DRAFT DECISION Tariff structure statement proposals Ausgrid Endeavour … - Draft decision... · 6...

DRAFT DECISION

Tariff structure statement

proposals

Ausgrid

Endeavour Energy

Essential Energy

August 2016

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2 New South Wales —Tariff structure statement— Draft decision

Contents

Contents .......................................................................................................... 2

Glossary........................................................................................................... 4

Request for submissions ............................................................................... 6

Draft decision .................................................................................................. 7

1 Background ............................................................................................. 25

2 Rule requirements .................................................................................. 34

3 Summary of NSW distributors' proposals ............................................ 38

3.1 Ausgrid ............................................................................................. 38

3.2 Endeavour Energy ........................................................................... 39

3.3 Essential Energy .............................................................................. 42

4 Tariff structures ...................................................................................... 45

4.1 Tariff design ..................................................................................... 45

4.2 Charging windows ........................................................................... 64

4.2.1 Time of day (business days) ......................................................... 65

4.2.2 Seasonality .................................................................................. 78

4.2.3 Charging windows for weekends/non-business days ................... 81

4.2.4 Harmonisation of charging windows ............................................. 84

5 Tariff levels .............................................................................................. 85

5.1 Calculation of long run marginal cost ............................................ 85

5.2 Recovery of residual costs ............................................................. 87

6 Tariff assignment policies ................................................................... 100

6.1 Tariff classes .................................................................................. 100

6.2 Residential and small business tariff assignment policies ........ 100

6.3 Large business tariff assignment policies .................................. 113


A Our consultation process .................................................................... 116

A.1 Issues paper, submissions and information requests ............... 116

A.2 Public forum ................................................................................... 116

A.3 Other consultation ......................................................................... 117

B Ausgrid’s proposed tariff structures .................................................. 119

C Distributors' customer consultation and customer impact analysis124

C.1 Customer consultation .................................................................. 124

C.2 Customer impact analysis ............................................................ 126


Glossary Term Interpretation

CoAG Energy Council The Council of Australian Governments Energy Council, the policy making council

for the electricity industry, comprised of Commonwealth, state and territory

governments.

Consumption tariff (usage tariff) A tariff based on energy consumed (measured in kWh) during a billing cycle.

Declining block tariff A tariff structure in which the per unit price of energy decreases in steps as energy

consumption increases past set thresholds.

Demand charge A tariff component based on the maximum amount of electricity used (measured in

kW or kVA), usually falling within a defined charging window or at any given time,

and usually reset either at the end of a month or a billing cycle.

Demand tariff A form of tariff that incorporates a demand charge component.

Distributor A Distribution Network Service Provider.

Fixed charge A tariff component usually based on a per day fixed price amount for connection to

the network.

Flat tariff A tariff incorporating a per unit consumption charge that does not vary regardless of

how much electricity is consumed or when consumption occurs.

Flat usage charge A per unit consumption charge that does not vary regardless of how much electricity

is consumed or when consumption occurs.

Inclining block tariff A tariff structure in which the per unit price of energy increases in steps as energy

consumption increases past set thresholds.

Interval meter A meter capable of measuring electricity usage in specific time intervals, such as 30

minute blocks.

LRMC Long Run Marginal Cost. Defined in the National Electricity Rules as follows:

"the cost of an incremental change in demand for direct control services provided by

a Distribution Network Service Provider over a period of time in which all factors of

production required to provide those direct control services can be varied".

Minimum demand charge Where a customer is charged for a minimum level of demand during the month or

billing period, irrespective of whether their actual demand reaches that level.

NEO The National Electricity Objective, defined in the National Electricity Law as follows:

"to promote efficient investment in, and efficient operation and use of, electricity

services for the long term interests of consumers of electricity with respect to—

(a) price, quality, safety, reliability and security of supply of electricity; and

(b) the reliability, safety and security of the national electricity system".

Network pricing objective The network pricing objective is that the tariffs that a distributor charges in respect

of its provision of direct control services to a retail customer should reflect the

distributor's efficient costs of providing those services to the retail customer.

NER, the Rules National Electricity Rules.

Smart meter A digital meter which records consumption in short intervals such as 30 minute

blocks and is capable of being read remotely. May facilitate other services (e.g. in–

home information display; load control).

Tariff A tariff is levied on a customer in return for use of an electricity network. A single


Term Interpretation

tariff may comprise one or more separate charges, or components.

Tariff assignment policy Policies and procedures a distributor will apply in assigning retail customers to tariffs

or reassigning retail customers from one tariff to another.

Tariff class assignment policy Policies and procedures a distributor will apply in assigning retail customers to tariff

classes or reassigning retail customers from one tariff class to another.

Tariff structure Tariff structure is the shape, form or design of a tariff, including its different

components (charges) and how they may interact.

Tariff charging parameter The manner in which a tariff component, or charge, is determined (e.g. a fixed

charge is a fixed dollar amount per day).

Tariff class A class of retail customers for one or more direct control services who are subject to

a particular tariff or particular tariffs.

Time of use tariff A tariff incorporating usage charges with varying levels applicable at different times

of the day, days of the week, or seasons. A time-of-use tariff will have defined

charging windows in which these different usage charges apply. These charging

windows might be labelled the 'peak' window, 'shoulder' window, and 'off-peak'

window.

Usage charge A tariff component based on energy consumed (measured in kWh). Usage charges

may be flat, inclining with consumption, declining with consumption, variable

depending on the time at which consumption occurs, or some combination of these.


Request for submissions

This document sets out our draft decision on the tariff structure statements submitted

to us by Ausgrid, Endeavour Energy and Essential Energy.

Copies of the proposed tariff structure statements are available on the AER’s website

www.aer.gov.au.

We invite submissions from interested parties on our draft decision.

Submissions should be emailed to [email protected] before 5pm on Tuesday,

4 October 2016. Enquiries may be emailed to the same AER email address.

Alternatively, submissions may be mailed to:

Mr Chris Pattas,

General Manager, Networks

Australian Energy Regulator GPO Box 520 Melbourne Vic 3001

We prefer all submissions be publicly available to facilitate an informed and

transparent consultative process. Submissions will be treated as public documents

unless otherwise requested. Parties wishing to submit confidential information are

requested to:

clearly identify the information that is the subject of the confidentiality claim

provide a non–confidential version of the submission.

All non-confidential submissions will be placed on the AER website.

http://www.aer.gov.au/

mailto:[email protected]


Draft decision

Ausgrid

Our draft decision is to not approve the tariff structure statement submitted to us

by Ausgrid as we do not consider it to be fully compliant with the rules.

This draft decision sets out why and in what respect we consider the proposed

tariff structure statement submitted by Ausgrid to be non-compliant. We invite

further submissions from stakeholders to assist us in arriving at our final decision.

Endeavour Energy


by Endeavour Energy as we do not consider it to be fully compliant with the rules.


tariff structure statement submitted by Endeavour Energy to be non-compliant.

We invite further submissions from stakeholders to assist us in arriving at our

final decision.

Essential Energy


by Essential Energy as we do not consider it to be fully compliant with the rules.


tariff structure statement submitted by Essential Energy to be non-compliant. We

invite further submissions from stakeholders to assist us in arriving at our final

decision.


Overall assessment

Ausgrid

Our draft decision is to not approve Ausgrid's tariff statement proposal. This is

because there are some elements of Ausgrid's proposal which we are not satisfied

contribute to the achievement of compliance with the distribution pricing principles.

Completeness of tariff structure statement

Ausgrid's tariff statement proposal largely incorporates each of the required

elements:

tariff classes

policies and procedures for assigning customers to tariffs

tariff structures

tariff charging parameters

the approach taken in setting tariffs, and

indicative pricing schedules.

Ausgrid's tariff assignment policy was not complete or sufficiently clear in its

proposal. Ausgrid has provided greater clarity to us in response in an information

request and through its submission on our issues paper. We require Ausgrid to

incorporate these clarifications in its revised tariff structure statement.

Compliance with the distribution pricing principles

There are many elements of Ausgrid's proposal we consider contribute to the

achievement of compliance with the distribution pricing principles. These include:

It exhibits modest movement towards cost reflectivity, incorporating time-of-use

tariff options for small customers, complementing existing cost reflective tariffs

for large customers

It demonstrates Ausgrid accounted for customer impacts by:

o sequencing the timing of its assignment policy changes to commence

shortly after the metering rule change is in place(1)

o introducing tariffs to transition customers towards more cost reflective

tariff structures

o transitioning towards the recovery of residual costs from fixed charges.(2)

The introduction of the transmission-use-of-system only tariff for customers

connected to its transmission network. This will result in greater efficiency as

these customers will not incur a distribution-use-of-system charge.


(1) AEMC, Rule determination—National Electricity Amendment (Distribution Network Pricing Arrangements)

Rule 2014, November 2014.

(2) Residual costs are the portion of allowed revenue that the distributor cannot recover through tariff

components that are based on LRMC. We discuss this in detail in chapter 5.

However, we are not satisfied that the following elements of Ausgrid's tariff

statement proposal contribute to the achievement of compliance with the

distribution pricing principles:

The inclusion of declining block tariffs— we are not satisfied such tariffs reflect

the efficient recovery of costs and provide efficient price signals to consumers.

We require Ausgrid to submit further evidence in support of declining block

tariffs; or, amend its declining block tariffs to have a flat rate structure.

The proposed charging windows—we consider Ausgrid did not provide

adequate evidence to justify the length of its peak and shoulder hours. We

require Ausgrid to provide further evidence in support of its proposed charging

windows; or, amend its charging windows to demonstrate greater movement

towards cost reflectivity.

The assignment of new residential and small business customers which

distinguishes between those new customers with embedded generation and

those new customers without embedded generation. We consider new

customers without embedded generation should also benefit from a time-of-use

tariff structure. We require Ausgrid to treat the assignment of new residential

and new small business customers with and without embedded generation

equally.

The change from the use of energy consumption to current transformer

connection as a basis of allocating medium and large customers with a low

voltage connection to particular tariffs.. We require Ausgrid to provide further

justification for using the size of the current transformer connection as the

eligibility criteria for assigning customers to tariffs.


Endeavour Energy

Our draft decision is to not approve Endeavour Energy's tariff statement proposal.

This is because there are some elements of Endeavour Energy's proposal which we

are not satisfied contribute to the achievement of compliance with the distribution

pricing principles.


Endeavour Energy's tariff statement proposal incorporates each of the required

elements:

tariff classes


tariff structures





There are elements of Endeavour Energy's proposal we consider contribute to the


It exhibits modest movement towards cost reflectivity, incorporating time of use


for large customers

It demonstrates that Endeavour Energy has accounted for customer impacts by

transitioning towards the recovery of residual costs from fixed charges.(1)

New low voltage transitional demand tariff for customers whose annual

consumption requires a demand tariff, due to lack of supportive metering, or

where the expected bill impact of a direct transition to low voltage time-of-use

tariff is deemed excessive.

The increase in the threshold between the first and second block of the inclining

block tariff from 10MWh to 120MWh. This will encourage larger customers to

move to a more efficient demand tariff.




However, we are not satisfied that the following elements of Endeavour Energy's

tariff statement proposal contribute to the achievement of compliance with the




We require Endeavour Energy to submit further evidence in support of declining

block tariffs; or, amend its declining block tariffs to have a flat rate structure.

The proposed charging windows—we consider Endeavour Energy did not

provide adequate evidence to justify the length of its peak and shoulder hours.

We require Endeavour Energy to provide further evidence in support of its

proposed charging windows; or, amend its charging windows to demonstrate

greater movement towards cost reflectivity.

Its 'wait and see' approach—Endeavour Energy proposed limited changes to its

current tariff arrangements and displays limited reform towards more cost

reflective pricing, particularly for residential and small business customers.

Specifically, this relates to Endeavour Energy's continuation of the current opt-in

approach for tariff assignment to time-of-use tariffs for small customers. There

has been low uptake of time-of-use tariffs under this approach. We require

Endeavour Energy to amend its tariff assignment policy (and/or other aspects of

its tariff statement proposal) to take greater steps towards transitioning to cost

reflective tariffs in its revised proposal, particularly for residential and small

business customers.


Essential Energy

Our draft decision is to not approve Essential Energy's tariff statement proposal.

This is because there are some elements of Essential Energy's proposal which we

are not satisfied contribute to the achievement of compliance with the distribution

pricing principles.


Essential Energy's tariff statement proposal incorporates each of the required

elements:

tariff classes


tariff structures





There are elements of Essential Energy's proposal we consider contribute to the


It exhibits modest movement towards cost reflectivity, incorporating time of use


for large customers

It demonstrates Essential Energy accounted for customer impacts by

transitioning towards the recovery of residual costs from fixed charges.(1)

However, we are not satisfied the following elements of Essential Energy's tariff

statement proposal contribute to the achievement of compliance with the




We require Essential Energy to submit further evidence in support of declining

block tariffs; or, amend its declining block tariffs to have a flat rate structure.

The proposed charging windows—we consider Essential Energy did not provide

adequate evidence to justify the length of its peak and shoulder hours. We

require Essential Energy to provide further evidence in support of its proposed

charging windows; or, amend its charging windows to demonstrate greater

movement towards cost reflectivity.




Background

Each distributor must propose a tariff structure statement and submit it to us for

assessment. Our role is to determine if a proposed tariff structure statement complies

with the requirements of the National Electricity Rules (the Rules).1 The Rules require a

tariff structure statement to include a number of specific elements, such as the

structure of each tariff, charging parameters, and the policies a distributor will apply in

assigning or re-assigning customers to particular tariffs.2 A tariff structure statement

must also be consistent with the distribution pricing principles.3 The distribution pricing

principles require distributors to set cost reflective tariffs but also to take account of the

impact on customers in transitioning to more cost reflective tariffs.

The distribution pricing principles are new and result from a long process of reform

initiated by Australian (Commonwealth, state and territory) governments. Those

reforms are intended to establish tariffs which better reflect the costs incurred by

distributors by customer decisions to use electricity at specific times or locations.4 This

is because a distributor's forward looking costs are primarily driven by building network

capacity to alleviate network congestion and provide a safe and reliable network during

periods of peak demand. Network costs are not primarily driven by usage outside of

peak demand periods.

1 NER, cl. 6.12.3(k)

2 NER, cl. 6.18.1.A(a). Stakeholders should note that, while tariff statements include indicative tariff levels (the dollar

amount), actual tariff levels are determined through an annual pricing approval process. Our review of tariff

statement proposals is focussed on tariff structures and intended movements in tariff levels based on these

structures, not on the actual tariffs levels. The first annual pricing approval process which will apply this tariff

structure statement is for tariffs that will take effect on 1 July 2017. 3 NER, cl. 6.18.5

4 AEMC, Rule determination - National Electricity Amendment (Distribution Network Pricing Arrangements) Rule

2014, November 2014.

Its 'wait and see' approach— Essential Energy proposed limited changes to its

current tariff arrangements and displays limited reform towards more cost

reflective pricing, particularly for residential and small business customers.

Specifically, this relates to Essential Energy's continuation of the current opt-in

approach for tariff assignment to time-of-use tariffs for small customers. There

has been low uptake of time-of-use tariffs under this approach. We require

Essential Energy to amend its tariff assignment policy (and/or other aspects of

its tariff statement proposal) to take greater steps towards transitioning to cost

reflective tariffs in its revised proposal, particularly for residential and small

business customers.


Cost reflective tariffs will mean customers will be more aware of these network costs

and may be able to respond, for example, by shifting some of their electricity usage out

of the periods of peak demand on the network. Reducing peak demand will mean there

is less need for new investment to maintain a safe and reliable electricity network. This

will help defer costly network investments and place downward pressure on network

charges over the longer term.

The distribution pricing principles are not prescriptive. They do not specify particular

tariff structures or transitional arrangements. We consider a range of approaches are

likely to comply with the distribution pricing principles. Hence, we do not seek to

enforce a single approach across all distributors. Instead, we assess the particular tariff

structure statement submitted by a distributor for compliance with the Rules. Each tariff

structure statement should show movement towards more cost reflective tariffs, taking

into account customer impacts, as the distribution pricing principles require.5

The following sections summarise our key findings and conclusions from our

assessment of the NSW distributors' tariff structure statements against the

requirements of the distribution pricing principles and other tariff provisions in Part I of

the NER. This discussion covers both the elements that we have approved and those

we have not approved.

Completeness of tariff structure statements

A distributor must include the following elements within its tariff structure statement:

the tariff classes into which its customers will be grouped

the policies and procedures the distributor will apply for assigning customers to

tariffs or reassigning customers from one tariff to another (including applicable

restrictions)

the structures for each proposed tariff

the charging parameters for each proposed tariff, and

a description of the approach that the distributor will take in setting each tariff in

each annual pricing proposal during the regulatory control period.6

A distributor must also accompany its proposed tariff structure statement with an

indicative pricing schedule which sets out, for each tariff for each regulatory year of the

regulatory control period, the indicative price levels determined in accordance with the

tariff structure statement.7

We are satisfied that the NSW distributors' tariff statement proposals contain each of

the broad topics as required under the Rules.

5 NER cl. 6.18.5

6 NER, cl.6.18.1A(a)

7 NER, cl.6.18.1A(e)


However we are not satisfied that all elements are complete or have been described

with sufficient clarity in Ausgrid's tariff statement proposal. While Ausgrid provided the

information above, we consider their tariff statement proposal was incomplete with

regard to their tariff assignment policies. Ausgrid provided additional information to us

regarding tariff assignment policies in response to an information request.8 We require

Ausgrid to include such information in their revised proposal for completeness and

transparency.

Compliance with distribution pricing principles

A distributor's tariff structure statement proposal must comply with the distribution

pricing principles and other applicable requirements in the Rules. We are not satisfied

the NSW distributors' tariff structure statements comply with and give effect to the

distribution pricing principles and other applicable requirements of the NER.

Of the three proposals, Ausgrid's proposal demonstrates the greatest degree of

movement towards more cost reflective pricing and in our view is the closest to

complying with the distribution pricing principles. Ausgrid has achieved this principally

through changes to its tariff assignment policy. We find most, but not all, elements of

Ausgrid's tariff assignment policy contribute towards the achievement of compliance

with the distribution pricing principles. On the other hand, Endeavour Energy's and

Essential Energy's proposals contain limited changes to their current tariff

arrangements. We consider the proposals from these two distributors display limited

movement towards more cost reflective pricing. Further, we find each of the three

distributors have submitted insufficient evidence to demonstrate that their declining

block tariff structure contributes to the achievement of compliance with the distribution

pricing principles.

We briefly explain our reasons for our assessment below. Further details are provided

in chapter 4 (tariff structures), chapter 5 (tariff levels) and chapter 6 (tariff assignment

policies), respectively.

Application of time-of-use tariffs to residential and small business

customers

The NSW distributors proposed time-of-use tariffs as their cost reflective tariffs for

residential and small business customers. The NSW distributors did not propose any

form of demand tariffs for these customers.

We are satisfied time-of-use tariffs for residential and small business customers

contribute to the achievement of compliance with the distribution pricing principles. At

this stage of tariff reform in NSW, we consider time-of-use tariffs are sufficiently cost

reflective for residential and small business customers. While demand tariffs may be

8 Ausgrid, Submission: Issues paper on tariff structure statement proposals for NSW DNSPs: Attachment 2:

Response to AER information request, 6 May 2016.


more appropriate for future tariff statement proposals, as a further tariff reform step

towards cost reflective pricing.

AGL suggested the NSW distributors adopt demand tariffs (as opt-in tariffs) for

residential and small business customers.9 On the other hand, EWON did not support

demand tariffs as they can be difficult to understand.10

We consider demand based tariffs are more cost reflective than time-of-use tariffs

because peak demand is a principal driver of network investment. However, time-of-

use tariffs are an appropriate transition to more cost reflective tariffs. Time-of-use tariffs

signal times when the network is likely to experience congestion and enable customers

shift their usage outside of peak times.11

Accordingly, we are satisfied that the NSW distributors' proposals to continue to use

time-of-use tariffs (and not introduce demand tariffs) as their more cost reflective tariff

for residential and small business customers is appropriate for this first round of tariff

reform. However, we have concerns that the NSW distributors' proposals would not

result in sufficient numbers of customers being assigned to time-of-use tariffs, and

would instead mean most customers would remain assigned to less cost reflective

declining (or inclining) block tariffs. This concern arises particularly with respect to

Endeavour Energy's and Essential Energy's opt-in only assignment policy, which is

discussed in the next section.

Section 4.1 contains our assessment of the application of demand tariffs to residential

and small business customers.

Tariff assignment policy for residential and small business customers

Ausgrid

Ausgrid has proposed to close its existing tariffs (e.g. declining block tariffs) to new

customers and adopt a new tariff assignment policy from 1 July 2018. This policy

involves assigning new customers by default to the time-of-use tariff, with the ability to

opt-in to a transitional flat rate tariff.

We are satisfied that assigning new customers by default to a time-of-use tariff

contributes to the achievement of compliance with the distribution pricing principles.

This is because:

it provides customers making new investments with more cost reflective price

signals—we are satisfied these types of customers are in a better position to

respond to the introduction of more cost reflective tariffs through their choice of

9 AGL, Re: Tariff Structure Statement proposals of the NSW electricity distribution network service providers, 10 May

2016, p. 2. 10

EWON, Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 3 May 2016,

p. 5. 11

NER, cll 6.18.5(a) and 6.18.5(h)(3).


appliances, technology and other measures such as building design to increase

energy efficiency.

the inclusion of the opt-out provision to a flat rate tariff moderates the impact on

customers by providing further choice in tariff design

However, Ausgrid proposed to only apply this tariff assignment policy to new

customers with solar PV. New customers without solar PV would by default be

assigned to the transitional flat rate tariff, with the ability to opt-in to the time-of-use

tariff.

We are not satisfied that Ausgrid's proposal to distinguish between new customers with

and without solar PV in relation to tariff assignments contributes to the achievement of

compliance with the distribution pricing principles.

Ausgrid stated customers with embedded generation have different load profiles to

those without embedded generation, but did not provide sufficient evidence in

support.12 We consider a more cost reflective and technology neutral approach is to

assign all new customers with interval metering to a time-of-use tariff by default, with

the choice to opt out, and transfer to the transitional flat tariff.

