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New Investment. Conference on ACCC Draft Statement of Principles for the Regulation of Transmission Revenues. John Howarth Executive Manager Energy Infrastructure VENCorp 2 April 2004. Contents. Why regulate State-owned enterprises who plan the transmission network? Incentive regulation

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Presentation Transcript
New investment

New Investment

Conference on ACCC Draft Statement of Principles

for the Regulation of Transmission Revenues

John Howarth

Executive Manager Energy Infrastructure

VENCorp

2 April 2004


Contents
Contents

  • Why regulate State-owned enterprises who plan the transmission network?

  • Incentive regulation

  • What is the regulatory contract with an ex-ante capex?

  • What should be included in an ex-ante capex cap?

  • What about NEC process/consultation/disputes?

  • What should happen to capex not included in firm cap?

  • Off-ramps or force majeure

  • Conclusions


Why bother
Why Bother?

  • All planners are state owned and accountable to duly elected governments

  • Stakeholders can lobby government

  • Why have a national regulator define how much capex should be spent within a state by a state owned enterprise?

  • Lets all go home – haven’t we got more important things to do?


Because
Because

  • Transmission built inefficiently can destroy value and confidence in upstream investment

  • Transmission not built can also allow market power to extract exorbitant revenues

  • Transmission is not the only solution to load growth

WE NEED TO STRIKE A BALANCE THROUGH GOOD INCENTIVE REGULATION


Incentives
Incentives

  • Don’t have to worry too much about regulatory incentives if the correct incentives are in place in terms of organisational governance

    • This is why the present and proposed arrangement for Victoria is different to other jurisdictions

  • If the decision to build assets is within the same organisation that earns a revenue from the assets then regulatory incentives become very important

  • Incentives to

    • Utilise existing assets

    • Employ alternative solutions to transmission investment

    • Time investments efficiently

    • Implement investments efficiently


What is new investment
What is New Investment

  • In Victoria

    • Augmentation  $ 30 to 50 m per annum

    • Replacement  $ 60 m per annum

    • Support the business  $ 10 per annum

  • In NSW


Ex ante estimates
Ex-ante Estimates

TransGrid Application


Ex ante estimates1
Ex-ante Estimates

Powerlink Application


Ex ante vs ex post
Ex-Ante Vs Ex-Post

  • Is it easier to verify efficiency looking forward or backward?

    • The best information to assess the efficiency of a project is at the time of the investment decision

    • Using a stick or carrot after the money is spent (ex-post) is inefficient

    • Trying to estimate conditions 5 years out is inaccurate and may lead to inappropriate incentives/service outcomes

  • Has ex-post worked?

    • QNI


What is ex ante regulatory contract
What is Ex-ante Regulatory Contract?

  • Needs to be a capped sum of money for a given level of service

  • Cannot measure transmission service even supply reliability over a 5 year time-frame

  • Measurable and accurate service definition is not yet possible for a transmission network particularly over a relatively short time frame compared to the asset lives


What could be treated on an ex ante basis
What Could be Treated on an Ex-ante Basis?

  • Asset replacement

  • Business support

  • Augmentation to meet load growth that is indifferent to generation patterns (about 50% of Victorian augmentation but very dependent on network geography)

  • Relies on being able to set an efficient level of investment at the start of the regulatory period


Other concerns about ex ante
Other Concerns about Ex-ante

  • What happens to the consultation and dispute process in the NEC as TNSP gets the revenue anyway?

  • What is to stop projects not being undertaken and then put up for the next period?


Those projects outside ex ante
Those Projects Outside Ex-ante

  • VENCorp preference is for no ex-post optimisation but scrutiny on the regulatory test compliance at the time of the investment decision

  • Justified amount in regulatory test is the amount to be rolled into the asset base allowing efficiency gains and penalising overspends during implementation

  • This also allows full consultation/dispute process


Off ramps
Off-ramps

  • Off-ramps required

    • Environmental changes

    • Taxes

    • Uncontrollable costs

    • i.e. Force majeure events

  • Need a test for materiality


Conclusions
Conclusions

  • Ex-ante could work for asset replacement, business support and some augmentation indifferent to generation patterns

  • Large projects are best dealt with at the time of the investment decision and this requires the regulator to get their “hands dirty”

  • A national planner appears to me to solve some of these regulatory problems


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