optimal, and for each distributor this will differ depending on, for example, if demand for their local network services is expected to grow or decline, an important aspect is consultation and feedback from affected end consumers.
A wave of change from 2017 onwards?
New and emerging technologies is one of two major changes the electricity sector both here and overseas is grappling with.
There is no text book solution and every country has its unique set of features that can hamper or hasten adaptation of regulatory settings.
One thing for sure is that regulators worldwide are focused to put in place regimes that will ensure an optimal uptake and speed of transition to new technologies by consumers, distributors, transmission companies, system operators and retailers. Mistakes will be made and the flexibility of modifying the regulatory regime will be essential. Stability in the process for modifying regulatory settings to encourage market-led decision making free of political interference is a critical success factor for this country that needs to be retained. The uncertain technology and regulatory environment will provide opportunities and risks for entrepreneurs.
The use of subsidies and other interventions overseas for renewable generation has been driven by the second major policy issue in the electricity sector internationally being climate change. Overseas experience with interventions such as feed-in tariffs has been disastrous and most have now been repealed.
As other countries face higher costs to replace non-renewable with renewable generation our electricity prices should, relative to competing countries, decrease and therefore assist electricity intensive industries.
There is a question whether individual end user businesses can weather any downside outcomes of poor decisions from the IM review, TPM review and changes in distributor pricing in the near to medium term before they can realise climate change benefits flowing through to competitive electricity prices in the long term.