Section 6.2 contains our detailed assessment of Ausgrid's tariff assignment policy for

residential and small business customers.

Endeavour Energy and Essential Energy

We are not satisfied that Endeavour Energy's and Essential Energy’s proposals

sufficiently progress towards the achievement of compliance with the distribution

pricing principles.

They proposed to offer, on an opt-in basis, time of use tariffs to residential and small

business customers whose meter is able to support time-of-use charging. Despite

being in place for a number of years, there has been low uptake of time-of-use tariffs

under these opt in approaches. Given this lack of progress, we consider Endeavour

Energy's and Essential Energy's proposals display insufficient tariff reform to comply

with the cost reflectivity requirements of the Rules.

We require Endeavour Energy and Essential Energy to take greater steps towards

transitioning to cost reflective tariffs in its revised proposal. They can demonstrate

progress towards cost reflectivity in a number of ways. For example, other distributors'

tariff statement proposals have done this using a number of reforms, including:

introducing demand-based tariffs on an opt in basis for customers with appropriate

metering

12

In response to an information request, Ausgrid provided load profiles for residential and small business customers

with and without embedded generation (Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and

ToU charging windows, 9 June 2016). These did not appear to indicate significant differences in the load profiles of

customers with and without embedded generation.


making demand-based tariffs the default tariff (on either a mandatory basis or with

the option to opt out) for new customers and/or customers who request supply

alterations

maintaining their time-of-use tariffs (instead of demand tariffs), but making these

time-of-use tariffs the default tariff (on either a mandatory basis or with the option to

opt out) for new customers and/or customers who request supply alterations

The third option is consistent with Ausgrid's approach. Accordingly, it would promote

simplicity and consistency for Endeavour Energy and Essential Energy to model their

approaches to tariff reform on Ausgrid's tariff assignment policy centred approach.13

However, there a number of ways a distributor can demonstrate compliance with the

distribution pricing principles. Accordingly, it is a matter for Endeavour Energy and

Essential Energy to decide how they will respond to the AER's direction that it needs to

demonstrate progress on tariff reform.

Section 6.2 contains our detailed assessment of Endeavour Energy's and Essential

Energy's tariff assignment policy for residential and small business customers.

Tariff structures—Medium low voltage customers

The NSW distributors proposed to offer time-of-use demand tariffs to medium sized

businesses with a low voltage connection.14 These tariffs include the following features:

network access charge ($/day or c/day)

consumption charge (c/kWh) for peak, shoulder and off-peak hours

demand charge during peak hours ($/kVA/month, c/kW/day or c/kVA/day)

We consider this structure, particularly the inclusion of demand charges, provide

appropriate movement towards efficient pricing signals. We are, therefore, satisfied

that the NSW distributors' tariff structures for LV demand customers contribute to the

achievement of compliance with the distribution pricing principles.15

Tariff assignment policy for medium low voltage customers

Ausgrid currently assigns medium sized business customers with a low voltage

connection to tariffs using energy consumption as a criterion. Ausgrid proposed to

change the eligibility criteria for such customers with a criteria based on the size of the

current transformer connection. We are not satisfied this change to the eligibility

13

This is subject to the AER's limited changes to Ausgrid's approach. 14

Endeavour Energy and Essential Energy offer these tariffs to businesses consuming more than 160 MWh per

annum. Ausgrid offers these tariffs to business consumers depending on the amperage of their current transformer

connection. 15

These are larger commercial and light industrial customers consuming more than 160 MWh annually.


criteria contributes to the achievement of compliance with the distribution pricing

principles.16

We are open to the use of criteria other than consumption levels in tariff assignment

polices. However, we do not consider Ausgrid provided sufficient evidence justifying

the use of transformer size as a criterion to assign customers to tariffs.

Section 6.2 contains our detailed assessment of Ausgrid's proposal to assign medium

sized business customers based on the size of their current transformer connection.

Tariff structures—Large business customers

The NSW distributors proposed to offer time-of-use demand tariffs to customers with

HV, sub-transmission or transmission (Ausgrid only) connections. These tariffs include

the following features:

network access charge ($/day or c/day)

consumption charge (c/kWh) for peak, shoulder and off-peak periods

demand charge during peak hours ($/kVA/month or $/kVA/day)17

We consider that this structure, particularly the inclusion of demand charges, provide

appropriate and efficient pricing signals. We are, therefore, satisfied that the NSW

distributors' tariff structures for customers with HV, sub-transmission or transmission

connections contribute to the achievement of the distribution pricing principles.

Ausgrid proposed to introduce a transmission-use-of-system only tariff for customers

connected to its transmission network (such customers were previously assigned to

the sub-transmission capacity tariff). We agree with Ausgrid that this will result in

greater efficiency as these customers will not incur a distribution-use-of-system charge

when they do not contribute to the costs of that segment of the network.

Endeavour Energy's indicative tariffs suggest there is only a small difference between

its demand charges for the high and low seasons.18 On the other hand, there is

evidence that demand in the low season is significantly lower than in the high

season.19 We encourage Endeavour Energy to investigate the relative levels of the

demand charges for the high and low seasons, including whether a low season

demand charge is required at all.

Similarly, Essential Energy's indicative tariffs suggest there is only a small difference

between its demand charges for peak and shoulder hours.20 On the other hand, there

is evidence demand during shoulder hours is significantly lower than during peak

16

NER, 6.18.5(a) and (g). 17

Essential Energy also includes demand charges for shoulder and off-peak periods. 18

Endeavour Energy, Tariff structure statement, 27 November 2015, pp. 81–83. 19

See Figure 4-8 and Figure 4-9 in section 4.2 of this draft decision. 20

Essential Energy, Tariff structure statement: Attachment 2: Indicative NUOS pricing schedule, 27 November 2015.


hours.21 We encourage Essential Energy to investigate the relative levels of the

demand charges for peak and shoulder hours—including whether both shoulder and

off-peak demand charges are needed.

Subject to their respective investigations, we encourage Endeavour Energy and

Essential Energy to consider amending the demand charges in their revised proposal,

or in future tariff structure statements, depending on feasibility and timing

considerations.

Re-balancing towards fixed charges

We are satisfied that the NSW distributors' proposed re-balancing of costs to fixed

charges contributes to the achievement of compliance with the distribution pricing

principles. This applies to tariffs for all general customer types that we outline below

(residential and small business, medium sized business and large business).

The Rules require that electricity distribution tariffs recover long run marginal costs

(LRMC).22 However, a tariff based only on LRMC would not enable the distributor to

fully recover its allowed revenue.

There is a trade-off in setting tariffs which reflect LRMC and the recovery of residual

costs. It would be efficient to recover residual costs via fixed charges because these

charges are independent of customer usage. However, this may result in sudden bill

increases, which may not satisfy the pricing principle that the distributor must consider

the impact on customers.23

From our analysis, we are satisfied that the NSW distributors' re-balancing towards

fixed charges contributes to the achievement of compliance with the distribution pricing

principles by:

recovering residual costs in a manner which minimises distortions to efficient price

signals.24

taking into account the impact on customers of tariff changes from year to year

including the desirability for a reasonable transition period towards more cost

reflective tariffs.25

Section 5.2 contains our detailed assessment of the NSW distributors' re-balancing

towards fixed charges.

Declining block tariffs

21

See Figure 4-7 in section 4.2 of this draft decision. 22

NER, cl 6.18.5(f). 23

NER, cl 6.18.5(h). 24

NER, cl. 6.18.5 (g). 25

NER, cl. 6.18.5(h)(1).


We are not satisfied the declining block tariff structure proposed by each of the NSW

distributors contributes to the achievement of compliance with the distribution pricing

principles.26

The NSW distributors proposed declining block tariffs for residential customers.

Ausgrid and Essential Energy also proposed declining block tariffs for small business

customers.27 Among other things, the NSW distributors considered declining block

tariffs would:

efficiently encourage consumers to use up the spare capacity in the NSW

distributors' networks.

spread the recovery of residual costs between the fixed charge and the low

consumption block usage charge. This is intended to minimise distortions in

consumption because usage in the low consumption block is less price sensitive

than in the high consumption block.

Several stakeholders opposed declining block tariffs. The Energy and Water

Ombudsman NSW (EWON), Public Interest Advocacy Centre (PIAC) and NSW

Council of Social Services (NCOSS) submitted that declining block tariffs disadvantage

low consumption households (who they consider are typically low income).28 Cotton

Australia and the NSW Irrigators Council (NSWIC) submitted declining block tariffs will

encourage consumption, resulting in the need for investment and in turn higher costs

to the consumer.29

We consider the NSW distributors did not sufficiently demonstrate that the first

consumption block is the least price sensitive block. Without such evidence, we

consider a flat rate tariff is likely to be the least distortive structure for recovering

residual costs.

While we consider it would be efficient to shift electricity consumption to times of low

congestion in order to make use of spare capacity within the NSW networks, declining

block tariffs do not do this effectively. Time-of-use tariffs are better able to achieve this

outcome. We consider the NSW distributors should focus on moving more customers

off block tariffs and onto time-of-use tariffs if they seek to encourage the efficient use of

spare capacity on their networks.

Section 4.1 contains our detailed assessment of the NSW distributors' declining block

tariffs.

Charging windows

26

NER, cl 6.18.5(a) and (f). 27

Ausgrid has closed its declining block tariffs to new customers. 28

EWON, Submission: AER issues paper, 3 May 2016; NCOSS, Submission: AER issues paper on the NSW tariff

structure statements, May 2016; PIAC, Submission: Response to the AER’s issues paper: NSW TSS, 6 May 2016. 29

Cotton Australia and NSWIC, Response to AER issues paper: Tariff structure statement proposals NSW electricity

distributors, 6 May 2016.


We are not satisfied that the NSW distributors' proposed charging windows contribute

to the achievement of compliance with the distribution pricing principles. This applies to

time of use and demand tariffs. We consider the NSW distributors did not provide

sufficient evidence to justify the proposed charging windows regarding:

times of the charging windows for business days (section 4.2.1 contains our

detailed assessment)

seasonality (Endeavour Energy and Essential Energy) (section 4.2.2 contains our

detailed assessment)

charging windows for non-business days (Ausgrid and Endeavour Energy) (section

4.2.3 contains our detailed assessment)

Several stakeholders expressed concern regarding the different charging windows

between the NSW distributors. They suggested aligning time and season definitions for

all NSW distribution areas to reduce complexity and implementation costs to retailers

and other stakeholders.30

While we acknowledge that harmonising charging windows may reduce complexity and

implementation costs for retailers, we consider that charging windows should primarily

be based on sending an appropriate price signal of when the network is more

congested than other times. We consider that issues of complexity can be addressed

by providing consumers with accurate and timely information. We did not receive any

information to support the suggestion that implementation costs would be higher if

charging windows were not harmonised across NSW.

We consider the NSW distributors should amend their charging windows so they better

reflect the level of congestion in their respective networks.31 We consider this would

contribute to the achievement of compliance with the distribution pricing principles. If

the load profile is different on each network, it follows that cost reflective charging

windows would also differ. However, where the load profiles are similar than it would

be cost reflective to move towards alignment of charging windows. That is, we consider

some harmonisation of the charging windows between the NSW distributors would

promote the distribution pricing principles. However, this harmonisation should be

pursued to promote cost reflective objectives, rather than reduce implementation costs.

Section 4.2.4 contains our discussion on harmonisation.

Future direction

This is the first tariff structure statement submitted by the NSW distributors. The move

to cost reflective pricing will take time to implement. The distribution pricing principles

30

EnergyAustralia, Submission: Issues paper: Tariff structure statement proposals: NSW, 6 May 2016, pp. 2–9;

EWON, Submission: AER issues paper, 3 May 2016, p. 4; NCOSS, Submission: AER issues paper on the NSW

tariff structure statements, May 2016, pp. 8–9; PIAC, Submission: Response to the AER’s issues paper: NSW

TSS, 6 May 2016, p. 3. 31

Otherwise, the NSW distributors should provide detailed explanations for departing from cost reflectivity.


require movement towards more cost reflective tariffs with every tariff statement

proposal over upcoming regulatory control periods.

In the discussion above, we identified elements of the NSW distributors' tariff structure

statements which we are not satisfied contribute to the achievement of compliance with

the distribution pricing principles.

We have also identified certain elements of the NSW distributors' proposals which

while not requiring changes in the NSW distributors' revised tariff structure statements,

we consider are less reflective of the distribution pricing principles and should be

addressed over time. We identify these matters to provide guidance to the NSW

distributors, and the industry more generally, on our views on the direction the industry

should be heading in in order to maintain compliance with the distribution pricing

principles in the future. Accordingly, in each further round of tariff structure statements,

we expect distributors to propose additional reforms in order to be compliant with the

rules.

In future rounds of tariff structure statements, we encourage the NSW distributors to

make further improvements in the following areas:

Greater integration between the NSW distributors' network pricing, network

planning and demand management strategies (see discussion in chapter 1)

Progression towards location based pricing (see discussion in section 4.1)

Refinements to the calculation of long run marginal cost (see discussion in section

5.1)

Refinements to the relative levels of Endeavour Energy's and Essential Energy's

demand charges for large business customers (see discussion in the 'Tariff

structures—Large business customers' subsection above).

Our process

The following table sets out how this tariff statement process flows on from the Power

of Choice reform program and will flow into the first annual pricing approval process.

In appendix A, we list the stakeholders who have made written submissions on our

issues paper from March and attended our public forum in April. We outline and

consider the stakeholder views we've received throughout this decision under each

topic the particular stakeholder views relate.

We request written submissions on our draft decision by 4 October 2016.

Tariff reform—Key timeframes

Reform milestones Date

Rule change process

AEMC recommends reforms to distribution pricing

through Power of Choice review November 2012


COAG Energy Council proposes distribution pricing

rule change to AEMC September 2013

AEMC makes final rule determination on distribution

pricing rule change November 2014

Tariff statement process

NSW distributors submit tariff statement proposal to

AER 27 November 2015

AER publishes issues paper 22 March 2016

AER hosts public forum on NSW distributors'

proposals 6 April 2016

Stakeholders' submissions on NSW distributors'

proposals and AER's issues paper closed 6 May 2016

AER publishes draft decision 2 August 2016

NSW distributors' revised proposals and stakeholders'

submissions on AER's draft decision due 4 October 2016

Stakeholders' submissions on NSW distributors'

revised proposals and other stakeholders' submissions

due

25 October 2016

AER publishes final decision 27 February 2017

First annual pricing proposal process to apply

tariff structure statement

NSW distributors submits annual pricing proposal 31 March 2017

AER publishes decision 17 May 2017

New tariffs take effect 1 July 2017

Source: AEMC, National Electricity Rules, AER analysis.


1 Background

The requirement on distributors to prepare a tariff structure statement arises from a

long process of reform to the National Electricity Rules (the Rules) governing

distribution network pricing. The purpose of the reforms is to empower consumers to

make informed choices by:

Providing better price signals—tariffs that reflect what it costs to use electricity at

different times so customers can make informed decisions and better manage their

bills.

Transitioning to greater cost reflectivity—requiring distributors to explicitly consider

the impact of tariff changes on customers and to engage with customers (and their

representatives) and retailers in developing tariff proposals.

Managing future expectations—providing guidance for retailers, customers and

suppliers of services such as local generation, batteries and demand management

by setting out the distributor's tariff approaches for a set period of time.

Why is network tariff reform important?

Distribution tariffs historically have not varied according to the time when electricity is

used. But distribution costs reflect the maximum demand the network must cater for at

key points in time. This means existing network tariffs don't reflect network costs. Most

existing tariffs send price signals that don't inform customers about the costs imposed

on distribution networks in peak demand periods.

Lifestyle changes, including increased use of air conditioners, means consumers now

use relatively more of their electricity at peak times, even if overall energy consumption

has declined. Network costs have increased in recent years as distributors invest in

additional infrastructure upgrades to meet the higher peak demand. This increased

investment has been a factor driving electricity price rises in recent years.

Moving to tariffs that reflect electricity use during peak demand periods will make

pricing for electricity more transparent. Those who use electricity at peak times will pay

rates better reflecting the costs created by their use. Those who use less power in

peak demand periods and more at other times will benefit from lower network prices

during non–peak times. And, if consumers take heed of these price signals, network

investment requirements will likely be lower than they otherwise would be, reducing

upwards pressure on electricity prices for everyone.

What are the key concepts to understand?

This draft decision incorporates concepts which may be unfamiliar to some readers. In

this section we provide descriptions of the more commonly used concepts. Readers

familiar with electricity network regulation and terminology may choose to skip to the

next section.

Difference between consumption and demand


Electricity consumption is the total amount of electricity consumed (used) over a

period of time. For example, a typical Australian household might use around 7,000

kWh of electricity over 12 months.32 Demand means the amount of electricity used at a

single point in time. Peak demand is the maximum amount of electricity used at a

single point in time over a defined time period, often a day or a year. A typical

Australian household might have its yearly peak demand of around 5 kW, either on a

hot summer afternoon when air conditioning is used, or on a winter evening when

electric heating is used.33 That is, the household's annual peak demand is 5 kW.

A good analogy for electricity consumption compared to electricity demand is a river

flowing under a bridge. Annual electricity consumption is equivalent to the total water

volume flowing under the bridge during a year. Electricity demand is equivalent to the

volume of water under the bridge at a single point in time. Peak electricity demand is

equivalent to the time when the largest volume of water is flowing under the bridge.

Long run marginal cost and residual costs

An important feature of this draft decision is the concept of long run marginal cost.

Long run marginal cost is equivalent to the forward looking cost of a distributor

providing one more unit of service, measured over a period of time sufficient for all

factors of production to be varied. Long run marginal cost could also be described as a

distributor's forward looking costs that are responsive to changes in electricity

consumption.

The Rules require network tariffs to be based on long run marginal cost.34 However,

not all of a distributor's costs are forward looking and responsive to changes in

electricity consumption. Hence, if network tariffs only reflected long run marginal cost,

distributors would not recover all their costs. Costs not covered by a distributor's long

run marginal cost are called 'residual costs'. The Rules require network tariffs to

recover residual costs in a way that minimises distortions to the price signals for

efficient usage that would result from tariffs reflecting only long run marginal costs.35

Types of network tariffs

A network ’tariff’ is the combination of charges paid by a network customer in return for

network services. Historically, most small customers in Australia have been on either a

flat usage tariff or a block tariff (tiered pricing):

Flat tariff—usually consists of a fixed charge and flat usage charge. That is, usage

is charged the same price no matter how much electricity the customer uses.

Inclining block tariff—usually consists of a fixed charge and a series of block

charges where the price changes depending on the size of the customer's total

32

For a 3 person household in NSW without gas nor swimming pool, via: Acil Allen Consulting, Electricity bill

benchmarks for residential customers (report to the Australian Energy Regulator), March 2015, p. 29. 33

EMET Consultants Pty Ltd as referenced by solarchoice.net.au. 34

NER, cl. 6.18.5(f). 35

NER, cl. 6.18.5(g)(3).


consumption. The first consumption block is charged the lowest price, and each

successive block of consumption is charged at a higher rate.

Declining block tariff—usually consists of a fixed charge and a series of block

charges where the price changes depending on the size of the customer's total

consumption. The first consumption block is charged the highest price, and each

successive block of consumption is charged at a lower rate. A declining block tariff

is the reverse of an inclining block tariff.

Flat tariffs or inclining block tariffs are relatively common. Declining block tariffs are

relatively uncommon.

A different type of tariff is a time-of-use (TOU) tariff. Time-of-use tariffs usually also

have a fixed charge component. Time-of-use tariffs apply a different price depending

on when the customer consumes electricity. A time-of-use tariff will have defined

charging windows when different rates apply. These charging windows might be

labelled the 'peak' window, 'shoulder' window, and 'off-peak' window. The highest

usage rate applies to consumption during the peak window, and the lowest usage rate

applies to consumption during the off-peak window.

A demand tariff includes a charge based on the customer's highest measured

demand at a single point in time during the billing period. Often, demand charges will

be limited to the highest demand measured during charging windows. Typically,

charging windows will coincide with the peak demand times for the whole network or

for specific customer types (e.g. residential or small business customers). Demand

tariffs usually also include fixed charges and usage charges.

Critical peak pricing is another tariff variant. Under this approach a distributor can

specify periods of critical network peak demand, and will set prices particularly high for

any demand or consumption that occurs during the specified critical peak event. This

approach is generally in use currently only for larger businesses which can moderate

consumption (e.g. by shutting down part of a production line) or use their own

generation assets as a substitute for network electricity.

Distributors sometimes offer combinations of a primary tariff, such as those listed

above, with secondary tariffs, such as load control tariffs. These tariffs typically

apply a lower rate to electricity used for certain appliances in return for using those

appliances during off peak times. For example, off peak hot water. In other cases a

lower rate may apply to customers who allow a distributor to remotely cycle appliances

on and off during peak demand periods. For example, air conditioning during high

demand hot summer afternoons. Distributors will often limit secondary tariffs to

customers on specified primary tariffs such as flat usage tariffs or block tariffs.

In addition to tariffs, distributors sometimes seek to influence network demand by

offering rebates (partial refunds) to customers in return for demand reductions made

by the customer during specific time periods. Rebates may be linked to critical peak

demand times or to specific geographic areas or both.

Metering and tariffs


Flat tariffs or block tariffs can be applied to customers with basic accumulation

meters (type 6 meters). This is because to calculate the tariff, it is only necessary to

know the customer's total consumption, not when that consumption has occurred.

Whereas interval (type 5) or smart meters (type 4) can facilitate time-of-use or

demand tariffs. This is because interval and smart meters measure both when and how

much electricity a customer has consumed, which is necessary to calculate a time-of-

use tariff or demand tariff.

A manually read meter (generally an accumulation or interval meter) must be read in

person at the customer's premises. A remotely read meter requires the meter to have

communications functionality, radio or digital communications, generally associated

with smart meters.

Degree of choice in network tariff assignment

An element of a tariff statement is the policies and procedures a distributor will apply to

assign customers to tariffs.36 These policies and procedures should include certainty

around whether a tariff is a 'mandatory' tariff, 'opt-out' tariff or 'opt-in' tariff for particular

customer types:

A mandatory tariff—the only tariff available for customers of a particular type. For

example, industrial customers connected to the high voltage network and whose

annual consumption falls within a particular range may be required to be assigned

a demand tariff and there may be no other tariff options they can choose from.

