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Access Arrangement & Technical Rules. Public Information Forum 27 June 2007. PRESENTATION OBJECTIVES. To provide an overview of: WP regulated business Approved Access Arrangement – features of interest Approved Technical Rules Other things to note. BUSINESS OVERVIEW.

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Access Arrangement &Technical Rules

Public Information Forum 27 June 2007


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PRESENTATION OBJECTIVES

To provide an overview of:

  • WP regulated business

  • Approved Access Arrangement – features of interest

  • Approved Technical Rules

  • Other things to note



Your electricity bill l.jpg
YOUR ELECTRICITY BILL

ONE UNIT OF ELECTRICITY …

14 cents/kWh

Retailer – 1 cent

Western Power – 4 cents

Generation – 9 cents


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WESTERN

POWER

GENERATOR

GENERATOR

NETWORK ACCESS CONTRACTS

ENERGY CONTRACTS

ENERGY CONTRACTS

GENERATOR

GENERATOR

RETAILER

RETAILER

RETAIL SALES CONTRACTS

ELECTRICITY CONSUMERS

THE ELECTRICITY MARKET

Arrows show money flow


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State Government

Parliament

Economic Regulation Authority (ERA)

Treasury

Minister for Energy

Office of Energy

Other Codes & legislation

Access Arrangement

Operating Licences

Access Code

Western Power

REGULATORY FRAMEWORK (ECONOMIC)


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PRICE

SERVICE

STANDARDS

RISK

REGULATORY OUTCOMES

  • Price

    • Business entitled to a level of income and profit to be viable and sustainable to do its stuff efficiently

  • Service standards

    • Declared customer service standards must be met

    • Network & connections must perform per Technical Rules

  • Risk

    • Access contracts & capital contributions now structured to share financial risk between customers and WP

  • Regulation provides “balance”

    • Proxy for competition


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TOTAL REGULATED REVENUE ENTITLEMENT ~$600m p.a.

EXPENDITURE

Capex

~$500M p.a.

Return on Assets

~$230M p.a.

ASSET CREATION

Rate of Return

WACC ~7%

Existing Assets

~$3B

Total Assets

Depreciation ~3% average

Depreciation of Assets

~$120M p.a.

Maintenance

~$125M p.a.

MAINTENANCE & OPERATIONS

Forecasts

O&M Costs

~$250M p.a.

Other

~$125M p.a.

HOW REGULATED REVENUE IS CALCULATED


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SOURCES OF INCOME

TOTAL REVENUE ENTITLEMENT

ACTUAL INCOME

Tariff Income (Access Charges)

~$440M p.a.

~$600M p.a.

Capital Contributions

~$150M p.a.

Minor Services ~$10M p.a.


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$60M

$70M

$250M

$115M

$105M

HOW WE USE OUR MONEY

  • WP is a self funded corporation (no subsidies from Govt) and uses its annual income as follows: (indicative)


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ACCESS ARRANGEMENT

  • The “Access Arrangement” is simply the formal agreed “business rules” for how WP goes about providing network services to the market

  • Includes (amongst lots of other stuff):

    • Tariffs

    • Customer service standards

    • Capital contributions policy

    • Standard access contract

    • Asset values, forecast expenditures, rate of return, etc

    • Detailed financial models

  • Approved by the ERA after public consultation and applies for 3 years



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REGULATORY SUBMISSION

  • Two and a half years from inception to approval

  • Originally submitted to ERA on 24 August 2005

  • Took further two revised submissions and 200+ detailed amendments to achieve approval on 26 April 2007

  • Submission comprised:

    • Access Arrangement doc

    • Access Arrangement Information doc

    • Technical Rules

  • Now published in full on both the ERA and WP web sites


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ACCESS ARRANGEMENT (1)

The AA document is a relatively concise quasi-legal document comprising the following key matters:

  • Description of Reference Services

  • Service standard benchmarks

  • Form of price control

  • Investment adjustment mechanism

  • Service standard adjustment mechanism

  • Cost of capital

  • Trigger events

  • Pricing methods and prices

  • Policy on prudent discounts

  • 8 Appendices (see over)