An opt-out tariff—the customer is assigned to this tariff by default, but may

voluntarily choose to be re-assigned to a different tariff. For example, a residential

customer may by default be assigned to a block tariff, but could choose to switch to

a time-of-use tariff.

An opt-in tariff—the customer can choose to be re-assigned to this tariff, but is by

default assigned to some other tariff. This is the opposite of an opt-out tariff. In the

previous example, the time-of-use tariff would be described as an opt-in tariff.

It is important that tariff statements are clear about which of their proposed tariffs are

mandatory, opt-out and opt-in, and for which customer types.

To assign customers to one of the various tariffs offered by a distributor requires also

that the distributor group customers into types, or classes. Customer classes might be

based on a customer's connection type or metering arrangements, their annual usage,

or whether the customer is a new or existing customer.

Tariff structure and charging parameters

Tariff structure incorporates the charges that make up a tariff. For example, a

demand tariff typically comprises a fixed charge, a usage charge and a demand

36

NER, cl.6.18.1A(a)(2).


charge. How those charges are applied to a customer reflect the tariff's charging

parameters. Examples of charging parameters include:

how frequently a charge is applied to a customer

the times during which usage or demand is measured to calculate a charge

variations in charges and how those variations are triggered.

Charging parameters may be varied to match the purpose of the distributor when

designing the tariff. For example, the demand charge within a demand tariff may target

the time of a distributor's broad network peak, a local regional peak, or a customer

class peak (e.g. residential customers).

To illustrate charging parameters linked to charges, Table 3 sets out the three usual

charges for a demand tariff. Alongside those usual charges are typical parameters for

each charge.

Table 1 Example demand tariff and charging parameters

Charge Charging parameters

Fixed charge Applied once per customer per billing period. Does not vary with customer usage or demand.

Usage charge Calculated using the total electricity consumed by the customer over the billing period.

Demand charge Calculated based on the customer's highest demand recorded during the demand charging

window 3pm to 8pm on weekdays.

Any of the charges described in Table 1 may vary according to the time of day, day of

the week or time of the year. For example, any of the fixed charge, usage charge or

demand charge could be higher in summer months and lower in non–summer months.

How does the tariff structure statement fit into the regulatory

process?

Tariff statements are a new element of the Rules. Generally, tariff statements will be

submitted to us by distributors with their distribution or revenue proposals every five

(usually) years.37 These revenue proposals set out the total amount of revenue

required from their customers to run their networks over a regulatory period (typically 5

years). As part of our distribution determination process we will publish, assess and

invite feedback on a tariff statement along with a revenue proposal. An approved tariff

statement will then apply to the distributors' tariffs for the coming five year regulatory

control period.

In this case, for the first tariff statements for each distributor, the Rules require tariff

statements be submitted outside the distribution determination process (excluding

37

NER, cl. 6.8.2.


TasNetworks).38 This is simply because of the timing of the introduction of tariff

statements to the regulatory framework compared to the timing of most distribution

determinations.

The timing of TasNetworks' distribution determination means that TasNetworks' tariff

statement is able to be submitted with its distribution determination. Other distributors,

in South Australia, Victoria, New South Wales, the Australian Capital Territory and

Queensland, are required to submit tariff statements in advance of their next

distribution determination. Initial tariff statements for these distributors will apply for

abbreviated periods, reflecting the time remaining until their next distribution

determination.

Once approved, a tariff statement will guide a distributor in shaping its annual pricing

proposals, submitted to us prior to each regulatory year. The annual pricing proposal is

where a distributor reflects our distribution determination into tariffs. We check that

total expected revenue to be earned in the coming regulatory year is consistent with

the annual revenue we have determined for that year.

We will now also check that an annual pricing proposal is consistent with a distributor's

approved tariff statement. A distributor may not propose a tariff which was not included

in its approved tariff statement. Nor may a distributor materially vary the parameters of

a tariff from that described in its approved tariff statement. This provides retailers,

customers and other stakeholders with certainty about the structure of tariffs to be

charged in each year of the regulatory control period.

Approved tariff statements address tariffs for both standard control services and

alternative control services. However, in practice the tariffs for alternative control

services are almost entirely dealt with by our distribution determinations and the annual

tariff approval process. There is relatively little regulatory role left for tariff statements in

the context of alternative control services. Tariffs for fee based and quoted services are

set on an individual customer specific basis, so typically reflect the costs that each user

imposes on the distributor to provide the service. For this reason distributors deal with

alternative control services in their tariff statements relatively briefly and for

completeness. For the same reason our tariff structure decisions will focus on standard

control services and make little comment on a distributor's alternative control services.

How does network tariff reform interact with other reforms?

Network tariff reform is commencing at the same time as reforms to provision of

metering services and access to customer information. These related reforms have

implications for network tariffs, including the pace at which tariffs can evolve to become

more cost reflective.

For metering, changes to the Rules will remove the existing barrier to third parties

supplying accumulation and interval meters to customers. The same wave of changes

38

NER, cl. 11.73.2.


to metering arrangements will establish new minimum specifications to improve

performance for all new meters compared to most meters currently in use. In effect, all

new meters will incorporate functionality equivalent to smart meters. This will see

better meter functionality progressively taken up across distribution networks and

facilitate broader use of more cost reflective pricing over time.

Consumers may engage an energy services provider or retailer to use their

consumption information to recommend bundled energy plans. In recognition of how

customer energy usage information might be used, reforms have been introduced to

make it easier to obtain access to this information.39 Customers may now access their

consumption data from their distributor and retailer. They may also authorise other

parties, such as retailers, to do so on their behalf. These reforms will not only help

customers but also assist energy service providers in developing tailored and

innovative energy products and services.

How does network pricing interact with network planning and

demand management?

Demand pressures can be addressed by sending price signals to encourage

customers (and retailers) to reduce demand, consistent with the aims of tariff reform.

Alternatively, demand pressures can be addressed by network expenditure, as has

been the case in the recent past. Another option, which distributors are required by the

Rules to consider, is the use of demand management initiatives. These can include

rebates for customers who reduce their consumption. Or distributors can install or

utilise generation assets in areas where the associated cost is less than the cost of

network investment to meet local area demand.

While not explicitly required of distributors by the Rules, we consider it useful for tariff

statements to describe the distributor's approach to integrating tariff reform, network

investment and demand management. Such discussion will position tariff statements

within the broader context of how distributors intend to respond to demand and service

challenges. Also, while the Rules require distributors to consider the time and location

varying nature of network cost drivers, difficulties with locational pricing suggest a

larger role for demand management or non-price initiatives to address local network

demand pressures.

An example of this is United Energy proposing to apply rebates for customers in

selected locations within its network, to encourage demand reductions that will limit

peak demand.40 This will alleviate, or postpone, the need for more costly network

upgrades to those areas where network constraints may be likely in the near term, and

still ensure continuing electricity supply and reliability.

39

Australian Energy Markets Commission, National Electricity Amendment (Customer access to information about

their energy consumption) Rule 2014, Final Determination, 6 November 2014. 40

United Energy, Revised Tariff Structure Statement 2017–20, 29 April 2016, pp. 34-35.


Ausgrid acknowledged the important inter-relationship between demand management

and pricing in managing areas facing congestion, particularly in networks that

predominantly have accumulation meters. In such networks, Ausgrid described how

non-time-of-use tariffs could result in over-use of the network. An effective demand

management strategy, which may include air condition cycling and peak rebates,

should reduce demand pressures.41

Ausgrid's tariff statement proposal discussed the interaction between demand

management and pricing at a theoretical level. Ausgrid controls supply to approved

appliances during network congestion under its controlled load tariffs.42 Besides this, it

is unclear whether Ausgrid has other demand management programs that would

interact with its pricing strategy. In its revised proposal, it would be useful for Ausgrid to

describe in more practical terms how its tariff strategy interacts with demand

management initiatives (and network planning). This could refer to demand

management initiatives Ausgrid has implemented, or plans to implement, in the current

regulatory control period.

Endeavour Energy referred to demand-based pricing trials it conducted with limited

groups of its customers. This included a peak time rebate it trialled over the 2012–13

and 2013–14 summers to determine the efficacy of a broad-based approach to

demand management.43 From the trial, Endeavour Energy considered the rebate

provided an effective signal for reducing demand during peak periods. However,

Endeavour Energy's ability to introduce such rebates is limited because of the low

take-up of interval and smart meters in its network.44

Referring to a study by the CSIRO, Essential Energy noted the potential to use tariff

strategies such as critical peak pricing and peak time rebates as a demand

management tool. However, Essential Energy did not propose such tariffs in its tariff

statement proposal due to the low numbers of interval and/or smart meters in its

network.45

Similar to Ausgrid, it would be useful for Endeavour Energy and Essential Energy to

describe the inter-relationship between its tariff strategy and its demand management

initiatives for the current regulatory control period. For example, Essential Energy

considered its tariffs form a key component of its overall demand management

strategy, and considered its declining block tariffs as a logical transition towards

efficient prices.46 Essential Energy could describe how it will use its current demand

41

Ausgrid, Tariff structure statement, 27 November 2015, pp. 55, 72–73. 42

Ausgrid, Tariff structure statement, 27 November 2015, p. 166. 43

Endeavour Energy described the peak time rebate as typically a flat price for electricity consumed, with a rebate

when the customer uses less electricity than normal during a designated critical event day. Endeavour Energy,

Tariff structure statement, 27 November 2015, p. 47. 44

Endeavour Energy, Tariff structure statement, 27 November 2015, pp. 48–49. 45

Essential Energy, Tariff structure statement, 27 November 2015, pp. 40–41. 46

Essential Energy, Tariff structure statement, 27 November 2015, p. 8.


management program (including its controlled load tariffs) to encourage more efficient

usage of the network during this transition.


2 Rule requirements

The Rules' amended pricing provisions have three aims, to provide:

better signals of the cost drivers of distribution networks

explicit consideration of tariff change impacts on retail customers

transparency and greater certainty on tariff strategies for a regulatory period.

A new network pricing objective is the focus for distributors when developing their

network prices. This objective is that:47

the tariffs that a distributor charges for provision of direct control services to a

retail customer should reflect the distributors' efficient costs of providing those

services to the retail customer

A tariff structure statement is part of the new tariff arrangements. It should show how a

distributor applied the distribution pricing principles48 to develop its price structures and

indicative price levels for the coming five year regulatory period. A distributor must

submit its proposed tariff structure statement to us for assessment.

Generally, a distributor will be required to submit its proposed tariff structure statement

when submitting its regulatory proposal.49 The Rules required submission of a tariff

structure statement outside the regulatory proposal process this time because of the

timing of the rule changes.50

Tariff Structure Statement requirements

There are two separate sets of requirements for tariff structure statements. First, the

Rules set out a number of elements that an approved tariff structure statement must

contain. Second, a tariff structure statement must also reflect the distribution pricing

principles.

What must a tariff structure statement contain?

The Rules require a tariff structure statement to include:51

the tariff classes into which retail customers for direct control services will be

divided

47

NER, cl. 6.18.5(a). 48

This is a reference to the Rules' pricing principles for direct control services, alternatively described in this paper as

the "distribution pricing principles"; NER, cl. 6.18.5(e)–(j). 49

NER, cl. 6.8.2(a). 50

NER, cl. 11.76.2(a). 51

NER, cl. 6.18.1A(a).


the policies and procedures the distributor will apply for assigning retail customers

to tariffs or reassigning retail customers from one tariff to another

structures for each proposed tariff

charging parameters for each proposed tariff

a description of the approach that the distributor will take in setting each tariff in

each pricing proposal.

A tariff structure statement must be accompanied by an indicative pricing schedule.52

What must a tariff structure statement comply with?

A tariff structure statement must comply with the distribution pricing principles, which

may be summarised as:

for each tariff class, expected revenue to be recovered from customers must be

between the stand alone cost of serving those customers and the avoidable cost of

not serving those customers53

each tariff must be based on the long run marginal cost of serving those customers,

with the method of calculation and its application determined with regard to the

costs and benefits and customer location54

expected revenue from each tariff must reflect the distributor's efficient costs,

permit the distributor to recover revenue consistent with the applicable distribution

determination and minimise distortions to efficient price signals55

distributors must consider the impact on retail customers of tariff changes and may

vary from efficient tariffs, having regard to:56

o the desirability for efficient tariffs and the need for a reasonable transition

period (that may extend over one or more regulatory periods)

o the extent of customer choice of tariffs

o the extent to which customers can mitigate tariff impacts by their

consumption

tariff structures must be understandable by retail customers57

tariffs must otherwise comply with the Rules and all applicable regulatory

instruments.58

52

NER, cl. 6.8.2(d1). 53

NER, cl. 6.18.5(e). 54

NER, cl. 6.18.5(f). 55

NER, cl. 6.18.5(g). 56

NER, cl.6.18.5(h). 57

NER, cl. 6.18.5(i). 58

NER, cl. 6.18.5(j); this requirement includes jurisdictional requirements.


The distribution pricing principles are not prescriptive. They do not specify particular

tariff structures or transitional arrangements. In practice, this means a range of

approaches are likely to be consistent with the distribution pricing principles. In

making our assessment, in general terms, we consider the distribution pricing

principles require tariff structure statements to demonstrate movement towards

more cost reflective tariffs, taking into account customer impacts.59

Our role in approving a distributor's tariff statement

We must approve a distributor's tariff structure statement unless we are satisfied that

the proposed tariff structure statement does not comply with the distribution pricing

principles or other applicable requirements of the Rules.60 In Queensland, the

distributors' tariff structure statements must also comply with the uniform tariff policy.

We make one holistic determination to approve or refuse to approve the distributor's

tariff statement. Our analysis on each element of the distributor's tariff structure

statement contributes to our overall determination.

What happens when a distributor submits a proposed tariff statement?

The Rules require us to publish a proposed tariff structure statement and invite

submissions.61 We then assess a proposed tariff structure statement for its compliance

with the distribution pricing principles. Taking into account submissions and any

supporting information submitted by the distributor, we will publish a draft

determination on the proposed tariff structure statement.62 This will set out our reasons

for making the draft determination.63 We will call for submissions on our draft

determination.64

Our role is largely one of assessing for compliance. We must approve a proposed tariff

structure statement unless we are satisfied that it will not comply with the distribution

pricing principles or other applicable requirements of the Rules.65

What happens if a proposed tariff statement is not approved?

A distributor may submit a revised tariff structure statement no later than 45 business

days after we publish our draft determination.66 Under the Rules, a distributor may only

make revisions to its tariff structure statement to address matters raised by our draft

determination.67 We will publish the revised tariff structure statement and again call for

59

NER, cl 6.18.5(b) - (d). 60

NER, cl 6.12.3(k) 61

NER, cl. 6.9.3(a). 62

NER, cl. 6.10.2; cl. 11.76.2(a). 63

NER, cl. 6.10.2(a)(3); cl. 11.76.2. 64

NER, cl. 6.10.2(a)(5). 65

NER, cl. 6.12.3(k). 66

NER, cl. 6.10.3(a). 67

NER, cl. 6.10.3(b).


submissions.68 We will make a final determination on the proposed tariff structure

statement in February 2017

What happens after a tariff statement is approved

Once approved, a tariff structure statement will remain in effect for the relevant

regulatory period.69 The distributor must comply with the approved tariff structure

statement when setting prices annually for direct control services.70

We will separately assess the distributor's annual tariff proposals for the coming 12

months. Our assessment of annual tariff proposals will be consistent with the

requirements of the relevant approved tariff structure statement.

An approved tariff structure statement may only be amended within a regulatory period

with our approval.71 We will approve an amendment if the distributor demonstrates that

an event has occurred that was beyond its control and which it could not have foreseen

so that the amended tariff structure statement materially better complies with the

distribution pricing principles.72

68

NER, cl. 6.10.3(d)(e). 69

Tariff Structure Statements may only be amended during a regulatory period, with our approval, if an event occurs

that is beyond the distributors' reasonable control and could not reasonably have been foreseeable requires a

change. 70

NER, cl. 6.18.1A(c). 71

NER, cl. 6.18.1B. 72

NER, cl. 6.18.1B(d).


3 Summary of NSW distributors' proposals

Table 3-1 to Table 3-3 summarise the tariffs the three NSW distributors proposed respectively.

These tariffs comprise the following main elements:

The structure of the tariffs, for example whether there is a fixed charge, and whether charges vary according to the level of usage

(irrespective of time), the time at which usage occurs, or maximum demand over a certain period (charging windows).

The rules that determine which tariffs customers are assigned to. These may vary according to the meter type (whether accumulation

meters, interval meters or smart meters) and type of connection. In addition to the tariff that customers are assigned to by default, they

may choose to be assigned to other tariffs in certain circumstances.

3.1 Ausgrid

Table 3-1 summarises the tariff structures that will apply to different types of customers as Ausgrid proposed in its tariff statement proposal.

Appendix B sets out Ausgrid's proposed tariffs in detail.

Most of Ausgrid's residential and small business customers are currently assigned to a usage based tariff with a declining block structure. This

is because the majority of these customers currently have accumulation meters, as opposed to smart meters.

Ausgrid proposed to assign residential and small business customers with an interval meter to a transitional flat usage tariff, with the option to

opt in to a time-of-use tariff. These transitional flat usage tariffs have a time-of-use structure, but the same charge for the peak, shoulder and

off peak periods. Ausgrid proposed these new tariffs to facilitate the transition of customers towards more cost reflective tariffs, especially

residential and small business customers.

Ausgrid proposed to assign larger customers with interval meters to more complex tariffs that include fixed, demand and time-of-use

components.


Table 3-1 Summary of Ausgrid's proposed tariffs

Customer type Meter type Connection type

Default tariff structure

Optional tariffs

Existing customer Type 6 Single phase or three phase Declining block + fixed charge

These customers will be re-assigned to a

transitional flat tariff if their meter is upgraded from 1

July 2018. They can then also opt in to a TOU tariff.

New customer without embedded

generation

Existing customer on a declining block

tariff

Interval meter Single phase or three phase Transitional flat usage + fixed

charge These customers can opt in to a TOU tariff.

New customer with embedded generation Interval meter Single phase or three phase TOU usage + fixed charge These customers can opt in to a transitional flat

tariff.

Low voltage CT 100–1,600 Amps

High voltage

Subtransmission

Interval meter Various Demand + TOU usage + fixed

charge

These customers can opt in to an individually

calculated tariff (which are more cost reflective) or a

substation connected tariff in some situations.

Source: Ausgrid, Response to AER issues paper on NSW DNSP’s draft tariff structure statements, May 2016, p. 4.

3.2 Endeavour Energy

Table 3-2 summarises the tariffs Endeavour Energy proposed in its tariff statement proposal. These tariffs are similar to Endeavour Energy’s

current tariffs.

Endeavour Energy proposed to assign residential customers with accumulation meters to declining block tariffs. Endeavour Energy proposed

to assign small business customers with accumulation meters to inclining block tariffs.


Residential and small business customers with interval or smart meters can opt in to tariffs that include fixed and time-of-use components,

under Endeavour Energy's proposal.

Endeavour Energy proposed to assign larger commercial and smaller industrial customers to tariffs that include demand, time of use and fixed

components. Endeavour Energy proposed to assign such customers without the necessary metering for time-of-use and demand tariffs to a

transitional tariff with usage and fixed components only.

Endeavour Energy proposed to assign industrial customers to more sophisticated tariffs that include fixed, demand and time-of-use

components.

Table 3-2 Endeavour Energy's proposed tariffs

Tariff

class Proposed tariffs Customer type Assignment

Meter type

Tariff structure Notes

LV

energ

y

Residential block Residential consuming < 160 MWh annually Default Type 6 Declining block +

fixed

Residential TOU Residential consuming < 160 MWh annually Opt in Type 4

1, 5 or

6 Usage + fixed

Small business2 block tariff

Small to medium business connection consuming

< 160 MWh annually Default Type 6

Inclining block +

fixed

Consumption block increased from

10MWh to 120 MWh (making this

effectively a “flat” tariff).

Small business2 TOU

Small to medium business consuming < 160 MWh

annually Opt in

Type 41, 5 or

6 Usage + fixed

Controlled load 1 Available to customers with a residential or small

business tariff Opt in

Separately

metered Usage + fixed

Controlled load so that supply may not

be available between 07:00 and 22:00.


Controlled load 2 Available to customers with a residential or small

business tariff Opt in

Separately

metered Usage + fixed

Controlled load so that supply does not

exceed a total of 17 hours in any 24 hour

period.

LV

dem

and

LV TOU demand Larger commercial and light industrial consuming

> 160 MWh annually Default Type 4

Demand + usage

+fixed

LV TOU demand transition Larger commercial and light industrial consuming

> 160 MWh annually

Mandated (see

notes)

Interval

meter Usage + fixed

For customers without necessary

metering for LV TOU demand tariff, or

where this tariff has excessive bill impact.

HV

dem

and

HV TOU demand Industrial Default Interval

meter

Demand + usage +

fixed

Individually calculated HV

TOU demand Industrial

Mandated (see

notes)

Interval

meter Various

For HV customers above certain

consumption or demand thresholds

Subtr

ansm

issio

n

dem

and

ST TOU demand Industrial Default Interval

meter

Demand + usage +

fixed

Individually calculated ST TOU

demand Industrial

Mandated (see

notes)

Interval

meter Various

For subtransmission customers above

certain consumption or demand

thresholds

Inte

r-dis

trib

uto

r

transfe

r

Inter-distributor TOU demand Distributors Mandated (see

notes)

Interval

meter

Demand + usage +

fixed (individually

calculated)

For electricity transferred through the

Endeavour Energy network on behalf of

Ausgrid and Essential Energy.

Source: Endeavour Energy, Tariff structure statement, 27 November 2015.

Notes: 1. Endeavour Energy currently has type 6 and type 5 metered versions of this tariff. Endeavour Energy proposed to add a type 4 metered version of this tariff effective 1 July 2016.

Endeavour Energy. Tariff structure statement, 27 November 2015, p. 37.

2. Endeavour Energy refers to these tariffs as 'general supply'. We have used the term 'small business' for ease of understanding.


3.3 Essential Energy

Table 3-3 summarises the tariffs Essential Energy proposed in its tariff statement proposal. These tariffs are similar to Essential Energy’s

current tariffs.

Essential Energy proposed to assign residential and small business customers with accumulation meters to declining block tariffs.

Residential and small business customers with interval or smart meters can opt in to tariffs that include fixed and time-of-use components,

under Essential Energy's proposal.

Essential Energy proposed to assign larger businesses that take power at low voltage to a tariff that includes demand, usage and fixed

components.

Essential Energy proposed to assign larger businesses that take power at high voltages to tariffs that also include demand, usage and fixed

components.

Table 3-3 Essential Energy's proposed tariffs

Tariff

class Proposed tariffs Customer type Assignment

Meter type


Low

voltage –

energ

y

Residential block Residential consuming < 160 MWh annually Default Type 6 Declining block +

fixed

Residential TOU Residential consuming < 160 MWh annually Opt in Type 5 Usage + fixed

Controlled load 1 Residential and business consuming < 160

MWh annually Opt in

Separately

metered

Usage (flat rate) +

fixed

For usage between 5–9 hours overnight

on weekdays and extra hours on

weekends except where time clock

controls load.


Controlled load 2 Residential and business consuming < 160

MWh annually Opt in

Separately

metered

Usage (flat rate) +

fixed

For usage between for 10–18 hours per

day on weekdays, and all day weekends

except where time clock controls load.

Business block Business consuming < 100 MWh annually Default Type 6 Declining block +

fixed

Business TOU < 100 MWh Business consuming < 100 MWh annually Opt in Type 5 Usage + fixed

Business TOU < 160 MWh Business consuming < 160 MWh annually Opt in Type 5 Usage + fixed

Low

voltage –

dem

and

LV – TOU three rate demand Business consuming > 160 MWh annually Default Type 4 Demand + usage +

fixed

LV – TOU average daily

demand Business consuming > 160 MWh annually Opt in (see notes) Type 4

Demand + usage +

fixed

For customers whose monthly load factor

exceeds a threshold. Intended for

customers with seasonal demand.

LV – TOU alternative demand Business consuming > 160 MWh annually Opt in Type 4 Demand + usage +

fixed

Hig

h v

oltage –

dem

and

HV – TOU monthly demand Large business consuming > 160 MWh annually Default Interval

meter

Demand + usage +

fixed

HV – average daily demand Large business consuming > 160 MWh annually Opt in (see notes) Interval

meter

Demand + usage +

fixed

For customers whose monthly load factor

exceeds a threshold. Intended for

customers with seasonal demand.

Subtr

ansm

issio

n Subtransmission – three rate

demand Large business consuming > 160 MWh annually Default

Interval

meter

Demand + usage +

fixed

Not applicable for connection to dual

purpose subtransmission/ distribution

circuits.

Site specific Large business customers Opt in Interval

meter Various


Inter-distributor transfers Customer with demand > 10MW or a load > 40

GWh annually Type 3

Negotiated with

customer Formerly in its own tariff class.

Source: Essential Energy, Tariff structure statement, 27 November 2015; Essential Energy, Tariff structure statement: Attachment 6: Policy for network tariff assignment and reassignment, 27

November 2015.


4 Tariff structures

This chapter considers each tariff structures proposed by the NSW distributors for

residential and small business customers and for large business customers.

4.1 Tariff design

We approve the NSW distributors' proposed design of tariff structures for medium and

large customers. We are satisfied that tariffs which are designed to include time-of-use

and demand components contribute to the achievement of compliance with the

distribution pricing principles. This is because time-of-use tariffs are able to send

signals regarding the timing of consumption as to when there are constraints on the

system and when there is additional capacity. However, we do not approve the timing

of the charging windows for the time-of-use tariffs. This is discussed in section 4.2

below.

We do not approve the NSW distributor's proposed declining block tariff structure for

residential and small business customers. We are not satisfied that a declining block

tariff structure contributes towards the achievement of compliance with the distribution

pricing principles. This is because we find that a declining block structure does not:

efficiently recovers costs from customers

send signals regarding the efficient use of spare capacity in the network.

These reasons are discussed in more detail below.

We consider there is scope for tariff reform at the residential and small business

customer level, as the current tariff structures and tariff assignment policies have

resulted in few customers moving towards more cost-reflective tariff structures.

Each of the NSW distributors proposed declining block tariffs and time-of-use tariffs for

their small customers, with some variations. Endeavour Energy proposed an inclining

block tariff for its small business customers and Ausgrid proposed transitional flat tariffs

for some residential and small business customers. The major difference between the

proposals was in relation to tariff assignment, rather than tariff structures, however

these issues are related. Endeavour Energy and Essential Energy proposed to

continue their block tariffs as the default tariff for residential and small business

customers, and to have time-of-use tariffs as opt-in only. Ausgrid proposed time-of-use

tariffs as the default tariff for certain new customers. We consider Ausgrid's proposal

better progresses tariff reform at the small customer level. Tariff assignment is

discussed in chapter 6.

Table 4-1 shows the tariff structures proposed by each of the NSW distributors.

Table 4-1 NSW distributors' proposed tariffs

Customer type Ausgrid Endeavour Energy Essential Energy

Residential Declining block Declining block Declining block


Time-of-use

Transitional flat time-of-use

Time-of-use Time-of-use

Small business

Declining block

Time-of-use

Transitional flat time-of-use

Inclining block

Time-of-use

Declining block

Time-of-use

Medium business

Time-of-use demand

Time-of-use

Time-of-use demand

Time-of-use

Time-of-use demand

Large business

High voltage time-of-use

demand system


demand substation


capacity


monthly demand


average daily demand

Sub-transmission

Sub transmission system

Sub transmission

substation

New transmission

connected time-of-use

capacity

Sub transmission time-of-

use demand

Sub transmission 3 rate

demand

Medium and large business customers

We are satisfied that the proposed tariff structures for medium and large business

customers contribute to the pricing principles, except for the time frames proposed for

the time-of-use charging windows. Our decision on charging windows is discussed in

section 4.2.

We are satisfied that time-of-use tariff structures, which contain peak, shoulder and off-

peak periods, and tariff structures with a demand charge contribute to the achievement

of compliance with the distribution pricing principles. These structures send signals

regarding the timing of consumption as to when peak periods occur and of the size of

the assets required to provide the electricity. We consider this contributes to the

signalling of efficient electricity use and efficient costs.

The demand charge sends signals regarding the size of the assets required to provide

the electricity and hence sends signals to customers to better manage their peak

demand and or invest in efficiency measures. This is a more efficient recovery of costs

from those large customers placing a burden on the grid, than through higher fixed

charges and usage charges. We consider this contributes to the pricing principle that

the tariff has regard to the additional costs likely to be associated with meeting demand

from customers that are assigned to that tariff at times of greatest utilisation.73 A

demand charge for large customers can incentivise them to shift their consumption.

73

NER, cl.6.18.5(f)(2)


Large customers are in a better positon to invest in battery storage and appliances to

reduce their peak load, than smaller customers. By encouraging larger customers to

reduce their load factors and shift their peak consumption the improved utilisation and

load factors at peak times will reduce overall future infrastructure costs. We consider

this contributes to the efficient use and costs of the network.

Residential and small business customers

Declining block structure

We are not satisfied that the declining block structure is an efficient tariff structure as it

provides no signals regarding the timing of consumption. We recognise that the lack of

interval metering at the residential and small business level limits the options of

different tariff structures to flat, declining block or inclining block structures. Taking this

into consideration we have assessed the NSW distributors proposed declining block

tariff structure against their reasons for proposing it and whether, of the options

available, it better promotes the pricing principles. We are not satisfied that the

declining block tariff structure contributes towards the achievement of compliance with

the distribution pricing principles because:

we are not satisfied that a declining block structure provides efficient price signals

to consumers to make use of spare capacity within the NSW networks,74 and

we do not consider it efficiently recovers costs from customers.

The NSW distributors proposed declining block tariffs for the following reasons:

It is one of the few tariff options (being declining block, inclining block and flat)

available given the lack of interval metering at the residential level.

The NSW distributors consider that a declining block tariff structure spreads the

recovery of residual costs between the fixed charge and the low consumption block

usage charge. They consider this is an efficient way to recover residual costs as it

will minimise distortions in consumption because usage in the low consumption

block is less price sensitive to usage in the high consumption block (Endeavour

Energy, Essential Energy).

Of the available tariff options a declining block tariff structure is efficient to

encourage consumers to use up the spare capacity within the NSW networks. The

NSW distributors submitted that a declining block structure is the more cost

reflective of the options available given the high sunk costs in NSW and the spare

capacity. The NSW distributors make this argument based on their view that a

declining block tariff allows residual costs to be recovered through the fixed charge

74

The national electricity objective includes the efficient use of electricity services for the long term interests of

consumers (NEL, s.7). Similarly, one of the revenue and pricing principles includes that a regulated network

service provider should be provided with effective incentives in order to promote economic efficiency with respect

to direct control network services. The economic efficiency that should be promoted includes the efficient use of

the distribution system with which the operator provides direct control network services (NEL, s.7A(3)(c)).


and the first block. The second and third blocks can then be set close to long run

marginal costs This provides the correct price signal for use within these blocks.

A declining block structure will provide efficient price signals to high consumption

consumers because the high consumption block usage rate will more closely reflect

long run marginal cost.

A declining block structure provides greater revenue stability for the distributor and

greater price stability for the consumer, as a greater portion of residual costs is

recovered from fixed charges gradually over time (Essential Energy).

Stakeholders have strongly opposed the declining block tariff. The main concerns

submitted by most stakeholders are that a declining block structure:

will encourage consumption therefore resulting in the need for further network

expansion and therefore higher costs to the consumer.75

will disadvantage low consumption users (which stakeholders consider to typically

be low income households).76

Stakeholders also considered that a declining block tariff structure would:

reduce the incentive / ability of customers to change their energy use behaviour77

discourage investment in energy efficiency measures by consumers78, and

disadvantage food and fibre groups.79

We are not satisfied that the allocation of more residual costs to the first block is

efficient because we have not been provided with sufficient evidence to persuade us

that consumption in this block is the least price sensitive. We are also not satisfied that

a declining block tariff provides efficient price signals to use spare capacity on the

NSW networks. Our analysis of the declining block tariff against the reasons proposed

for it is summarised in Table 4-2 and further discussed below.

Table 4-2 Summary of declining block analysis

Reason / argument AER Response

NSW distributors' reasons for declining block tariffs

Minimises distortions in the recovery of residual costs

Only true if supported by evidence that the first

consumption block is the least price elastic. We are not

convinced the first consumption block is least price

elastic. Many low consumption households may be

holiday homes or homes with solar PV installed. The

75

Energy and Water Ombudsman NSW (EWON), Public Interest Advocacy Centre (PIAC), NSW Council of Social

Services (NCOSS). 76

Cotton Australia, NSW Irrigators' Council (NSWIC), Solar Citizens 77

NSW Irrigators' Council (NSWIC), Cotton Australia, NSW Council of Social Services (NCOSS) 78

NSW Irrigators' Council (NSWIC), Cotton Australia 79

NSW Irrigators' Council (NSWIC), Cotton Australia


increase in battery storage is likely to change the elasticity

of these customers.

Efficiently encourages use of spare capacity within the

NSW networks

Only true if there is widespread capacity at all times. We

are not convinced there is spare capacity at all times. As a

block tariff sends no signals regarding the timing of

consumption we are concerned that this may over

incentivise consumption during peak times. Time-of-use

tariffs better signal times of spare capacity and hence are

more efficient. Or in the absence of interval metering a flat

tariff will have a more neutral effect on consumption.

Provides efficient price signals for network congestion

Declining block tariffs provide no price signals around

peak times or locations and may over incentivise

consumption at these times. Time-of-use tariffs provide

more direct signals, or in the absence of interval meters a

flat tariff would neutralise the effect.

Greater revenue stability for the distributor and price

stability for the consumer

We do not consider this is a concern as the NSW

distributors are each subject to a revenue cap. By its

nature, a revenue cap provides greater revenue stability

for the distributor. Similarly overall revenues are set

separately as part of 5 yearly reviews.

Stakeholders main reasons against the declining

block tariff

Encourages consumption (relative to other tariff options)

The lack of price signals as to the timing of consumption

is a concern.

Subsidises high consumption users High consumption users will pay a lower average price

per kilowatt hour than low consumption users.

Reduces the incentive / ability of customers to change

their energy use behaviour

Declining block tariffs reduce the incentive to manage

electricity use.

Discourages investment in energy efficiency

measures

Declining block tariffs do not send signals regarding peak

times and hence reduce the incentive for energy efficiency

Disadvantages food and fibre groups Declining block tariffs reduce the ability of food and fibre

groups to mitigate bill impacts through their usage.

Time-of-use tariffs would better signal spare capacity within the NSW network

compared to a declining block tariff. Block tariffs provide no signals as to when

capacity is available making it less certain that the capacity will be efficiently utilised. A

declining block tariff designed to encourage consumption may encourage it at the

wrong times. We are concerned that a declining block tariff will not effectively

encourage consumption in times of capacity and could over incentivise consumption at

peak times. Time-of-use tariffs can be structured to encourage consumption of

electricity at the times when capacity is available. The lack of widespread interval

metering at the residential and small business level, however, means that the option

for time-of-use tariffs for the majority of customers is limited. We consider a more

neutral tariff such as a flat tariff, whilst still not sending signals regarding the timing of

consumption, would reduce the risk of encouraging too much consumption (over-

incentivising) compared to a declining block tariff when there are constraints on the

network.


Efficient recovery of residual costs

A cost reflective tariff is one where the usage components recover the long-run

marginal costs and the fixed charge recovers the sunk (residual) costs. Where the

residual costs are significant it may be necessary to recover some residual costs

through the usage charge, so as not to set the fixed charge too high and increase the

possibility of disconnection and price shock to customers. In the first stages of tariff

reform the recovery of some residual costs through usage charges may be necessary

to mitigate the impact of changes in tariffs on consumers.80 The declining block tariffs

proposed by the distributors spread the recovery of residual costs between the fixed

charge and the low consumption block usage charge. These tariffs will be efficient

only if consumption in the first block has a lower price elasticity than consumption in

the second and third blocks.

We are not satisfied that the NSW distributors have provided sufficient evidence to

show that customers consuming in the first consumption block are less price sensitive

than those that reach the second or third blocks.

As discussed in section 5.2, the majority of customers consume only in the first block.

There is some reason to suggest that the consumption of at least some of these

customers is sensitive to price. There is some evidence to suggest that price elasticity

is proportional to income, and it might be assumed that income is lower for low use

customers and higher for high use customers. However there is no conclusive

evidence that price elasticity varies predictably with income.81 We also note that for any

link to price elasticity in the first block which is related to income, relies on an

underlying assumption that low use customers are also low income customers. While

there is some evidence to suggest this is the case it is also true that many low

consumption households are those with solar, holiday homes and those where the

occupants are at work for significant parts of the day.

We consider the introduction of roof top solar has implications for price elasticity

particularly for low consumption households and therefore the assumption that low

consumption households are less elastic. With the development of improved battery

storage and better solar PV those low consumption solar customers are likely to have

a higher elasticity. Overall we find that the distributors have not provided sufficient

information to support the link between low consumption customers having low

elasticity. Accordingly, we are not satisfied that the recovery of residual costs through

the first block of consumption contributes to the achievement of compliance with the

distribution pricing principles.

In the absence of supporting evidence on price elasticity, we consider the least

distortive method to recover the residual costs would be through a consistent mark-up

80

NER, cl.6.18.5(h)(3) 81

The Brattle Group, Structure of Electricity Distribution Network Tariffs: Recovery of Residual Costs, August

2014,p.42


to the usage rates (i.e. through a flat rate tariff). A flat rate tariff is consistent with the

pricing principles in the following respects:

for tariffs to comply with the pricing principles, albeit after a reasonable period of

transition82 and

the ability of customers to mitigate the impact of changes through their usage

decisions.83

We are not satisfied that customers are able to mitigate the impact of changes in tariffs

through their usage decisions84 under a declining block tariff where more costs are

recovered through the fixed charge and first consumption block .

We consider that in principle a declining block tariff would only contribute to

compliance with the distribution pricing principles if the NSW distributors can

demonstrate that consumption in the first block is less price sensitive than consumption

in the second and third blocks. This would be consistent with the Rules which require

total costs be recovered in a way which minimises distortions to price signals for

efficient usage resulting from tariffs reflecting long run marginal cost.85

Efficient use of spare capacity

The NSW distributors proposed declining block tariff relies on there being spare

capacity in the NSW network. In the presence of spare capacity and high sunk costs,

the average cost to provide electricity decreases with the volume of electricity sold.

This is because in the case of distributors which are natural monopolies the largest

costs are incurred to build the infrastructure in the first place, but once built, the cost of

transporting an additional unit of electricity is very low—up until the point where

congestion sets in, and further capacity is required to be built.

Spare capacity where it exists should be signalled to customers to enable them to use

it. This is consistent with the national electricity objective which includes the promotion

of efficient use of the network in the long term interests of consumers.

While spare capacity may exist in the NSW network, it may not exist at all times. The

NSW distributors' tariff statements suggest that network constraint is an issue at least

at certain times of the day.86 If this is the case declining block tariffs will also not

reflect the efficient costs of providing network services87 and will also not accurately

82

NER, cl.6.18.5 (h)(1) 83

NER, cl.6.18.5 (h)(3) 84

NER, cl.6.18.5(h)(3). 85

NER, cl. 6.18.5(g)(3). 86

The peak usage charges proposed by Ausgrid for its time-of-use tariff are double the usage charge for any of its

declining block usage charges. Ausgrid is introducing seasonal components to time-of-use tariffs with differing

peak charging windows applied during summer and winter months. The peak and shoulder periods proposed by

Ausgrid and Endeavour time-of use tariffs are wide covering 62 per cent of the time 87

NER, cl.6.18.5(a)


reflect long run marginal costs of providing the service.88 Further, a declining block

structure will reflect efficient costs of providing network services only until

augmentation is required. The distributors have not provided sufficient evidence to

show that further augmentation is not required.

Block tariffs send the same price signals regardless of when consumption occurs. They

do not provide any incentives for shifting consumption from peak to off-peak periods as

customers receive no signals regarding the timing of their consumption. A declining

block tariff, where the price decreases for higher blocks of consumption may over-

incentivise consumption at peak times.

As block tariffs do not send any price signals or incentives to customers to shift their

consumption from peak periods to off-peak periods, the incentive to change energy

behaviour or invest in energy efficiency is reduced. Any increase in consumption

during peak times will contribute to the need for further network investment and hence

increases in prices.

Stakeholders did not support the NSW distributors declining block tariffs.

Jemena submitted:

Having declining block structures supported by a non-robust long-run marginal

cost estimate may result in forgoing the opportunity to efficiently downsize or

delay some of the capex program. This is because of the weaker signals to

reduce demand levels.89

Cotton Australia and NSW Irrigators' Council (NSWIC) submitted:

Declining block tariff will incentivise higher electricity consumption. This will

further expand the regulatory asset base and generate a requirement for higher

network operating and capital expenditure – an investment spiral.90

Solar Citizens submitted that higher users will be encouraged to use more energy and

pay on average less per unit price for energy consumption. They submitted that:

It is intuitively obvious that the declining block pricing scheme is designed to

and will encourage more consumption, which could be used by the distributors

to justify existing excessive investment in infrastructure, and potentially even to

attempt to make a case for future investment by promoting increasing electricity

consumption.91

88

NER, cl.6.18.5(f) 89

Jemena, Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6 May

2016, p.3 90

NSW Irrigators Council (NSWIC) and Cotton Australia Submission, AER Issues paper on the NSW Tariff Structure

Statements 6 May 2016, p.3. 91

Solar Citizens Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 5 April

2016, p.1.


New South Wales Council of Social Service (NCOSS) considered declining block

structures would increase the incentive not to conserve energy, and noted two possible

perverse outcomes from this:

Firstly, ongoing or increased consumption of energy at peak times could give

rise to the re-emergence or continuation of the peak demand problem, leading

to the necessity for further costly augmentation of the network.

The other likely consequence is that consumers who are able, will seek to

reduce their reliance on the network by investing in solar and batteries, while

those who are not able will bear the price impact of reduced overall demand.

This scenario is already familiar, and is not consistent with the outcomes being

sought by the new pricing rules.92

A time-of-use structure would better promote the pricing principles through the

signalling of when capacity is available; however given the lack of interval metering at

the small customer level in NSW, we consider a more neutral tariff, such as a flat tariff,

is a preferred option to a declining block. A flat tariff, whilst not sending signals

regarding the timing of consumption would reduce any risk of over incentivising

consumption during peak periods.

A flat tariff will ensure that high and low usage customers will pay for residual costs in

proportion to their use of electricity.

Table 4-3 shows analysis of how much 100kWh would cost for each subsequent block

in 2018-19 prices. From this we can see that for customers in Ausgrid’s area once they

reach the second block they will pay $2.63 less for each 100kWh consumed compared

to the first block and 62 cents less for each 100kWh consumed in the third block

compared to what they paid in the second block. For Endeavour Energy this difference

is $1.03 and $1.33. For Essential Energy the difference is only 50 cents and 49 cents

between the blocks. At current proposed levels the declining block price signals are

fairly flat and the change to a more neutral flat tariff is unlikely to have a significant

impact on the NSW distributors recovery of costs.

Table 4-3 Comparison of revenue recovered in each block

Ausgrid Endeavour Essential

Amount

paid for

100kWH

($)

Difference

b/w blocks

($)

Amount paid

for 100kWH

($)

Difference b/w

blocks ($)

Amount paid

for 100kWH

($)

Difference

b/w blocks

($)

Block 1 (first 1000kWh in 91

day period)

11.60

9.74

11.05

Block 2 (next 750kWh per 91 8.97 -2.63 8.71 -1.03 10.55 -0.50

92

NSW Council of Social Service (NCOSS) Submission: AER issues paper: Tariff structure statement proposals:

NSW electricity DNSPs May 2016, p.8.


day period)

Block 3 (all kWh over 1750 per

91 day period) 8.35 -0.62 7.38 -1.33 10.06 -0.49

Effect on revenue stability

The NSW distributors submitted that a declining block structure provides greater

revenue stability for the distributor and greater price stability for the consumer.