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ACCESS ARRANGEMENT (2)

Appendices:

  • Applications & queuing policy

  • Transfer & relocation policy

  • Capital contributions policy

  • Standard access contract

  • Price list (tariffs)

  • Price list information

  • Reference services

  • Explanatory notes on price control


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ACCESS ARRANGEMENT INFORMATION (1)

The AAI document provides all the detailed supporting information for the AA, including:

  • Description of key business drivers

  • Recent performance and benchmark data

  • Justification for proposed service standards

  • Supporting narrative on revenue “building blocks”:

    • Demand & energy forecasts

    • Forecast Opex & Capex

    • Value of WACC

    • Depreciation rates

    • Asset values (ODV)

  • Detailed price methodology

  • Appendices – detailed reports


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ACCESS ARRANGEMENT INFORMATION (2)

Appendices:

  • Network benchmarking reports (2)

  • WACC reports (3)

  • Expenditures report, including capital project listing

  • Asset valuation report

  • Revenue model (spreadsheet)

  • Demonstration of Code compliance for contract & policies


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REVENUE CAPS

  • ERA has essentially approved what WP asked for:

    • Asset valuation

    • Depreciation rates

    • Rate of return (WACC) – 6.76% – high end of “reasonable range”

    • Expenditure forecasts - minor changes




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TARIFF EQUALIZATION CONTRIBUTION (TEC)

  • Govt policy of uniform network tariffs has always subsidized unprofitable Regional areas

    • Loss previously absorbed by Western Power integrated business

    • Now a direct cost recovered through SWIS network tariffs (distribution customers only)

  • Explicit in Legislation & Code

  • ~$70M each year (goes to Horizon)


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REVENUE & PRICE CONTROL

  • Annual “revenue cap”

  • Code provides for revenue adjustments in subsequent regulatory period due to:

    • Force majeure events

    • Changes in Technical Rules

    • Investment & Capital Contributions adjustment mechanisms

  • Tariff setting:

    • Limit of CPI+5% on tariff variations (+/-) in years 2 & 3


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REFERENCE SERVICES (1)

11 reference services at network exit points

Anytime Energy (Residential) Exit Service A1

Anytime Energy (Business) Exit Service A2

Time of Use Energy (Small) Exit Service A3

Time of Use Energy (Large) Exit Service A4

High Voltage Metered Demand Exit Service A5

Low Voltage Metered Demand Exit Service A6

High Voltage Contract Maximum Demand Exit Service A7

Low Voltage Contract Maximum Demand Exit Service A8

Street lighting Exit Service A9

Un-Metered Supplies Exit Service A10

Transmission Exit Service A11


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REFERENCE SERVICES (2)

2 reference services at network entry points

Distribution Entry Service B1

Transmission Entry Service B2




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PRICING STRUCTURE

Current pricing structure is maintained:

  • Cost reflective tariffs for:

    • transmission connected customers (nodal)

    • distribution connected customers >1MVA (zonal)

  • “Bundled” transmission/distribution tariffs for distribution connected customers

  • “Uniform” (non-locational) tariffs for all customers <1MVA throughout the SWIN

  • No change to tariff design


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PRICE OUTCOMES (1)

  • Unprecedented expenditure levels (both capex & opex) are driving up revenues and tariffs

    • Note: capex forecasts deliberately understated

  • Expected annual tariff increase ~CPI+3% average for several years

  • AA only “becomes effective” on 1 July 07 – change from 2005/06 to 2007/08 tariffs on this date

    • 2006/07 tariffs approved by ERA (in AA approval) but never applied in practice


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PRICE OUTCOMES (2)

  • 2006/07 to 2007/08 price movements limited to CPI+5% (per AA)

  • Effective price changes on 1 July are larger - relative to current (2005/06) prices

  • Both relative movements detailed in 07/08 Price List Information

  • NOTE: WP intends to maintain current “transition tariffs” only until 30 June 2009