We do not agree that revenue stability is an issue that needs to be addressed through

a declining block tariff structure at the expense of efficient price signals.

Further, we are not persuaded that the NSW distributors would face significant revenue

instability if the declining block structure was removed. The NSW distributors are each

subject to a revenue cap. By its nature, a revenue cap provides a significant degree of

revenue stability for the distributor, and more revenue stability than a price cap (where

the distributor’s revenue is affected by volume risk). Under a revenue cap, the only

revenue volatility faced by the distributor is in relation to the unders-and-overs

mechanism where a distributor recovers more or less revenue than the revenue cap in

a particular year. Similarly, under a revenue cap there is no significant effect on price

stability for customers over the regulatory period. Therefore, we are not satisfied that

revenue or price instability concerns are justified or require a response as proposed.

Disadvantaged consumers

Affordability is an important issue for vulnerable customers. Our role is to encourage

efficient pricing so consumers understand the cost of their decisions. This will also

provide policy makers with accurate information in deciding to target certain groups of

customers, such as vulnerable customers, with additional assistance.

The distribution pricing principles, which we assess distributor's proposals against,

require distributors to balance cost reflectivity and customer impact considerations.

The customer impact considerations relate to gradually transitioning to cost reflective

prices. Accordingly, we consider any movement to a pricing structure where more

costs are recovered through fixed charges should be gradual. Such an approach will

contribute to the pricing principle that customers can mitigate the impact of tariffs

through their usage decision.93

Stakeholders submitted that the recovery of more residual costs through the first block

of the declining block tariff disadvantages low consumption households and subsidises

high consumption households. Under the NSW distributors proposed declining block

tariffs, more of the residual costs are recovered through the first block usage charge,

rather than being spread over all usage, as would be the case with a flat tariff. This

means the average rate paid by low consumption households on tariffs with more costs

allocated to the first block charge will be higher compared to high consumption

93

NER, cl.6.18.5(h)(3)


households. Although the rules do not take into consideration whether one customer

group is 'disadvantaged' compared to another, the pricing principles take into account

a customer's ability to mitigate bill impacts.94 An increased recovery of residual costs

through the fixed charge and first consumption block will make it more difficult for low

consumption households to mitigate the changes in tariffs through their usage

decisions.95

The extent to which low income households are disadvantaged by a declining block

tariff will depend on the extent that low consumption is correlated with low income.

New South Wales Council of Social Services (NCOSS) submitted:

Evidence that low income households are generally low consumers of energy is

demonstrated in NSW by an IPART survey of households in 2010. For the

Sydney households in the IPART survey, 39 per cent of the lowest income

group were also in the very lowest consumption group. This low income-low

consumption group were consuming less than 4MWh per annum when the

average household was consuming 7.2 MWh.96

NCOSS also submitted that:

Low income households already spend a higher proportion of household

income on residential electricity. A 2012 estimate for Australia is that lower

income households spend over 4 per cent of household income on household

energy compared to 2 per cent for all households combined.97

For low income households, a tariff structure in which most of the costs are recovered

through the fixed charge and the first block reduces the ability of these customers to

manage these costs through changes in their usage, and is inconsistent with pricing

principles.98 To the extent that low consumption households are also low income

households this impact is exacerbated.

Food and Fibre customers

Food and fibre groups submitted that a declining block tariff would disadvantage them,

as their energy use can be very high at certain times of the year and significantly lower

during others. In NSW, irrigators have water entitlements which mean they are only

allowed to pump water for very short periods (sometimes just a 48 hour period). The

water has to be pumped at a certain time or they lose their entitlement. For customers

with low usage most of the year, a tariff structure where most of the costs are

recovered through the fixed charge and the first block usage charge would make it

94

NER, cl.6.18.5(h)(3) 95

NER, cl. 6.18.5(h)(3). 96

NSW Council of Social Services (NCOSS) Submission: AER issues paper: Tariff structure statement proposals:

NSW electricity DNSPs, May 2016, p.10. 97

NSW Council of Social Services (NCOSS) Submission: AER issues paper: Tariff structure statement proposals:

NSW electricity DNSPs, May 2016, p.10. 98

NER, cl. 6.18.5()(3).


more difficult for these customers to mitigate the impact of the tariff through their usage

decisions compared to a time of use tariff, or if interval meters are not available

through a more neutral tariff such as a flat tariff.

We are not satisfied that a declining block tariff structure contributes to the

achievement of compliance with pricing principles for food and fibre customers. We

consider a declining block tariff reduces the ability of food and fibre customers to

mitigate bill impacts through their usage and is inconsistent with the distribution pricing

principles.99

Inclining block tariff

We are satisfied Endeavour Energy's proposed inclining block tariff for small business

customers contributes to the achievement of compliance with the distribution pricing

principles. Specifically, we consider Endeavour Energy's proposed inclining block tariff

for small business customers is consistent with the distribution pricing principles of

minimising customer impact and promoting customers moving to more efficient tariffs.

Endeavour Energy proposed to maintain its current inclining block structure for small to

medium commercial customers. Endeavour Energy submitted that the benefits of this

tariff structure in the context of commercial customers, where the penetration of more

advanced interval meters is greater, is that it:

Incentivises customers with higher consumption (consuming close to the 160MWh

per annum consumption border of our LV energy and LV demand tariff classes) to

move to more efficient demand based tariff structures.

Ensures that this signal to large customers does not create distortions to smaller

customers on the tariff.

We received no submissions from stakeholders regarding Endeavour Energy's

proposed inclining block tariff structure.

An inclining block tariff like the declining block tariff does not send any price signals

regarding the timing or location of consumption. Under an inclining block tariff structure

larger customers on average will pay more per kilowatt hour than small customers.

Endeavour Energy's rationale for its proposed inclining block tariff structure for small to

medium commercial customers is to encourage those higher consumption customers

(consuming close to 160 MWh per annum) to move to the more efficient demand

based tariff structures.

Endeavour Energy proposed to increase the energy consumption point at which the

second block starts from the current threshold of 10 MWh to 120 MWh per annum.

This will mean that the vast majority of customers will pay only the fixed annual charge

and the first block energy charge, making this effectively a ‘flat’ tariff structure for the

vast majority of customers (97.8 per cent).

99

NER, cl. 6.18.5(h)(3).


Increasing the consumption threshold at which the second block commences provides

a long term signal for larger customers on the tariff to switch to a more efficient tariff,

whilst minimising distortions to the vast majority of customers on this tariff. We

consider this contributes to the achievement of compliance with the distribution pricing

principles

that the tariff should reflect the distributors efficient costs100, and

that the additional costs likely to be associated with meeting demand are assigned

at times of greatest utilisation.101

Time-of-use tariffs

We are satisfied that the proposed time-of-use tariff structure design better contributes

to cost reflectivity and the achievement of compliance with the pricing principles than a

flat structure, or a block structure. Time-of-use tariffs send signals regarding the timing

of consumption and provide incentive for customers to shift their energy usage from

times of network constraint. We consider this contributes to achievement of compliance

with the pricing principles

that prices should reflect the efficient costs102 and

reflects the additional costs likely to be associated with meeting demand at times of

greatest utilisation.103

However, we are not approving the proposed timing of the charging windows for time-

of-use tariffs. This is discussed further in section 4.2.

Endeavour Energy and Essential Energy proposed opt-in time-of-use tariffs for their

residential and small business customers. This means that any customer with an

interval meter can opt-in to a time-of-use tariff. As discussed in chapter 6 Ausgrid has

proposed that new customers with embedded generation will be assigned by default to

a time-of-use tariff from 1 July 2018. Ausgrid also proposed that customers with

interval meters will be assigned to time-of-use tariffs.

Other tariffs—proposed by distributors

Ausgrid proposed transitional tariffs for existing customers with interval meters and

time-of-use tariffs for new customers. Endeavour Energy and Essential Energy

proposed to maintain their current opt-in time-of-use tariffs.

Ausgrid's transitional tariffs

100

NER, cl.6.18.5(a) 101

NER, cl.6.18.5(f)(2) 102

NER, cl.6.18.5(a) 103

NER, cl.6.18.5(f)(2)


As discussed in chapter 6 Tariff Assignment Policies, we consider Ausgrid's proposed

transitional tariff which has a time-of-use tariff structure (i.e. peak, shoulder and off-

peak windows) but where the usage rate is consistent across all charging windows is a

move towards more cost reflective pricing for existing customers. By being on a

transitional tariff with a time-of-use structure but with flat rates the customer is

protected from any bill shock due to re-assignment. By having a time-of-use structure

the transitional flat tariff will better enable customers to see their consumption

behaviour in each charging window, whilst providing protection from bill shock in the

initial transition period until they can better manage their usage decisions.

We consider this to contribute to the pricing principle that customers are able to

mitigate the impact of changes in tariff through their usage decisions.104

We also consider the proposed transitional tariff will promote the pricing principle

that the tariff must be reasonably capable of being understood by customers

assigned to it.105

Ausgrid's proposed tariff for new transmission connected customers

Ausgrid proposed to introduce a transmission-use-of-system only tariff for customers

connected to its transmission network (such customers were previously assigned to

the sub-transmission capacity tariff). Ausgrid proposed that this should be the default

tariff for all new transmission customers connected to its network.106 This tariff has the

following structure:107

network access charge (c/day)

consumption charge (c/kWh) for peak, shoulder and off-peak periods

demand charge during peak hours (c/kVA/day).

We are satisfied the introduction of this tariff contributes to the achievement of

compliance with the distribution pricing principles.108 We agree with Ausgrid that this

will result in greater efficiency as these customers will not incur a distribution-use-of-

system charge when they do not contribute to the costs of that segment of the network.

We also consider the tariff structure, particularly the inclusion of a demand charge,

provides appropriate and efficient price signals.

Endeavour Energy's new low voltage transitional demand tariff

We are satisfied that Endeavour Energy's proposed time-of-use transitional demand

tariff contributes to the achievement of compliance with the distribution pricing

principles. Endeavour Energy proposed that this tariff should be mandatory for certain

104

NER, cl.6.18.5(h) 105

NER, cl.6.18.5(i) 106

Ausgrid, Tariff structure statement: Appendix 2: General description of Ausgrid’s default network use of system

tariffs, 27 November 2016, p. 17. 107

Ausgrid, Tariff structure statement, 27 November 2016, pp. 11 and 126. 108

NER, cl 6.18.5(a)


customers. These are customers whose annual consumption requires a demand tariff

but who cannot be transferred to it either because their meter will not support this tariff

or because the impact of transferring them to this tariff is excessive. At a minimum,

customers that are allocated to this tariff must have an interval meter. The low voltage

time-of-use demand transition tariff is not available on customer or retailer request.

We consider this contributes to the distribution pricing principles

that the tariff should reflect the distributors efficient costs109

that the additional costs likely to be associated with meeting demand are assigned

at times of greatest utilisation110

that customers are able to mitigate the impact of changes in tariff through their

usage decisions,111 and

that the tariff must be reasonably capable of being understood by customers

assigned to it.112

Other tariff options—requested by stakeholders

We consider at this stage of tariff development in NSW, time-of-use tariffs and policies

to assign customers to time-of-use tariffs or transitional tariffs will progress to more

efficient use of the network and contribute to the distribution pricing principles. Rather

than expecting a large number of possible tariff forms to be introduced at once, our

main concern in this initial period is moving customers from non-cost reflective tariffs to

more cost reflective tariffs.

Stakeholders had mixed views on whether the NSW distributors should introduce a

wider range of tariff options than currently proposed. The Energy Network Association

(ENA) and EnergyAustralia did not support a wider range of tariff options, because

they considered simplicity in the options for customers was important at this stage of

the reform process.113 In contrast, some other stakeholders considered there should be

more tariff options, however their views differed with respect to what additional tariff

options should be introduced. AGL considered the distributors should introduce a

demand tariff for residential and small business customers114, whereas the Energy and

Water Ombudsman (EWON) disagreed with this.115 EWON and the NSW Council of

Social Services (NCOSS) considered the distributors should introduce a ‘social

109

NER, cl.6.18.5(a) 110

NER, cl.6.18.5(f)(2) 111

NER, cl.6.18.5(h) 112

NER, cl.6.18.5(i) 113

Energy Network's Association (ENA) Submission: AER issues paper: Tariff structure statement proposals: NSW

electricity DNSPs, 6 May 2016, p.3; Energy Australia Submission: AER issues paper: Tariff structure statement

proposals: NSW electricity DNSPs, 6 May 2016, p.4-5. 114

AGL Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 10 May 2106,

p.2 115

Energy and Water Ombudsman NSW (EWON Submission: AER issues paper: Tariff structure statement

proposals: NSW electricity DNSPs, 3 May 2016, p.5


tariff’116, and Cotton Australia and the NSW Irrigator's Council (NSWIC) considered the

distributors should introduce ‘food and fibre’ tariffs.117

Social tariffs

EWON and NCOSS supported a social tariff. EWON believed that discussion around a

social tariff is important and that the AER and the networks should engage in

discussion with stakeholders about a Social Tariff in preparation for the next round of

tariff design as part of a multifaceted approach to developing affordability solutions. In

summary, they argued the concept of a network social tariff should be explored with

particular focus on four aspects:

design flexibility to suit variable consumption needs

retailer tariff supported

have broad eligibility criteria, and

accessibility

The AER has no particular views on the intrinsic merits of a social tariff or the need for

such a tariff to be explored as suggested above, the requirements of the rules are

focused on moving customers towards more cost reflective prices, while managing the

impact on customers through the transition. There are no particular requirements for

tariffs to deal directly with affordability concerns, beyond transitional considerations. It

is also usually more efficient to provide assistance to vulnerable customers through

more targeted measures.

Food and Fibre tariffs

Cotton Australia and NSWIC supported a food and fibre tariff. Cotton Australia and

NSWIC submitted they were misrepresented by Networks NSW who submitted that the

feedback from commercial stakeholders was that ‘it is the responsibility of

Government, not networks, with policy changes and the provision of industry

assistance providing better solutions’. Cotton Australia and NSWIC submitted that this

is certainly not the case, and is why Cotton Australia and NSWIC have made

submissions, participated in Tribunal hearings associated with the network

determination and tariff structure statement process as they believe that the networks

can undertake significant and meaningful actions in tariff reform and cost reductions in

order to provide electricity price relief for food and fibre producers.118

116

The NSW Council of Social Services (NCOSS Submission: AER issues paper: Tariff structure statement

proposals: NSW electricity DNSPs, May 2016, p.12 117

Cotton Australia and NSW Irrigator's Council (NSWIC Submission: AER issues paper: Tariff structure statement

proposals: NSW electricity DNSPs, 6 May 2106, p.5 118

Cotton Australia and NSW Irrigator's Council (NSWIC) Submission: AER issues paper: Tariff structure statement

proposals: NSW electricity DNSPs, 6 May 2016, p.5


Cotton Australia and NSWIC submitted that the majority of their members are large

energy users and are therefore assigned to either demand or time-of-use tariffs. They

also raised concerns with the specific design of the charging windows associated with

these tariffs. In particular, they noted that Essential Energy charges the same rate

across its peak and shoulder periods, and that its off-peak window is narrow. They

submitted that these aspects combined means there is little incentive for customers to

shift to a time-of-use tariff.

We are satisfied that, in principle, the use of demand and time-of-use tariffs contribute

to the achievement of compliance with the distribution pricing principles because both

tariffs send signals to customers on times of high and low network congestion.

However, we share some of Cotton Australia and NSWIC's concerns over the design

of the charging windows associated with these tariffs. Our discussion on charging

windows is set out in section 4.2.

Demand tariffs

AGL submitted that the NSW networks have all justified their decisions to ignore

energy demand as a cost driver on their individual networks because of the excess

capacity that exists. AGL queried the networks’ general positions that network capacity

is unconstrained and submitted that the distributors should be considering a more

significant step towards tariff reform as part of their proposals. AGL suggested that

demand-based network pricing is an achievable goal in the immediate term,

particularly as an opt-in network tariff for residential and small business customers.

AGL proposed that the distributors can create demand-based network tariffs that are

cost reflective for consumers with good load factors and/or low peak demand which

would incentivise the take-up of the tariffs accordingly. AGL considered it is highly

unlikely that any customers will access the proposed time-of-use tariffs in the tariff

statement period given their structure, so replacing these with demand-based tariffs

can only be a positive step.119

Although supportive of more tariff options EWON did not support a demand tariff –

demand tariffs are complex and can be difficult to understand.120

Endeavour Energy submitted that it is not proposing to introduce demand tariffs.

Endeavour Energy submitted that this is a prudent approach in light of the fact that:

demand for our network has been reducing over time, with peak demand currently

lower than forecast, and

new metering technology will be required.121

119

AGL Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 10 May 2016,

p.4 120

Energy and Water Ombudsman NSW (EWON) Submission: AER issues paper: Tariff structure statement

proposals: NSW electricity DNSPs, 3 May 2016, p.5 121

Endeavour Energy Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6

May 2016, p.4


Our role is to assess a distributor's proposal for compliance against the distribution

pricing principles. While we consider demand tariffs are the next step along the cost

reflectivity spectrum after time-of-use tariffs, we are not satisfied that the introduction of

demand tariffs for small customers in NSW at this point in time is required for

compliance against the distribution pricing principles.

We consider at this stage of tariff development in NSW, time-of-use tariffs and policies

to assign customers to time-of-use tariffs or transitional tariffs will progress to more

efficient use of the network and contribute to the distribution pricing principles. Our

main concern in this initial period is getting customers off non-cost reflective tariffs

(declining block, inclining block and flat tariffs) and onto more cost reflective tariffs

(either demand or time-of-use tariffs).

Locational tariffs

Endeavour Energy submitted that it is unclear at this time if the potential benefits of

location specific tariffs outweigh the equity concerns of customers and the added

complexity and administrative cost imposed on networks and retailers.122

We consider that as tariff reform progresses and costs are allocated more efficiently

locational based pricing may become more appropriate. At this time locational tariffs

may be limited because of technical barriers and there will be a need for distributors to

consult with stakeholders on their impact. We consider this issue should be revisited in

future tariff statements.

Tariff simplicity

ENA and Energy Australia were supportive of tariff simplicity. ENA submitted that at

this stage of tariff reform there are strong arguments to support simplicity to minimise

customer confusion and to assist retail marketing, rather than a broad suite of network

tariff options. This approach appears consistent with behavioural economic research

which finds that customers:

will weigh financial losses more heavily and discount future (uncertain) financial

benefits;

are risk averse and have a preference for certainty;

tend to stick to defaults as information increases; and

find decision-making more difficult as information or options increase.123

122

Endeavour Energy Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6

May 2016, p.4 123

Energy Networks Association (ENA) Submission: AER issues paper: Tariff structure statement proposals: NSW

electricity DNSPs, 6 May 2016, p.3


The ENA submitted that it would caution the AER against imposing additional

obligations on the DNSP which mandate a wider menu of tariff options for customers

for the following reasons:

such requirements may have potential implications for complexity and transaction

costs in the absence of strong evidence that they are likely to be taken up by

customers or retailers. Distributors would need to re-evaluate take up rates and

parameter relativities across a wider array of tariffs and to ensure effective

communication of a wider variety of tariff options. The net benefit of providing a

wider range of tariff options is likely to be better evaluated by distributors directly in

consultation with their customers, and

it does not appear that a compulsory requirement to offer a menu of more cost-

reflective options is necessary. A number of tariff structure statement proposals by

Australian distributors have proactively offered options for customers to opt in to a

more cost reflective pricing option. Equally, the locational targeting of network

constrained areas can also be addressed through non-tariff agreements between

distributors and their customers, such as other Australian distributors have

proposed. The National Electricity Rules provides a framework in which

distributors, in consultation with their customers, can consider the prospective need

or net benefits of such options.124

ENA submitted that location based cost-reflectivity for all customers would be likely to

lead to very significant price increases for regional customers, particularly in areas of

relatively low customer density. Further, some jurisdictional policy settings will prevent

the network tariff locational signal being sent to customers through their retail bills, in

which case the cost of creating the signal will definitely outweigh any benefit to be

obtained.125

Energy Australia submitted that examples of the type of issue that complicate timely

implementation of revised tariffs or that undermines reform objectives include:

significant differences in tariffs between networks, including their definition of peak

periods (in terms of time of day or season, for example)

different treatment of customers where there is no obvious difference in the cost of

supply, such as mandatory assignment to a particular tariff class depending on

whether the customer is new or existing, and

uncertainty about the application of tariffs and whether customers have a choice

between different tariff options.126

124


electricity DNSPs, 6 May 2016, p.3 125


electricity DNSPs, 6 May 2016, p.3 126

Energy Australia Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6

May 201, p.7-8


We consider the first step to more cost reflective pricing in NSW is a move towards

time-of-use tariffs and an increase in the assignment of customers to time-of-use

tariffs. As customers understanding of time-of-use tariffs increases there may be more

opportunities for more complex structures including locational and demand tariffs.

The ENA and Energy Australia's raised views associated with the design of charging

windows and tariff assignment policies. We discuss these issues in section 4.2 and

chapter 6, respectively.

4.2 Charging windows

One aim of the pricing rules is to encourage more cost reflective pricing.127 If prices

were fully cost reflective, tariffs would reflect demand conditions through time and at a

local level. Periods of high demand risk assets becoming congested, which may trigger

expenditure. One aim of cost reflective pricing is to incentivise customers to shift their

use of network services to less congested periods, which would mitigate the need for

expenditure. However, there are currently impediments to the full application of cost

reflective pricing. In NSW, for example, the low penetration of interval meters limits the

number of customers to whom cost reflective pricing can apply. There are also

implementation and equity issues in transitioning to location-based pricing.128 In the

absence of perfectly cost reflective pricing, distributors commonly utilise charging

windows that signals times when the whole network is likely to experience high levels

of demand.

The objective of the pricing rules is to better reflect the distributor's costs of providing

network services,129 and we consider this should be the primary consideration in

setting charging windows. However, distributors also need to manage the impacts of

tariff changes and customer ability to respond.130 Customers can reduce their peak

usage through moving some appliance use outside the peak charging window. For

example, they can use other large appliances at other times while the air conditioner is

on.

We are not satisfied that all aspects of the NSW distributors' proposed charging

windows for time of use and demand tariffs contribute towards the achievement of

compliance with the distribution pricing principles. We consider the NSW distributors

did not provide sufficient evidence to justify the proposed charging windows regarding:

what time of day the charging windows apply (business days)

whether the charging windows differ based on seasonality, or time of year

(Endeavour Energy and Essential Energy), and

127

NER, cl 6.18.5(a). 128

Location-based pricing may increase implementation costs due to increased complexity in tariff structures, for

example. 129

NER cl 6.18.5(a) 130

NER, cl 6.18.5(h)


charging windows for weekends/non-business days (Ausgrid and Endeavour

Energy).

We discuss our consideration of these issues in sections 4.2.1, 4.2.2 and 4.2.3,

respectively. These sections also contain the changes we require in the NSW

distributors' revised proposals to demonstrate compliance with the distribution pricing

principles. We also discuss stakeholder submissions calling for the NSW distributors to

harmonise their charging windows in section 4.2.4.

4.2.1 Time of day (business days)

We consider the NSW distributors did not provide sufficient evidence demonstrating

how charging windows reflect the level of congestion in their respective networks.131 In

particular, we consider the NSW distributors' peak and shoulder hours are too long.

This potentially distorts the price signals for efficient usage of the distribution networks

and reduces customers' ability to mitigate the impact of changes in tariffs through their

usage decisions.132 We therefore, require the NSW distributors to amend the times of

their charging windows to be more cost reflective (that is, they better reflect congestion

in their respective networks).

We understand the NSW distributors may have considered other factors besides cost

reflectivity when designing the times of their charging windows. Ausgrid, for example,

stated the recovery of residual costs influenced how it derived its charging windows,

(the 'Ausgrid' subsection discusses this issue further). The Rules allow departure from

cost reflectivity in certain cases, for example, to mitigate the impact on customers of

transitioning to cost reflective tariffs.133 If this is the case, we require the NSW

distributors to explain these factors in their revised proposal and demonstrate how they

influence the times of their charging windows.

Stakeholders also submitted their concerns that there is limited opportunity for

customers to access off-peak pricing.134 Available evidence indicates it may be

appropriate for the NSW distributors to adjust their charging windows—namely, by

reducing the number of hours allocated to peak and shoulder periods. This would

provide customers greater opportunities to access off-peak pricing.135

Ausgrid

We are not satisfied that Ausgrid's proposed times for its charging windows on

weekdays contribute to the achievement of compliance with the distribution pricing

131

NER, cl 6.18.5(f). 132

NER, cll 6.18.5(g) and (h)(3). 133

NER, cll 6.18.5(c) and 6.18.5(h)(1). 134

NCOSS, Submission: AER issues paper on the NSW tariff structure statements, May 2016, p. 8; Cotton Australia

and NSWIC, Submission: Issues paper: Tariff structure statement proposals NSW, 6 May 2016, pp. 4–5. 135

NER, cl 6.18.5(h)(3).


principles. We do not consider that Ausgrid achieved the appropriate balance between

greater cost reflectivity and customer ability to respond, for the following reasons:

we consider that Ausgrid's proposed times for the peak period are too long and do

not reflect the level of congestion in its network

we consider that Ausgrid's tariff statement proposal did not provide sufficient

evidence and explanation on how it determined its shoulder and off peak hours

during working weekdays

we consider that the times of peak hours on weekdays should be different between

summer and winter (we also discuss this in section 4.2.2).

In its revised proposal, we require Ausgrid to:

Amend its charging windows to better reflect network congestion (which Ausgrid

indicated in its tariff statement proposal is the primary driver of its charging

windows). We consider the peak period should be shorter than Ausgrid's proposal,

and peak times should differ between summer and winter. Based on evidence in

Ausgrid's tariff statement proposal, we consider that Ausgrid's peak hours occur

approximately 2:00PM to 4:00PM in summer and 5:00PM to 7:00PM in winter. In its

revised proposal, Ausgrid may initiate the transition to more cost reflective charging

windows with longer peak hours, with the view of achieving greater cost reflectivity

in subsequent regulatory control periods.

Provide further evidence to justify the times of its charging windows during working

weekdays. In response to an information request, Ausgrid clarified the recovery of

residual costs, in addition to network congestion, influenced the time of its charging

windows. For transparency, we require Ausgrid to include this, and any other

considerations that affect the times of its charging windows, in its revised proposal.

Explain how it determined the thresholds between peak, shoulder and off peak

hours. Following from the point above, we require Ausgrid to clearly demonstrate

the link between the times of its charging windows and the recovery of residual

costs.

The rest of this section sets out our reasons for our draft decision and directions to

Ausgrid.

Figure 4-1 summarises Ausgrid's proposed charging windows. The hours for the peak,

shoulder and charging windows are largely consistent with Ausgrid's current charging

windows. A significant reform is Ausgrid's proposal to include a seasonal component in

its charging windows.136

136

Ausgrid, Tariff structure statement, 27 November 2015, p. 15.


Figure 4-1 Ausgrid's proposed charging windows

Source: Ausgrid, Tariff structure statement, 27 November 2015, p. 15; Ausgrid, Tariff structure statement: Appendix

2: General description of Ausgrid’s default network use of system tariffs, 27 November 2015.

In its tariff statement proposal, Ausgrid appears to justify its peak period on the basis

that it reflects network congestion. Ausgrid considered the most economically efficient

peak period definition should only apply to usage on hot summer days in summer

peaking parts of the network (and the converse for winter).137 Ausgrid included in its

tariff statement proposal the top peak demand intervals from recent years for summer

(Figure 4-2) and winter (Figure 4-3).

137

The peak period should only apply to usage on cold winter days in winter peaking parts of the network. However,

Ausgrid did not propose to introduce dynamic peak pricing given the limited penetration of interval metering in its

network. See Ausgrid, Tariff structure statement, 27 November 2015, p. 47.

Tariff Type of day Season 12

AM

6 7 8 9 10 11 12

PM

1 2 3 4 5 6 7 8 9 10 11

Working

weekday

Summer,

Winter,

Weekend,

Public

All

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weekday

Summer,

Winter

Working

weekday

Other

Weekend,

Public

All

Peak

Shoulder

Off peak

Residential

time of use

All other

tariffs


Figure 4-2 Ausgrid historical system-wide peak demand (MW) – Half Hour

Intervals - Summer

Source: Ausgrid, Tariff structure statement, 27 November 2015, p. 48.


Figure 4-3 Ausgrid historical system-wide peak demand (MW) – Half

Hour Intervals – Winter

Source: Ausgrid, Tariff structure statement, 27 November 2015, p. 48.

Figure 4-2 does not support Ausgrid's statement that network peak demand occurs

between 2:00PM and 8:00PM in summer.138 Rather, it suggests the summer peak

period should end at approximately 4:00PM.139

Figure 4-3 suggests the winter peak period is between approximately 5:00PM and

7:00PM. Further, the level of peak demand, and hence congestion, in winter appears

to be equivalent to summer demand levels in the shoulder charging window.140 This

suggests Ausgrid should charge shoulder rates during winter.

Ausgrid acknowledged that its proposed charging windows are inefficient. Specifically,

it submitted:141

The inefficiencies associated with the current period definition for time of use

(peak, shoulder and off peak) arise because it is designed to cover both the

evening winter and summer peak across the whole network. Ausgrid believes

138

Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 23. 139

There are significantly fewer peak demand data points after 4:00PM and these are mostly below the levels of data

points found between 9:00AM and 2:00PM, which is within Ausgrid's shoulder period. 140

The winter peak demand points in Figure 4-3 fall below 5,500MW and most are below 5,000MW. This is

comparable to demand points that are within Ausgrid’s shoulder period in summer (see the demand points

between 9:00AM and 2:00PM in Figure 4-2). 141



that the broad definition of the peak period that covers all business days

throughout the year has the potential to undermine economic efficiency even if

peak energy charges are set reflective of LRMC because the network is not

congested on all business days.

Ausgrid further stated ‘there appears to be economic advantages from adopting a

narrower peak period definition in winter’.142 However, Ausgrid proposed to delay

changing peak time periods pending further research on: 143

customer response to “sharper” peak price signals

the impact on future peak demand patterns of emerging technologies, such as solar

and electric vehicles.

We do not consider Ausgrid's proposal to delay changing peak time periods


We are not convinced by Ausgrid's reasoning for this delay.

Ausgrid did not explain what information it required from research on customer

response to sharper peak price signals. For example, does Ausgrid require information

regarding all customers or a just a particular customer class, such as residential

customers? Evidence suggests residential and small business customers are the main

contributors to the sharp evening peaks in winter.144 Ausgrid also did not discuss where

it was going to obtain such information. For example, does Ausgrid intend to conduct

trials with its own customers, or will it rely on external research? If the former, it is

unclear why Ausgrid cannot use its first tariff statement to transition to narrower peak

times. Given the low penetration of time-of-use enabled meters in its network,

introducing such a transition, even on a trial basis, would not impact revenue recovery.

Rather, Ausgrid would likely gain valuable information from such a transition for

designing charging window times for future tariff statements.

Regarding the impact of emerging technologies on peak demand patterns, the time

horizon is unclear. It is not clear whether such technologies will significantly impact

peak demand patterns in five, ten or more years. On the other hand, we consider each

tariff statement should begin the transition towards cost reflectivity to the greatest

extent practicable for the regulatory control period in which it applies. Ausgrid can

consider the peak demand impact of emerging technologies and their implication for

charging windows in future tariff statement proposals.

Ausgrid provided analysis showing that narrowing the winter peak period to between

5:00PM and 7:00PM (as suggested by Figure 4-3) would result in unacceptable bill

impact for its time-of-use customers. This is because a narrower peak period would

necessitate a rise in tariffs in order to recover residual costs (we discuss this further

142



Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and ToU charging windows, 9 June 2016.


below).145 However, this first tariff statement provides Ausgrid the opportunity to

transition to the efficient peak window. We require Ausgrid to investigate the bill impact

of transitioning towards the 5:00PM to 7:00PM window with slightly wider intervals.146

Ausgrid can further mitigate the bill impact by making use of its tariff assignment policy

and developing opt in tariffs with narrower peak windows.

As noted above, Ausgrid's tariff statement proposal appeared to justify its peak period

on the basis that it reflects network congestion. We therefore assessed the tariff

statement proposal on this basis. In response to an information request, however,

Ausgrid explained that the recovery of residual costs influenced how it derived its

charging windows.147

Ausgrid stated, in theory, the peak period should coincide with the moment system

peak demand occurs. Prices in the peak period should equal LRMC, and prices

outside the peak period should equal zero (from a price signalling perspective).148 Strict

application of this efficient 'reference' tariff means recovering all residual costs through

the fixed charge. To mitigate the bill impact of the efficient tariff, Ausgrid proposed to

largely maintain the times of its charging windows as a transition. Wider peak charging

windows (compared to the reference tariff) as well as shoulder and off-peak windows

would enable Ausgrid to allocate some residual costs away from the fixed charge.149

We agree, in principle, with using charging windows to recover residual costs, and

hence mitigate the customer impact of transitioning to cost reflective tariffs.150

However, we do not consider Ausgrid provided sufficient evidence to show the

relationship between charging windows and residual costs. Ausgrid largely used

qualitative evidence to justify its proposal to use charging windows as a mechanism to

recover residual costs. In some cases, the evidence Ausgrid provided contradicted

information in its tariff statement proposal. For example, Ausgrid's proposed peak

tariffs exhibit much greater mark-ups over its shoulder and off peak rates compared to

Endeavour Energy and Essential Energy.151 On the other hand, Ausgrid expects to

recover a much smaller portion of residual costs through peak charges compared to

shoulder and off peak charges.152 It is, therefore, difficult to see the interactions

145

Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, pp. 23–

25. 146

For example, Ausgrid can investigate the bill impact of the following winter peak windows: 5:00PM–8:00PM or

4:00PM–7:00PM, and 4:00PM–8:00PM. Ausgrid can similarly investigate the impact of transitioning to shorter peak

periods in summer. 147


23. 148



26. 150

NER, cl 6.18.5(g) and (h). 151

For example, see AER, Issues paper: Tariff structure statement proposals: NSW electricity distribution network

service providers, March 2016, pp. 35–36. 152

Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 27.


between Ausgrid's proposed tariffs, including the residual costs they are supposed to

recover, and the length of the charging windows.

In its revised proposal, we require Ausgrid to provide quantitative evidence to more

clearly demonstrate the interaction between its recovery of residual costs and its peak,

shoulder and off peak times. In particular, we require Ausgrid to demonstrate how

amendments to the charging windows redistribute the recovery of residual costs and

how this, in turn, affects tariff levels.

Endeavour Energy

We are not satisfied Endeavour Energy's proposed times for its charging windows on

business days contribute to the achievement of compliance with the distribution pricing

principles. We do not consider Endeavour Energy achieved the appropriate balance

between greater cost reflectivity and customer ability to respond, for the following

reasons:

we consider Endeavour Energy's proposed times for the shoulder and peak periods

are too long and do not reflect the level of congestion in its network

we consider the times of peak hours on weekdays should be different between

summer and winter (we discuss this further in section 4.2.2)

we consider Endeavour Energy did not provide sufficient evidence and reasoning to

justify its method for determining the threshold between peak, shoulder and off

peak hours.

In its revised proposal, we require Endeavour Energy to:

amend its charging windows to better reflect network congestion (which Endeavour

Energy indicated in its tariff statement proposal is the primary driver of its charging

windows). We consider the peak period should be shorter than Endeavour

Energy's proposal, and peak times should differ between summer and winter.

Based on available evidence, we consider Endeavour Energy's peak hours occurs

approximately 3:00PM to 5:00PM in summer and 6:00PM to 8:00PM in winter.153 In

its revised proposal, Endeavour Energy may initiate the transition to more cost

reflective charging windows with longer peak hours, with the view of achieving

greater cost reflectivity in subsequent regulatory control periods.

provide evidence and reasoning to justify its method for determining the threshold

between peak, shoulder and off peak hours. In doing so, Endeavour Energy should

note our concerns with the 10 and 20 per cent thresholds, as well as seasonality

(we discuss both issues below and in section 4.2.2).


Endeavour Energy.

153

Endeavour Energy, RE: Endeavour - TSS info request no.1 - Load profiles and ToU charging windows, 10 June

2016.


Figure 4-4 summarises Endeavour Energy's proposed charging windows. The hours

for the peak, shoulder and charging windows are largely consistent with Endeavour

Energy's current charging windows.

Figure 4-4 Endeavour Energy's proposed charging windows

Source: Endeavour Energy, Tariff structure statement, 27 November 2015.

Note: Endeavour Energy’s ‘high’ and ‘low’ seasons apply only to the demand component of certain TOU tariffs.

The demand charges apply during peak hours.

Endeavour Energy stated it based the timing of peak, shoulder and off-peak periods

and its high and low seasons on historical peak demand at the total network level.

Endeavour Energy stated it is important that its time of use and seasonal definitions

are monitored to ensure that they continue to accurately reflect times of peak network

congestion.154

Endeavour Energy justified its peak and shoulder hours using the highest demand

intervals in recent years. Endeavour Energy normalised each point against the peak

demand interval for its year to account for year-on-year variations. Endeavour Energy

stated its peak period contains data points within 10 per cent of the peak demand for

each year. The shoulder period contains the data points between 10 per cent and 20

per cent of the peak demand interval for that year.155 Endeavour Energy presented its

analysis in Figure 4-5, which includes summer and winter data points.

154

Endeavour Energy, Tariff structure statement, 27 November 2015, p. 72. 155

Endeavour Energy, Tariff structure statement, 27 November 2015, p. 72.


AM

6 7 8 9 10 11 12

PM

1 2 3 4 5 6 7 8 9 10 11

Business

day

High, Low

Non-

business

High, Low

Business

day

High, Low

Non-

business

High, Low

Peak

Shoulder

Off peak

All other

tariffs

Residential

time of use


Figure 4-5 Endeavour Energy's peak period definition

Source: Endeavour Energy, Tariff structure statement, 27 November 2015, p. 73.

From the evidence in Figure 4-5, we consider Endeavour Energy should reduce the

number of hours in its peak period. It shows data points after approximately 6:00PM

appear noticeably lower than data points around 1:00PM, which is the threshold

between peak and shoulder periods. Figure 4-5 also suggests Endeavour Energy

should reduce the number of hours in its shoulder period.156

Further, Endeavour Energy's method of defining the peak period as those data points

within 10 per cent of the year's peak demand includes both summer and winter data in

the same analysis. We consider Endeavour Energy should assess summer and winter

demand data separately. As we discuss in more detail in section 4.2.2 below, there is a

clear difference in the levels and timing of peak demand during summer and winter

months. We therefore require Endeavour Energy to introduce different times in its

charging windows for different seasons.

Lastly, we require Endeavour Energy to provide more robust explanation as to why

they used the 10 per cent and 20 per cent thresholds to define peak and shoulder (and

by extension, off peak) hours. In particular, we require Endeavour Energy to clearly

demonstrate the link between its 10 per cent and 20 per cent thresholds and network

congestion.

We do not consider Endeavour Energy provided sufficient explanation as to why data

points within 10 per cent of a particular year's peak demand should define the peak

period. For example, why is 10 per cent a more appropriate threshold for the peak

156

Figure 4-5 suggests the shoulder period should begin at 10:00AM, rather than 7:00AM. There is a single data

point within the 10 and 20 per cent band at 8:00AM, which appears to be an outlier compared to all the other data

points.


period than, say, five percent or one per cent? Similarly, Endeavour Energy did not

appear to explain why the 10 to 20 per cent range is an appropriate threshold to define

the shoulder period.

Endeavour Energy's tariff statement proposal stated that its peak period 'accurately'

targets the top 10 per cent of demand periods. Similarly, its shoulder period 'accurately'

targets demand periods within the 10 and 20 per cent band.157 However, the tariff

statement proposal does not appear to provide sufficient explanation on these

thresholds' link with network congestion. We understand it is absolute demand levels

that cause network congestion and, in turn, informs distributors' investment decisions.

We are not convinced that normalised demand data signals network congestion.

Essential Energy

We are not satisfied Essential Energy's proposed times for its charging windows on

business days contribute to the achievement of compliance with the distribution pricing

principles. We are not satisfied that Essential Energy has achieved the appropriate

balance between greater cost reflectivity and customer ability to respond, for the

following reasons:

Essential Energy’s network does not appear to peak on summer mornings (see

Figure 4-7)

it is unclear whether the magnitude of Essential Energy’s winter morning peak

warrants an additional peak charging window (see Figure 4-7)

we consider a single evening peak window will make it easier for customers to

move their consumption to shoulder/off-peak periods

there appears to be a seasonal component to the demand profiles in Essential

Energy's network (we discuss this further in section 4.2.2).

In its revised proposal, we require Essential Energy to:

amend its charging windows to better reflect network congestion (which Essential

Energy indicated in its tariff statement proposal is the primary driver of its charging

windows). Specifically, we require Essential Energy to implement a single evening

peak window. We also require Essential Energy to extend its off peak hours during

weekdays.

o Based on available evidence, we consider Essential Energy's off peak hours

can extend to 9:00AM on weekdays. In its revised proposal, Essential

Energy may initiate the transition to more cost reflective charging windows,

with the view of achieving greater cost reflectivity in subsequent regulatory

control periods.

explain how it determined the thresholds between its peak, shoulder and off peak

hours.

157

Endeavour Energy, Tariff structure statement, 27 November 2015, p. 72.



Essential Energy.

Figure 4-6 summarises Essential Energy's proposed charging windows. The hours for

the peak, shoulder and charging windows are largely consistent with Essential

Energy's current charging windows.

Figure 4-6 Essential Energy's proposed charging windows

Source: Essential Energy, Tariff structure statement, 27 November 2015.

Essential Energy proposed morning and evening peaks (7:00AM–9:00AM, and

5:00PM–8:00PM) during weekdays. In its tariff statement proposal, Essential Energy

appeared to justify its peak period on the basis that it reflects network congestion (see

Figure 4-7).158 Essential Energy's tariff statement proposal did not appear to explain

how it determined the thresholds between peak, shoulder and off peak hours.

Figure 4-7 Essential Energy average daily summer and winter system

demand 2014–15 (MW)

Source: Essential Energy, Tariff structure statement, 27 November 2015, p. 27.

We consider the evening window to be more cost reflective, as Essential Energy's

network peaks in the evening at both a residential and total system level, and in both

summer and winter.

158

Essential Energy, Tariff structure statement, 27 November 2015, pp. 26–27.


AM

6 7 8 9 10 11 12

PM

1 2 3 4 5 6 7 8 9 10 11

Weekday NA

Weekend NA

Peak

Shoulder

Off peak

All tariffs


However, we are not satisfied a morning peak window is cost reflective. Firstly, there

does not appear to be a morning peak in summer. Demand in summer rises steadily

from a low at about 3:30AM until the system peak demand at around 5:30PM.

While there is an increase in demand between 7:00AM–9:00AM in winter, it is

questionable whether the magnitude of that demand warrants an additional morning

peak period. Networks set capacity levels to meet the peak demand. Figure 4-7 shows

the higher evening peak demand is more likely to be contributing to network

congestion in Essential Energy's network, and thus network expenditure.

Further, Figure 4-7 shows that the 7:00AM–9:00AM period during weekdays has lower

demand on average than the ‘evening peak’ on weekends (around 5:00PM–

7:00PM).159 Since Essential Energy defines weekends as off-peak all day, this implies

the off-peak period can extend to 9:00AM (at least) on weekdays.

Overall, we are not satisfied that two peak charging windows (morning and evening)

applicable year round is cost reflective. As discussed above, there is evidence

Essential Energy can extend its off-peak hours for weekdays (and hence shorten its

shoulder and/or peak hours). In addition, two peak charging windows (morning and

evening) provide:

an increased level of complexity with limited efficiency gains (see cost reflective

discussion above), and

reduced opportunity for customers to respond to changes to their tariff via their

usage decisions

While there may be some merit to maintaining consistency with current tariff structures

as Essential Energy has done, we are not satisfied this is sufficient. Firstly we consider

two demand charging windows increase complexity.160 Secondly, the two peak

charging windows provide customers with a reduced opportunity to move their usage

outside of peak and shoulder windows.161 In our view a single peak window will be

simpler for small customers to understand and manage their usage in response to

network peak demand.