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PRICE LIST INFORMATION

  • Required by the Code to explain cost allocation and price setting principles

    • Incorporates much of the general information from old “pricing and charges papers”

  • Sections 9 & 10 detail price movements

  • Appendix describes method of determining UOS prices for new transmission nodes where historical data is not available

  • http://www.westernpower.com.au/documents/AccessArrangement/prices0708/200708PriceListInformation.pdf


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“NON-REFERENCE” SERVICES

  • Essentially “miscellaneous” services, including:

    • Requested relocation of assets

    • Planning studies

    • High load movements

    • Disconnection/reconnection of services

    • Insulate & make safe aerial conductors

    • etc, etc …

  • Prices not regulated under AA - but don’t affect profitability (refer Slide 9)


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DISTRIBUTION SERVICE STANDARDS (1)

  • WP originally proposed single service standard – SAIDI – for feeder categories

    • Urban (metro + Geraldton, Bunbury, Albany & Kalgoorlie)

    • Rural (all other areas)

  • ERA insisted on SAIDI & SAIFI for feeder categories CBD, Urban, Rural Short & Rural Long

  • Definitions per national reporting guidelines (IEEE 1366 & SCNRRR standards)

  • Target performance based on 25% improvement from June 2004 (existing corporate targets)



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STREETLIGHTING SERVICE STANDARDS

  • Repair times per Customer Charter:


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TRANSMISSION SERVICE STANDARDS (1)

WP proposed, & ERA approved

  • 3 service standards

    • Circuit availability (primary circuits only, excludes zone substations)

    • System minutes interrupted (meshed network only, teed lines excluded)

    • System minutes interrupted (radial network only, teed lines excluded)

  • Target performance is status quo - current performance levels considered OK

  • WP must develop measures that include teed circuits “next time”



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SERVICE STANDARD ADJUSTMENT MECHANISM

  • Potentially provides financial penalty (reward) for actual performance significantly worse (better) than targets

  • ERA did not approve this approach for first AA

  • “Normal” performance defined as [targets +/-10%]

  • WP must explain performance outside normal range

  • Financial incentives may apply “next time”


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CAPITAL CONTRIBUTIONS POLICY (1)

  • Fundamental principles:

    • Calculation by “Economic test” i.e.

      Capcon $ = Capital cost $ - Forecast future access revenue $

    • Capcons can only apply to investments that do not meet the “New Facilities Investment Test” (details later)

    • Exceptions to 1 & 2 covered in “Extension & Expansion Policy” (details later)


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CAPITAL CONTRIBUTIONS POLICY (2)

  • New features of approved policy:

    • Customer can elect to make time payments if capcon >$30K

    • WP & customer may negotiate rebate scheme if capcon >$100K

    • WP can request security from customer for capcons >$50K


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EXTENSION & EXPANSION POLICY

  • Essentially preserves WP’s existing “100% contribution” supply extension policies

    • Subdivisions, UMS, etc.

  • Required by Electricity Industry Act & approved by Coordinator of Energy (OOE)

    • Can be varied from time to time

    • Practical instrument to implement Govt policy

  • Sits outside AA but essential component of the AA’s capcon policy (by reference)


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NEW FACILITIES INVESTMENT TEST

  • In practice, the “test” is ultimately convincing the ERA that each & every project satisfies the NFIT criteria (prudency & benefits)

  • WP building this “test” transparently into business cases & investment approval processes

  • ERA is currently developing “NFIT guidelines”


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ALTERNATIVE OPTIONS TEST

  • Equivalent to NFIT but applies to OPEX capacity solutions e.g. local generation

  • Must pass same tests i.e.:

    • Prudency

    • Provide either a revenue, general or safety/reliability benefit


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REGULATORY TEST (1)

  • To assess efficiency of large (individual) projects:

    • Tx projects >$15M

    • Dx projects >$5M

  • WP must submit “major augmentation proposal” to ERA for approval

    • Demonstration that network enhancement is the best economic outcome compared with alternatives such as local generation, demand management, etc

  • Always additional to NFIT

  • Hefty penalties apply for non-compliance


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REGULATORY TEST (2)