Essential Energy indicated that amending its charging windows would be costly to

implement. Essential Energy stated that the meters in its network are of a nature that

any changes to the time of use profiles would require a manual update for each meter.

This would require a site visit to each installed meter to complete these program

updates. Essential Energy stated the 312,000 meters are widely distributed across its

159

In winter 2014–15, for example, the average weekend experienced its highest demand levels of 1,879 MW at

approximately 6:30PM. In comparison, the peak day of 2014–15 (as opposed to the average weekday of 2014–15)

experienced its highest morning demand level of 1,821MW at approximately 9:30AM. Essential Energy, RE:

Essential - TSS info request no.1 - Load profiles and ToU charging windows, 30 May 2016. 160

NER, cl.6.18,5(h)(3). 161

NER, cl.6.18,5(i).


network and travel time will vary greatly between each site. This would be extremely

difficult to execute in a timely manner and would involve significant cost.162

Essential Energy did not provide an estimate of these costs. Hence, it is unclear

whether such costs would inhibit application of charging windows that are more cost

reflective.163 In its revised proposal, we expect Essential Energy to provide an estimate

of these costs, including inputs and assumptions used to derive the estimate. Essential

Energy should also consider whether it could reduce costs by incorporating the meter

updates with ongoing activities (such as regular meter reads), rather than proposing it

as a discrete one-off project.

4.2.2 Seasonality

As we noted earlier, the aim of the pricing rules is to encourage more cost reflective

pricing.164 If there is evidence that demand patterns differ between seasons, we

consider differentiating charging windows by season would contribute to the

achievement of compliance with the distribution pricing principles.

Ausgrid

We are satisfied Ausgrid's introduction of seasonality in its charging windows

contributes to the achievement of compliance with the distribution pricing principles. As

we discussed in section 4.2.1, there is evidence that the pattern and levels of network

congestion differs between summer and winter.165

However, we do not agree with the times Ausgrid allocated for peak, shoulder and off

peak periods, which is largely consistent with its current charging windows (see section

4.2.1). We consider the introduction of seasonality is 'in name only'. There is no real

movement towards greater cost reflectivity since the times of the charging windows are

still the same across summer and winter. Further, Ausgrid's indicative tariff levels for its

time of use and demand tariffs appear to be the same for winter and summer.166

Customers will still face limited opportunity to shift usage to off peak times, despite

Ausgrid providing evidence that narrower peak times may be justified, especially in

winter.

As we discussed in section 4.2.1, we require Ausgrid to amend the times of its peak,

shoulder and off peak hours to reflect different patterns of network congestion

according to the season.

162

Essential Energy, Response: TSS information request no. 1: Load profiles and charging windows for TOU tariffs, 9

June 2016, p. 3. 163

NER, cl 6.18.5(f)(1). 164

NER, cl 6.18.5(a). 165

Ausgrid, Tariff structure statement, 27 November 2015, pp. 47–48. 166

Ausgrid, Tariff structure statement: Appendix 10: Indicative annual distribution use of system pricing schedules, 27

November 2015.


Origin expressed concern about Ausgrid's proposal to include seasonality in its

charging windows. Origin considered seasonality will hinder the ability of residential

customers to understand price signals. Origin stated it appreciated the intent of

seasonal demand signals, but considers multiple charges will not help customers.167

We agree seasonality adds some complexity to tariff structures. However, we have not

seen evidence that seasonality will hinder the ability of residential customers to

understand price signals.

We also note that these signals only apply to customers assigned to time-of-use tariffs

(not block or flat rate tariffs). This means the introduction of seasonality to customers

would be gradual over time.

Endeavour Energy

With respect to seasonality, we are not satisfied Endeavour Energy's proposed

charging windows contribute to the achievement of compliance with the distribution

pricing rules. Given evidence that seasonality affects demand profiles, we do not

consider the proposed charging windows reflect network congestion across different

seasons of the year.ge, We, therefore, require Endeavour Energy to amend the times

of its charging windows having regard to the different levels of congestion in different

seasons. In redefining the times of its charging windows by season, Endeavour Energy

should have regard how it determined the thresholds between peak, shoulder and off

peak hours (see section 4.2.1).

Figure 4-8 shows the highest demand intervals in Endeavour Energy's network from

the past few years in the months that they occurred. These are the same data points

as those in Figure 4-5. Using Endeavour Energy's own definition of the peak and

shoulder periods (see section 4.2.1), Figure 4-8 suggests Endeavour Energy should

not include a peak window during the winter months.168 Although, as we discussed in

section 4.2.1, we do not consider Endeavour Energy adequately explained how it

determined the thresholds between peak, shoulder and off peak periods.

167

Origin, Submission: Networks NSW tariff structure statements, 10 May 2016, p. 2. 168

That is, all of the demand intervals in the winter months are in the range of 10 to 20 per cent of the peak demand

for the year. We discussed this in section 4.2.1.


Figure 4-8 Distribution of highest demand intervals by month

Source: Endeavour Energy, Tariff structure statement, 27 November 2015, p. 73; Endeavour Energy, RE: Endeavour

- TSS info request no.1 - Load profiles and ToU charging windows, 10 June 2016.

We consider Endeavour Energy's peak hours of 1:00PM to 8:00PM applicable all year

on business days do not reflect the level of congestion in the network. Figure 4-9

shows the average daily demand profile on Endeavour Energy's network for summer

and winter. It shows that network demand reaches its highest level at different times in

different seasons: approximately 3:00PM in summer and approximately 6:30PM in

winter.

It also shows Endeavour Energy's network experiences much narrower peaks in winter

evenings compared to summer evenings (similar to Figure 4-7 for Essential Energy).169

For example, demand levels in winter between 1:00PM and 5:00PM are below the

levels seen in the 7:00AM to 1:00PM shoulder period.170 This suggests the peak period

should not begin until 5:00PM in winter.171

169


2016. 170

This applies when comparing the same data type: that is, when comparing weekday with weekday, or weekend

with weekend. 171

Similarly, demand after 5:00PM in summer are approximately the same levels seen in the 7:00AM to 1:00PM

shoulder period (in summer). This suggests the peak period should end at approximately 5:00PM in summer.

0.75

0.80

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ise

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man

d

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LowHigh (HS)(Summer)

Data: FY 12/13, 13/14 and 14/15

High(Winter)

Low HS


Figure 4-9 Endeavour Energy average daily summer (2014–15) and

winter (2015) system demand (MW)

Source: Endeavour Energy, RE: Endeavour - TSS info request no.1 - Load profiles and ToU charging windows, 10

June 2016.

Essential Energy

With respect to seasonality, we are not satisfied Essential Energy's proposed charging

windows contribute to the achievement of compliance with the distribution pricing rules.

Given evidence that seasonality affects demand profiles, we do not consider the

proposed charging windows reflect network congestion across the different seasons of

the year. We, therefore, require Essential Energy to amend the times of its charging

windows having regard to different levels of congestion in different seasons. In

redefining the times of its charging windows by season, Essential Energy should have

regard to how it determined the thresholds between peak, shoulder and off peak hours

(see section 4.2.1).

Figure 4-7 shows that Essential Energy's network peaks at different times:

approximately 5:30PM in summer and approximately 6:30PM in winter. Further, Figure

4-7 shows the shape of the evening peak in winter is narrower compared to the

summer evening peak. This may suggest that the peak period for summer should be

slightly wider for summer than in winter.

4.2.3 Charging windows for weekends/non-business days

We do not consider Ausgrid's and Endeavour Energy's proposed application of

shoulder rates on weekends contributes to the distribution pricing principles. We have

not seen evidence that charging shoulder rates on weekends is cost reflective in

Ausgrid's and Endeavour Energy's network.

We discuss these considerations below.

Ausgrid

We are not satisfied Ausgrid's application of shoulder charging windows on non-

business days contributes to the achievement of compliance with the distribution

pricing principles. We require Ausgrid to apply off peak rates for all hours of weekends

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0

10

:00

11

:00

12

:00

13

:00

14

:00

15

:00

16

:00

17

:00

18

:00

19

:00

20

:00

21

:00

22

:00

23

:00

De

man

d, M

W

EE Total (Summer 14/15)

Summer Wkday Summer Wkend Summer Peak Day

1,000

1,500

2,000

2,500

3,000

3,500

0:0

0

1:0

0

2:0

0

3:0

0

4:0

0

5:0

0

6:0

0

7:0

0

8:0

0

9:0

0

10

:00

11

:00

12

:00

13

:00

14

:00

15

:00

16

:00

17

:00

18

:00

19

:00

20

:00

21

:00

22

:00

23

:00

De

man

d, M

W

EE Total (Winter 15)

Winter Wkday Winter Wkend Winter Peak Day


(and public holidays). Otherwise, we require Ausgrid to explain in greater detail its

rationale for applying shoulder rates to customers on non-business days. In doing so,

Ausgrid should have regard to how it determined the thresholds between peak,

shoulder and off peak hours and the recovery of residual costs (see section 4.2.1).

Ausgrid designated the period between 7:00AM and 10:00PM of weekends and public

holidays to be shoulder period for all of its time of use tariffs (see Figure 4-1). Figure

4-10 shows it experiences significantly lower levels of demand on weekends.172 This

suggests off peak pricing should apply to all hours of weekends.

Figure 4-10 Ausgrid average daily summer (2015–16) and winter (2015)

system demand (MW)

Source: Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and ToU charging windows, 2 June

2016.

In response to an information request, Ausgrid clarified it included shoulder charging

windows on weekends to recover residual costs (see also section 4.2.1). Ausgrid

explained that including shoulder and off peak windows (rather than just one window

outside of peak times) is justifiable if energy consumption in the shoulder period is

more inelastic than consumption in the off peak period. In that case, the welfare gain

from the lower off peak price would be higher than the welfare loss from the higher

shoulder price.173 Ausgrid stated:174

The inclusion of weekends in the shoulder period definition may also be

justified on economic grounds given that it is likely that residential energy

consumption may be more inelastic at these times, particularly during the

summer and winter months of the year when households are likely to place a

high value on their electricity use for cooling and heating purposes.

It does not appear Ausgrid provided evidence regarding this assertion, particularly for

the time period it proposed (7:00AM to 10:00PM). Further, Ausgrid did not justify its

172

For example, the highest levels of demand on the average summer weekend is approximately 3,082 MW at around

5:00PM. By comparison, demand reaches approximately 3,300 MW at around 6:00AM on summer weekdays

(which Ausgrid designated as off peak). 173


Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 29.

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

De

man

d M

W

Eastern Standard Time of Day

Summer 2015/16

Peakday 1 Peakday 2 Weekday Weekend

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

De

man

d M

W

Eastern Standard Time of Day

Winter 2015

Peak Day Weekday Weekend


proposal to include the same shoulder periods for non-residential customers. Load

profiles of such customers in Ausgrid's network are flat on weekends with much lower

demand levels compared to business days.175 Indeed, Ausgrid currently has off-peak

rates on weekends for its medium and large business customers (such customers

have annual consumption greater than 40MWh).176

Endeavour Energy

We are not satisfied Endeavour Energy's application of shoulder charging windows for

residential customers on non-business days contributes to the achievement of

compliance with the distribution pricing principles. We require Endeavour Energy to

apply off peak rates for all hours of weekends (and public holidays). Otherwise, we

require Endeavour Energy to explain in greater detail its rationale for applying shoulder

rates for residential customers on non-business days. In doing so, Endeavour Energy

should have regard to how it determined the thresholds between peak, shoulder and

off peak hours (see section 4.2.1).

Endeavour Energy proposed to apply off peak rates all day on non-business days for

its non-residential time of use and demand tariffs. Figure 4-9 shows average demand

levels on weekends are noticeably lower than weekdays. Hence, we consider applying

off peak rates for the entire weekend for its non-residential time of use and demand

tariffs is cost reflective.177

On the other hand, Endeavour Energy designated the period between 7:00AM and

10:00PM of non-business days to be shoulder period for its residential time of use tariff

(see Figure 4-4). We consider this is inconsistent with Endeavour Energy's

statement:178

… we do not believe that separating load profiles by customer type is relevant

to the calculation of charging windows that are designed to target demand at

the network level. To separate peak demand periods by customer type would

suggest that Endeavour Energy builds a separate network to supply the loads

of each different customer class. This is clearly not the case in a shared

network.

It is therefore unclear why Endeavour Energy does not apply off peak rates all

weekend to all of its customers, including residential customers.

Essential Energy

175

Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and ToU charging windows, 2, 8 and 9 June

2016. 176

Ausgrid, Initial pricing proposal, May 2015, p. 14. 177

NER, cl 6.18.5(a). 178

Endeavour Energy, Re: TSS info request no. 1: Load profiles and TOU charging windows: Response to Q1, 31

May 2015.


Essential Energy defined all hours of weekends as off peak. We are satisfied this


Figure 4-7 shows the level of demand (and, therefore, congestion) in Essential

Energy's network is lower on weekends than it on weekdays. We consider applying off

peak tariffs on weekends is cost reflective and enables customers to mitigate the

impact of changes in tariffs through their usage decisions.179 For example, it would

enable households to transfer the use of some appliances from weekdays to

weekends.

4.2.4 Harmonisation of charging windows

We acknowledge submissions from some stakeholders advocating the benefits of

harmonising charging windows. However, we are not convinced the benefits are

greater than the costs of harmonising charging windows where the pattern of network

congestion may differ between distribution networks. We consider the NSW distributors

should amend their charging windows so they are more cost reflective (that is, they

better reflect the level of congestion in their respective networks).180 We consider this

would contribute to the achievement of compliance with the distribution pricing

principles. If the load profile is different on each network, it follows that cost reflective

charging windows would also differ. However, we have not received evidence that this

is the case, and the times for congestion appear similar across networks (see sections

4.2.1 to 4.2.3). This would mean the NSW distributors should more closely align their

charging windows.

EnergyAustralia, the Energy and Water Ombudsman NSW (EWON), the Council of

Social Service NSW (NCOSS) and the Public Interest Advocacy Centre (PIAC)

expressed concern regarding the different charging windows in the NSW distributors’

tariff structure statement proposals. They submitted consistency is desirable at this

stage to reduce complexity and implementation costs. 181

Stakeholder submissions did not quantify or discuss in great detail the savings

harmonisation would produce. It is also unclear to what extent retailers can pass such

savings on to consumers. Endeavour Energy also pointed out that retailers have

already invested in systems to manage multiple charging windows in different networks

in the National Electricity Market. It is not apparent that the stranding of this sunk

investment will result in savings to customers.182

179

NER, cll 6.18.5(f), (g) and (h)(3). 180

Otherwise, the NSW distributors should provide detailed explanations for departing from cost reflectivity. 181

EnergyAustralia, Submission: Issues paper: Tariff structure statement proposals: NSW, 6 May 2016, pp. 2–9;

EWON, Submission: AER issues paper, 3 May 2016, p. 4; NCOSS, Submission: AER issues paper on the NSW

tariff structure statements, May 2016, pp. 8–9; PIAC, Submission: Response to the AER’s issues paper: NSW

TSS, 6 May 2016, p. 3. 182


2016.


5 Tariff levels

The distribution pricing principles require each tariff to be based on the long run

marginal cost of providing the service to which it relates to the retail customers

assigned to that tariff.183 The Rules define long run marginal cost as the cost of an

incremental change in demand over a period of time in which all factors of production

can be varied.184 This is also known as the forward-looking cost. This chapter sets out

our considerations on the NSW distributors' approaches to calculating long run

marginal cost, passing those costs through to customers and dealing with residual

costs.

5.1 Calculation of long run marginal cost

When tariffs accurately reflect the marginal or forward-looking cost of increasing

demand, consumers may make informed choices about their electricity usage. Tariff

reform seeks to promote additional investment in the network by distributors only when

consumers value increased demand more than the cost of delivering the additional

network capacity necessary to meet that demand.

The estimation of long run marginal costs involves three key steps, which are to:

choose the overall approach (the two principal choices are the Turvey approach

and the average incremental cost approach)

define what costs are considered ‘marginal’ vs. what costs are considered

‘residual’, and

define what timeframe is considered the ‘long run’.

We consider elements of the NSW distributors' long run marginal cost methodology

contribute to compliance with the distribution pricing principles better than other

elements of their methodology. That said, taken as a whole, on balance, we are

satisfied that the distributors' proposed methodology sufficiently complies with the

distribution pricing principles for this initial round of tariff reform.

Accordingly, we do not require the NSW distributors to make changes to their

methodologies in their revised proposals. Nonetheless, we elaborate here on the

elements of their methodologies we consider are less reflective of the distribution

pricing principles. We do so to provide guidance to the NSW distributors, and the

industry more generally, on our views on the direction the industry should be heading

in in order to maintain compliance with the distribution pricing principles in the future.

Tariff reform is a long tern project. Accordingly, in each round of tariff structure

statements, we envisage distributors would likely need to propose additional reforms in

order to be compliant with the rules. In the second round of tariff structure statements,

183

NER, cl. 6.18.5(f). 184

NER, Chapter 10—Glossary.


we encourage the NSW distributors to make further improvements and refinements to

their long run marginal cost methodologies.

We consider that the choice of overall approach or methodology proposed by each

NSW distributor—the average incremental cost approach—is in accordance with the

distribution pricing principles. On the other hand, the elements of their methodology

which we consider could be improved in the future to better promote the distribution

pricing principles are:

The NSW distributors' definition of 'marginal' costs does not capture all major types

of marginal costs as it excludes replacement capital expenditure and related costs

The NSW distributors' timeframe over which they forecast costs is too short to be

considered 'long term'

Definition of marginal costs

The definition of long run marginal costs in the Rules is the cost of an incremental

change in demand over a period of time in which all factors of production can be

varied.185

In the long run, the level of capacity in a distribution network is a factor of production

that can be varied. When assets come to the end of their useful life, distributors have a

choice of maintaining their current level of capacity, increasing capacity or decreasing

capacity, depending on demand and use of the network. Distributors should not adopt

a default position of maintaining existing capacity levels, especially where existing

networks have spare capacity and where there are changing patterns of use. To

promote network capacity in the long run being at a level consumers' value, we

consider replacement capital expenditure (and associated operating expenditure)

should be included within long run marginal cost estimates.

This differs from the approach that most distributors have reflected in their proposals

for this first round of tariff structure statements, which have typically excluded

replacement capex from long run marginal cost estimates. The NSW distributors'

proposals are no different.186 The only exception appears to be one of the Queensland

distributors who has included a small portion of replacement capex within the

estimation of long run marginal cost.187 Distributors generally base their LRMC

estimates on augmentation capex alone on the basis that this is the only ‘growth’

capex. However, this reasoning overlooks the point made above that the level of

network capacity (whether to increase, maintain or decrease) is not fixed in the long

run.

185

NER, Chapter 10—Glossary. 186

Ausgrid, Tariff structure statement, 27 November 2015, p. 40; Endeavour Energy, Tariff structure statement, 27

November 2015, p. 68; Essential Energy, Tariff structure statement, 27 November 2015, p.57; Houston Kemp,

Estimation of long run marginal cost and other concepts related to the distribution pricing principles - prepared for

Essential Energy, November 2015, pp.11-12. 187

Ergon Energy, Tariff structure Statement 2018–2020 appendices, 27 November 2015, p.25.


We encourage the NSW distributors, along with other distributors, to review this

element of their long run marginal cost methodology in the lead-up to the next round of

tariff structure statements.

Definition of long run

As noted above, the definition of long run marginal costs in the Rules is the cost of an

incremental change in demand over a period of time in which all factors of production

can be varied.188 And in the long run, the level of capacity in a distribution network is

variable. Accordingly, theoretically the 'long run' would match the life of the assets.

Some distribution network assets have very long lives (e.g. in excess of 60 years).

However, it would likely be impractical to produce accurate forecasts over such a long

horizon.

Distributors have typically used timeframes of between 10 and 40 years to estimate

long run marginal costs.189 We consider there is no clear correct timeframe, and we are

satisfied that a range of timeframes would be compliant with the rules. However, the

timeframe must be long enough to allow a significant number of factors of production to

change—and a key factor of production is the level of capacity the network is built to

withstand. The timeframes proposed by distributors outside NSW is more in line with

the long lives of network assets. Endeavour and Essential appear to have proposed

timeframes of around or less than 5 years.190 This is out of step with the rest of the

industry and appears too short to allow a significant number of factors of production to

change (i.e. the capacity of the network). That is, the timeframes over which

Endeavour and Essential have forecast their costs do not reflect the 'long term' as well

as most other distributors' proposals.

As noted above, for this first round of tariff structure statements we do not require the

NSW distributors to change their long run marginal cost methodologies to comply with

the rules. However, we encourage the NSW distributors to review this element of their

long run marginal cost methodology in the lead-up to the next round of tariff structure

statements.

5.2 Recovery of residual costs

Not all of a distributor's costs are forward looking and variable. Costs not captured by

long run marginal cost estimates are called residual costs. Together, long run marginal

costs and residual costs form a distributor's total costs. The Rules require total costs

be recovered in a way which minimises distortions to price signals for efficient usage

188

NER, Chapter 10—Glossary. 189

Ausgrid, ActewAGL, SAPN, CitiPower, Powercor, AusNet Services and United Energy 190

HoustonKemp, Estimation of long run marginal cost and other concepts related to the distribution pricing principles

- prepared for Essential Energy, November 2015, pp.11-12; HoustonKemp, Estimation of long run marginal cost

and other concepts related to the distribution pricing principles - prepared for Endeavour Energy, November 2015,

pp.11-12.


resulting from tariffs reflecting long run marginal cost.191 In this context, non–

distortionary tends to mean unresponsive to customer usage.

In this section, we assess the NSW distributors' proposals on recovery of residual

costs through:

Fixed charges—The NSW distributors' have proposed to moderately increase their

fixed charges in order to recover a greater portion of their residual costs through

fixed charges

Usage rates—The NSW distributors' proposals for declining block tariff structures

rests on their view on how to recover residual costs. The design of their time-of-use

usage rates also appears connected to their residual cost recovery methodology, at

least for Ausgrid.