  • Code provides for streamlined approval (or waiving) where alternatives clearly don’t exist e.g. new generator connection

  • Market Rules provide process for IMO to call for public proposals on alternatives

  • In practice, expect:

    • customer driven projects and most major reinforcements to be routinely approved (or the test waived)

    • full Reg Test process to apply to incrementally large investments e.g. Geraldton 330, distribution edge-of-grid

  • Does not apply to projects “committed” before 1 July 2007


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REGULATORY TEST (3)

  • WP building this “test” transparently into business cases & investment approval processes

  • Geraldton 330kV proposal will be first application of Reg Test

  • “Guidelines” currently being developed by ERA


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STANDARD ACCESS CONTRACT (1)

  • “Electricity Transfer Access Contract” (ETAC)

    • Developed from model access contract in Code

    • Used for access and connection

  • Standard ETAC applies to each reference service

  • Approved ETAC to WP’s satisfaction with 1 exception:

    • Customer has the right to contract for any capacity, whether used or not

    • WP argued this could be “gamed” and lead to over investment in new capacity – ERA didn’t agree


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STANDARD ACCESS CONTRACT (2)

  • Main differences between the ETAC and Access Agreements (current):

    • All references to Access Arrangement, not old Regulations - obvious

    • Some flexibility in security arrangements

    • Liabilities no longer “strict” – now only for negligence & default

    • Liabilities are determined in accordance with number of connection points and voltage levels and reset annually

  • Note: Interconnection Works Contract for network reinforcements not part of the Access Arrangement


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APPLICATIONS & QUEUING POLICY (1)

  • Aim of policy is to manage connection applications and development of access contracts in a timely and equitable manner

  • It covers the process for:

    • Making applications

    • Management of the application queue

    • Amendment or withdrawal of applications

    • Processing applications & making access offers

    • Developing new or modified access contracts


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APPLICATIONS & QUEUING POLICY (2)

  • “First come, first served” principle continues to apply

  • Covers applications for both transfer & connection applications

  • Access offer now in a form that becomes the access contract (ETAC) when signed

  • Bypass test can be applied to stalled or dormant connection applications

  • Priority rules for both amended applications and applications associated with tenders


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APPLICATIONS PROCESS IMPROVEMENTS

  • Time taken is perennial cause of customer dissatisfaction

  • WP will respond to “enquiry” (pre-application) within 20 business days

  • WP has undertaken major process review

    • Still a complex process

    • Key parts undergoing further detailed re-design

  • Time expectations for access offer for major projects still ~6 -12 months


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TRANSITION FROM REGULATIONS TO ACCESS ARRANGEMENT (1)

  • Changes to Regulations under way (OOE) to facilitate transition

  • Existing Access Agreements

    • Regulations remain in force contractually

    • Regs changes will transfer some major things (such as prices, capcons policy) to AA provisions

    • E.g. existing contracts subject to AA Price List from 1 July (subject to individual contract details)

    • No urgency in converting existing contracts to new Access Contracts under the AA


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TRANSITION FROM REGULATIONS TO ACCESS ARRANGEMENT (2)

  • New access offers/contracts per AA from now

  • Transfer of the ‘Access Application Queue’

    • Position in queue will be a seamless transfer

    • Management of transferred applications will be per new Applications & Queuing Policy from 1 July

  • New applications managed per new Policy from 1 July


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TRANSFER & RELOCATION POLICY

  • Details the conditions under which a network user may:

    • Assign or novate rights and obligations under an access contract

    • Re-assign contracted capacity from one location to another


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DISCOUNT POLICIES

2 policies for applying discounts to published tariffs:

  • Prudent discounts:

    • Apply where a prospective network user can source an equivalent service at a lower price than that offered by a reference service (“network bypass”)

  • Discounts for distributed generation:

    • Apply where connection of a generator at a particular location results in reduced capital or operating costs

  • The amount of discount is recoverable from other users


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NEXT ACCESS ARRANGEMENT ?

  • Submission due 30 September 2008 !

  • Planning has already commenced

  • The Code contemplates:

    • 5 year regulatory term

    • Price control (rather than revenue control)



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TECHNICAL RULES (1)

  • Do not form part of the AA per se, but are required by the Code to be submitted concurrently – (effectively underpin service standard and expenditure proposals)

  • Approved by the ERA on 26 April 2007

  • AA contains provision for adjustment of revenues where there is a material change in the Technical Rules


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TECHNICAL RULES (2)

Apply to:

  • Western Power

    • Quality of supply standards (not reliability)

    • Network planning criteria

    • Operation of the network, including under emergency conditions

  • Generators & loads connected to the network

    • Design & operation of connected plant and equipment


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TECHNICAL RULES (3)

  • The technical part of WP’s regulatory contract with the ERA

    • for the expenditures & revenue approved

  • Provide transparency & clarity to:

    • Users of the network (existing & prospective)

    • ERA

    • WP planners, designers & operators


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SMALL

GENERATORS

CODE

TRANSMISSION

TECHNICAL CODE

DISTRIBUTION

TECHNICAL CODE

TECHNICAL

RULES

TRANSMISSION

DISTRIBUTION

PLANNING

CRITERIA

TECHNICAL RULES (4)

Amalgamate pre-existing “codes”


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TECHNICAL RULES (5)

Considered good outcome compared with National Electricity Market where the following apply:

  • National Electricity Rules, plus

  • State rules, plus

  • Utility rules


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TECHNICAL RULES (6)

Chapter 1:

  • Legal background

  • Responsibility to act reasonably

  • Dispute resolution

  • Exemptions

  • Rule change process


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TECHNICAL RULES (7)

Chapter 2:

  • System performance standards

  • Load shedding

  • Planning criteria

  • Protection requirements


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TECHNICAL RULES (8)

Chapter 3:

  • Connection requirements for all users

    • Generators

    • Loads

    • Small generators <10MW - Section 3.6

    • ‘Roof-top inverters’ – Section 3.7


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TECHNICAL RULES (9)

Chapter 4

  • Inspection, testing, connection, disconnection

    Chapter 5

  • Operation and coordination of plant not covered by Market Rules


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TECHNICAL RULES (10)

  • Acknowledge did not get everything “right”

  • Some agreed amendments were overlooked in final documentation – subject of first rule change

  • WP agreed to undertake further work on small generator protection standards – national approach to be taken


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TECHNICAL RULES (11)

User Guide for small generators < 10MW

  • To assist Users planning to connect

  • Addresses planning, design and operational issues

  • Explains the requirements of Section 3.6 clause by clause

  • Example calculations provided

  • Enables Users to do self-evaluation

  • Draft complete - to ERA early July for review - anticipated publication in September


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TECHNICAL RULES (12)

  • Rules do not apply retrospectively

    • Transitional provisions where Rules have changed

  • Process for exemptions:

    • Code allows:

      • WP to approve individual cases

      • WP can refer “blanket” exemptions to ERA for approval

    • Late application not a fait accompli

      • WP must treat all people equally

      • Everything is on public record – precedents



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SYSTEM MANAGEMENT

  • Two distinct roles – Network & Market management

  • Network management costs included in AA & recovered via network tariffs

  • Market function:

    • Concerned with security of the transmission network and dispatch of generators in accordance with Market Rules

    • Costs not part of AA – recovered via IMO from market participants (about $4.5M per year) – subject to review & audit by IMO & ERA


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LOSS FACTORS

  • IMO now publishes loss factors annually

  • Market Rules require WP to calculate Tx & Dx loss factors as service to IMO, by 1 June each year

  • Market participants can request IMO to audit WP’s calcs

  • No longer published by WP with tariffs


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FURTHER INFORMATION

Lots more info is available …

  • Visit www.westernpower.com.au/networkaccess

    OR

  • Contact your WP account manager

    OR

  • Contact WP Regulation & Pricing on 9326 4911:

    Peter Mattner, Greg Turnbull, Neil Gibbney,

    Hugh Smith, Zoran Bozic


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