Re-balancing towards fixed charges

We are satisfied that the moderate increases in fixed charges proposed by the NSW

distributors contributes to compliance with the distribution pricing principles. This is

because we consider this approach appropriately balances the distribution pricing

principles to:

Recover residual costs in a manner which minimises distortions to efficient price

signals.192

Take into account the impact on customers of tariff changes from year to year

including the desirability for a reasonable transition period towards more cost

reflective tariffs.193

A significant proportion of a distributor’s revenue requirement is made up of the fixed

capital costs of previous investments in network assets. These fixed costs are not

affected by current and future consumption decisions. Therefore, from an economic

perspective, fixed costs do not provide a basis for signalling the costs of network use.

The relevant costs to signal the costs of network use are marginal (forward looking)

costs. However, in the case of natural monopolies, pricing based on marginal cost

alone does not provide sufficient revenue to recover a distributor’s total efficient costs.

There are fixed (or “residual”) costs which must be recovered by other means, and the

key economic consideration in the rules is reflected in the distribution pricing principle

that these residual costs are recovered in a manner which minimises distortions to

efficient price signals.194 That is, minimises distortions compared with the situation

where network prices are based on marginal cost alone. Setting usage charges

significantly higher than marginal cost to recover all or most residual costs would be

expected to distort consumption decisions because consumers are facing usage

191

NER, cl. 6.18.5(g)(3). 192

NER, cl. 6.18.5 (g). 193

NER, cl. 6.18.5(h)(1). 194

NER, cl. 6.18.5 (g).


charges which are too high. In contrast, recovering a greater proportion of residual

costs through fixed charges is expected to lead to smaller distortions, because by their

nature, the level of fixed charges has less impact on consumption decisions.

Accordingly, the NSW distributors’ modest re-balancing towards fixed charges is

consistent with the efficiency considerations in the rules. There is a balance here as

excessive fixed charges would likely not be consistent with the customer impact

distribution pricing principle, especially where increases in fixed charges were

significant and occurred over a short period of time.195 We are satisfied that the NSW

distributors' proposal reflects an appropriate balance between these principles.

We consider the level of revenue in the applicable distribution determination, and

changes in the level of total revenue between distribution determinations, are relevant

considerations for the AER to take into account in assessing whether a distributor's

tariff structure statement proposal contributes to compliance with the customer impact

distribution pricing principle. 196 This is because the customer impact principle refers to

the impact on customers from changes in tariffs from one regulatory year to the next—

and changes in tariffs between years are driven by both changes in total revenue and

changes in tariff structures.

The NSW distributors’ proposed tariff re-balancing is impacted by our recent

distribution determinations which significantly reduced the total revenue requirements,

compared with the previous regulatory period. While the tariff structure statement

determines the structure of tariffs, the revenue determination is also important as the

allowed revenue sets the level of prices. So any relative re-balancing between tariff

components due to changes in tariff structures, or re-balancing within the same tariff

structure will have either a bigger or smaller impact on customers depending on the

total revenue to be recovered from customers. The recent revenue determinations for

the NSW distributors significantly reduced the allowed revenue. This means that,

despite the re-balancing towards fixed charges, fixed charges will not be significantly

higher than they were in the previous regulatory control period. We consider this

means the re-balancing will have less of an impact on customers, than if the re-

balancing occurred at a time when revenue was not falling or was increasing. A time

series of the fixed charges for residential customer on the NSW distributors' declining

block tariffs is displayed in the table below.

Table 5-1 NSW residential declining block tariffs (nominal, $)—

Historical, current and forecast

2013-14 2014-15 2015-16 2016-

17197

2017-18 2018-19

195

NER, cl. 6.18.5(h)(1). 196

NER cl 6.18.5(h) 197

The recent undertaking for Ausgrid and Endeavour for 2016-17 prices held prices constant in real terms. The CPI

increase was 1.51% on the 2015-16 prices. Therefore the proposed prices for Ausgrid and Endeavour Energy in

this table will not apply.


Ausgrid

Fixed charge ($/year) 142.17 145.71 119.54 122.53 125.60 128.74

Block 1 (c/kWh) 12.915 12.86 10.81 11.05 11.32 11.6

Block 2 (c/kWh) 15.375 13.96 10.52 8.72 8.89 8.97

Block 3 (c/kWh) 19.475 14.96 10.27 8.22 8.35 8.35

Simple average (c/kWh)

15.92

13.93

10.53

9.33

9.52

9.64

Endeavour Energy


Block 1 (c/kWh) 10.8934 10.8934 9.7212 9.96 9.91 9.74

Block 2 (c/kWh) 14.5818 12.4941 9.1315 9.35 9.12 8.71

Block 3 (c/kWh)

8.0407 8.23 7.90 7.38

Simple average (c/kWh)

12.74

11.69

8.96

9.18

8.98

8.61

Essential Energy


Block 1 (c/kWh) 16.8301 16.1353 9.4654 10.355 10.6637 11.0534

Block 2 (c/kWh) 16.8301 16.1353 9.1474 9.9595 10.1876 10.5506

Block 3 (c/kWh) 16.8301 16.1353 8.8295 9.5676 9.7493 10.0604

Simple average (c/kWh) 16.8301 16.1353 9.15 9.96 10.20 10.55

Source: Ausgrid tariff structure statement proposal; Endeavour Energy tariff structure statement proposal; Essential

Energy tariff structure statement proposal; AER analysis

After factoring in the re-balancing, the NSW distributors’ proposed fixed charges for

residential customers at the end of the tariff structure statement period (2018-19)

compared to current 2015-16 levels would see these increase by 8 per cent for

Ausgrid, 7 per cent for Endeavour Energy, and 18 per cent for Essential Energy.

However, compared to the previous regulatory period (2013-14 and 2014-15) the fixed

charge is lower for all households except for Essential Energy’s customers. In 2018-19

compared to 2013-14:

Ausgrid’s fixed charge is 8 per cent lower in nominal terms, and 19 per cent lower

in real terms,

Endeavour Energy’s fixed charge is constant in nominal terms, and 11 per cent

lower in real terms

Essential Energy’s fixed charge is 9 per cent higher in nominal terms, and 3 per

cent lower in real terms.


The above calculations are based on the NSW distributors’ indicative tariff schedules

included within their tariff statement proposals. While these schedules are non-binding,

the distributors must justify any significant departures from these indicative schedules

in their annual pricing proposals.198 Further, the distributors’ also included a re-

balancing constraint formula within their tariff statement proposals which will be binding

on annual pricing proposals.

For example, Endeavour Energy’s tariff statement proposal contains a tariff re-

balancing constraint formula that limits increases in any tariff component (e.g. fixed

charges) to the greater of:

The average annual price movement plus 2.5 per cent

The rate of inflation199

Ausgrid’s and Essential Energy’s proposals contain similar tariff re-balancing

constraints.200

We note that the Rules set out the side constraints on tariffs classes for standard

control services.201 This constraint allows for an annual adjustment to the weighted

average tariff class within the regulatory period of CPI-X+2 per cent. This is a much

looser constraint than that proposed by the distributors as it applies to the whole tariff

class. This means that any component of any tariff within that class can be adjusted by

any amount as long as the weighted average of the whole tariff class only increases by

CPI-X+2 per cent. The constraint proposed by the NSW distributors is a much tighter

constraint as it applies to each tariff component of each tariff. The Rules require

distributors to consider the impact on customers of changes in tariffs from one

regulatory year to the next, and permits distributors to address this customer impact in

several ways including incorporating a reasonable transition path towards more cost

reflective tariffs. The NSW distributors’ proposed re-balancing constraint appears to be

part of the way the distributors are seeking to address the customer impact principle.

We consider this is a reasonable approach to address the customer impact principle,

subject to the comments below.

This limit is reflected in the moderate fixed charge increases in their indicative pricing

schedules. However, the NSW distributors sought review of our distribution

determinations to the Australian Competition Tribunal. On 26 February 2016, the

Tribunal decided to remit the decisions back to the AER to be re-made, particularly in

relation to the opex allowance, return on debt allowance, and tax allowance (gamma).

The AER has sought judicial review of the Tribunal’s decisions. As a result of the

appeals processes, there is uncertainty about the prices NSW consumers will pay in

198

NER, cl.6.18.2(b)(7A). 199

Endeavour Energy, Tariff structure statement, 27 November 2015, p.38 200

Essential Energy, Tariff structure statement, 27 November 2015, p.66; Ausgrid, Tariff structure statement, 27

November 2015, p.15 201

NER, cl.6.18.6.


the future, meaning, electricity prices in NSW may be different to the tariffs in the

indicative tariff schedules.

If the AER is successful in the appeals process—that is, if allowed revenue remains at

the level from the AER’s distribution determinations—then we have no concerns with

the NSW distributors’ proposed re-balancing formula, and we would expect the re-

balancing of fixed charges in the annual pricing approval processes to be similar to that

contained in the NSW distributor's indicate tariff schedules.

If the AER is unsuccessful in the appeals process and all foregone revenue is

recovered in the final year of the current regulatory period—the above re-balancing

constraint may be ineffective in moderating increases in fixed charges. This is because

the “average annual price movement plus 2.5 per cent” may need to be quite high in

order to recover all foregone revenue in one year. In this situation, it is likely however

that there will be smoothing of the recovery of revenue into the next regulatory period.

We understand the NSW distributors have submitted a rule change proposal to the

AEMC to enable this result.

At this stage, we do not require the NSW distributors to amend their proposed re-

balancing constraint formula. However, we will continue to monitor the upcoming rule

change process concerning the smoothing of revenue, and will take into account any

relevant developments in making our final tariff structure statement decision.

Residual cost recovery and declining block tariffs structures

As discussed in chapter 4 Tariff Structures we are not satisfied that the distributors'

proposal that the recovery of residual costs through the first block of the declining block

tariff contributes to the achievement of compliance with the pricing principles. This

section discusses this in more detail.

We are not satisfied that the recovery of residual costs through the first block of

consumption contributes to the achievement of compliance with the distribution pricing

principles, in particular the NPO, that this is an efficient recovery of costs. This is

because we are not convinced that applying the first block to low consumption

household, along with higher consumption customers, reflects the distributors' costs of

providing direct control services to these retail customers. We are not convinced that

consumption in the first block is less price sensitive than consumption in the second

and third blocks. We also consider the recovery of more residual costs through the

fixed charge and the first block does not contribute to achievement of compliance with

the distribution pricing principle regarding a customer's ability to mitigate tariff impacts

through changing their usage.202

All of the NSW distributors proposed a declining block tariff for their residential

customers. Endeavour Energy and Essential Energy proposed that a declining block

tariff structure spreads the recovery of residual costs between the fixed charge and the

202

NER, cl.6.18.5(h)


low consumption block usage charge (i.e. the first consumption block). They proposed

this is an efficient way to recover residual costs as they considered it will minimise

distortions in consumption because usage in the low consumption block is less price

sensitive to usage in the high consumption block.

Essential Energy proposed that their declining block tariff will be transitioned over time

such that the residual costs will eventually be recovered from the fixed charge and first

block, while the second and third blocks will be set to long-run marginal cost.203

Ausgrid proposed that its declining block tariff becomes a closed tariff to new

customers.

HoustonKemp provided analysis to Endeavour Energy. In its analysis HoustonKemp

noted that all three blocks of Endeavour Energy's declining block tariffs are currently

set at a level exceeding the long-run marginal cost. That is, residual costs are currently

recovered in part from all three blocks.204

HoustonKemp acknowledged that Endeavour Energy’s current declining block tariff

does not provide the lowest possible distortions to price signals. HoustonKemp stated

a ‘more efficient’ tariff (hereafter ‘long-run marginal cost only’) structure is one that

more closely aligns the charging metric with the network costs caused by an

incremental change in network use – the structure that would result in no distortions to

price signals would be where the levels of the tariff components were set equal to the

long-run marginal cost, assuming that customers are somewhat responsive to changes

in price.205 HoustonKemp stated:

In the absence of any direct information on price responsiveness of customers

with different levels of consumption, implicit within a declining block tariff

structure is an assumption that low consuming customers are less price

responsive than high consuming customers, all other things equal. Endeavour

shows that year-on-year variations in first and second block volumes are lower

than for the third block, which provides some evidence that the price elasticity

may differ according to volume, albeit this evidence is not conclusive.206

HoustonKemp also noted that the declining block tariff provides flexibility to manage

customer impact.

HoustonKemp concluded that the blocks allow Endeavour to reduce the usage charge

for the third block towards its estimate of the long-run marginal cost, and in so doing

provide an improved price signal for a segment of customers on the tariff, without

203

Essential Energy, Tariff Structure Statement, 27 November 2015, p.40 204

HoustonKemp, Tariff Structure Statement, Supporting documentation Review of Consistency with the pricing

principles, p.13 205




principles, p.13


necessarily impacting on the bills for all customers. HoustonKemp considered that

Endeavour’s assumptions about elasticity of different charging components are correct.

In their opinion the declining block tariff satisfies the requirement of minimising

distortions to price signals, subject to the limiting customer impact. However,

HoustonKemp reiterated that Endeavour should investigate its price elasticity

assumptions, and strengthen its understanding thereof in the future.207

We consider that minimising distortions in the recovery of residual costs aligns with the

pricing principles. A declining block tariff is potentially an effective way to reduce

distortions to efficient consumption decisions. A declining block tariff structure will only

be efficient if consumption in the first block is less price sensitive than consumption in

the higher blocks. This assumption is based on Endeavour Energy's submission that

the year-on-year variations in first and second block volumes which are lower than for

the third block is a proxy for price elasticity. However, we do not consider this is

sufficient.

The majority of customers consume only in the first block. There is some reason to

suggest that the consumption of at least some of these customers is sensitive to price.

There is some evidence to suggest that price elasticity is proportional to income, and it

might be assumed that income is lower for low use customers and higher for high use

customers. However there is no conclusive evidence that price elasticity varies

predictably with income.208 We also note that for any link to price elasticity in the first

block which is related to income, relies on an underlying assumption that low use

customers are also low income customers. While there is some evidence to suggest

this is the case it is also true that many low consumption households are those with

solar, holiday homes and those where the occupants are at work for significant parts of

the day.

We consider the introduction of roof top solar has implications for price elasticity

particularly for low consumption households and therefore the assumption that low

consumption households are less elastic. With the development of improved battery

storage and better solar PV those low consumption solar customers are likely to have

a higher elasticity. Overall we find that the distributors have not provided sufficient

information to support the link between low consumption customers having low

elasticity. Accordingly, we are not satisfied that the recovery of residual costs through

the first block of consumption contributes to the achievement of compliance with the


We further note, that Ausgrid's appendix 5 provides information from various studies

regarding elasticities of consumption. This provided the following:

207



The Brattle Group, Structure of Electricity Distribution Network Tariffs: Recovery of Residual Costs, August

2014,p.42


Reiss and White (2002) also generate estimates of price elasticities for

households of different characteristics. The key results are:

Households with electric space heating or air conditioning exhibit higher price elasticities than households without such systems (close to zero for households without either of these systems)

Lower income households tend to be more sensitive to energy prices than households with medium to high income; and

Elasticities are lower for households that use high amounts of electricity (the authors recognise that this is a slightly unusual result in light of the two previous conclusions and suggest that it reflects both a weak correlation between household income and ownership of space heating / air conditioning and the fact that households tend to substitute toward more price inelastic electricity use as income rises).

209

Instead of the first block of the declining block tariff being less elastic, it could be that

the second and third blocks are less elastic.

Residual cost recovery and time-of-use tariff rates

We consider it appears that changes in the NSW distributors' time-of-use tariffs

contribute to compliance with the distribution pricing principles. Specifically, it appears

the NSW distributors are progressing tariff reform at the residential level through:

reductions in usage charges of their time-of-use tariffs towards long run marginal

cost, and

through an allocation of more costs to the declining block tariff and less to the more

efficient time-of-use tariff structure.

However, we request further information from the distributors as to how they have

allocated residual costs at the residential level before we are able to ascertain with

certainty whether the allocation of costs is efficient. This includes:

how much of the residual costs have been allocated to the declining block and

time-of-use tariff,

the allocation of residual costs between the usage rate components of the time-of-

use tariff.

Residual cost recovery between declining block tariff and time-of-use

tariffs

In the initial stages of tariff reform where more than one tariff can apply to a group of

customers an efficient allocation of residual costs would be to allocate more residual

costs to the less efficient tariff and less residual costs to the more efficient tariff. This

209

Ausgrid, Appendix 5: Price Elasticity of Demand, p.16


will encourage customer take up of the more efficient tariff during the transition to more

cost reflective prices.

This is supported by Houston Kemp's analysis that:

For tariffs where a customer can switch to a tariff with a different strength price

signal, residual costs should be assigned so as to encourage customers to shift to

tariffs that have the most efficient price signal. That is residual costs should be

allocated to tariffs so that customers on more efficient tariffs pay a smaller quantum

of residual costs.

Over time charging parameters will need to be re-balanced to ensure that the

shifting of customers between tariffs:

Does not lead to under or over recovery of revenue; and

Does not violate the customer impact principle.210

In comparing the less efficient declining block tariff to the more efficient time-of-use

tariff we can observe the fixed charges proposed for the time-of-use tariffs are higher

than that of the declining block tariffs. This may suggest more residual costs have been

allocated to the time-of-use tariffs. However, the proposed shoulder and off-peak rates

for the time-of-use tariffs are lower than the block usage rates.

AGL submitted that the NSW networks have largely designed their time-of-use tariffs

with higher fixed charges than for standard block tariffs. AGL submitted it is unknown

why the fixed charges should vary between these tariffs and AGL believes it will

prevent the take-up of time-of-use tariffs. AGL submitted a similar situation has

occurred in Queensland and almost no customers moved to time-of-use tariffs as a

result over the last three-year period.211

Our analysis of an average customer on the declining block tariff compared to the time-

of-use tariff for each distributor suggests that more costs have been allocated to the

declining block tariff compared to the time-of-use tariff. This is supported by Ausgrid's

comment at our public forum in April, that the levels for its residential time-of-use tariff

had been set initially to be attractive to customers and that over time would increase.

However, without further information from the NSW distributors as to how residual

costs have been allocated between tariffs at the residential level we are unable to say

with certainty that this is the case.

The following three tables show the annual bill for an average customer on the

declining block tariff compared to the time-of-use tariff for each of the NSW distributors.

These tables show that for all NSW distributors a typical customer consuming 5 MWh

210

HoustonKemp, Estimation of Long Run Marginal Cost and Other Concepts Related to the Distribution Pricing

Principles, prepared for Essential Energy, Final Report November 2015. P.24-25. 211

AGL, Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 10 May 2016,

p.3


per annum would be better off on a time-of-use tariff, albeit marginally for Endeavour

Energy.

Table 5-2 Ausgrid declining block tariff compared to time-of-use and

transitional tariff (2018-19) for residential customer consuming 5MWh/p.a

Note: Average customer usage is peak (21 per cent), shoulder (51 per cent) and off-peak (28

per cent), based on 2015-16 annual tariff submission.212

Table 5-3 Endeavour Energy declining block tariff compared to time-of-

use tariff (2018-19) for residential customer consuming 5MWh/p.a

212

Source: 2015-16 Annual tariff submission

0

100

200

300

400

500

600

700

800

Declining block Residential time-of-use Transitional

$ p

er

ann

um

Fixed charge Usage

0

100

200

300

400

500

600

700

Declining block Residential time-of-use

$ p

er

ann

um

Fixed charge Usage




Table 5-4 Essential Energy declining block tariff compared to time-of-use

tariff (2018-19) for residential customer consuming 5MWh/p.a



However, the above results could be driven by factors other than the residual cost

recovery methodology. Our analysis is based on the average load profile of customers

currently on time-of-use tariffs. The average load profile of this group of customers

could differ from the overall population of residential customers, and this may explain

the above results. Accordingly, given the uncertainty in the distributors' residual cost

recovery methodologies, we require further information to better understand their

allocation of residual costs between declining block and time-of-use tariffs.

Residual cost recovery through time-of-use usage charges

As discussed above an efficient allocation of costs would be that usage charges are

set equal to long run marginal cost, which promotes efficiency.

Table 5-5 shows the proposed change in tariff components for the residential time-of-

use tariff between 2016-17 and 2018-19. This indicates that the NSW distributors are

allocating fewer costs to their usage charges. However, without more information from

the distributors regarding the actual level of long-run marginal cost for each tariff

213

Source: 2015-16 Annual tariff submission 214

Source: 2015-16 Annual tariff submission

0

100

200

300

400

500

600

700

800

900

Declining block Residential time-of-use

$ p

er

ann

um

Fixed charge Usage


component we are unable to determine how much each tariff component cost are

related to residual cost recovery or long run marginal cost.

Table 5-5 Changes in residential time-of-use tariff components between

2016-17 and 2018-19

Tariff Fixed charge Peak Shoulder Off peak

Ausgrid 6% -5% 1% -14%

Endeavour 7% -6% -5% -3%

Essential 18% 5% -1% 3%

We further note that there is variation between the usage charges proposed by each of

the NSW distributors. The table below shows that Ausgrid has a high peak charge

compared to the Endeavour Energy and Essential Energy. However, Ausgrid's

shoulder and off-peak rates are lower than that of Endeavour and Essential Energy.

Table 5-6 Proposed residential time-of-use tariffs (2018–19)

Proposed Tariff Fixed charge

($/p.a) Peak (c/kWh)

Shoulder

(c/kWh)

Off peak

(c/kWh)

Ausgrid 160.24 25.06 5.55 2.41

Endeavour 197.10 12.99 8.67 4.54

Essential 322.29 13.53 12.76 5.40

Note: Some tariffs have been rounded to two decimal places

These differences in the level of each of the tariff components between the NSW

distributors likely reflects both the different underlying costs of the distributors and their

methodologies for calculating long run marginal cost and allocating residual costs.

Without this additional information we cannot say at this stage whether the level of the

tariff components for the time-of-use tariffs proposed by the NSW distributors reflect

efficient costs.


6 Tariff assignment policies

This chapter sets out our assessment of the NSW distributors' policies and procedures

for grouping and assigning customers to tariffs.

6.1 Tariff classes

We are satisfied that the tariff classes proposed by each of the NSW distributors

contribute towards the achievement of compliance with the distribution pricing rules.215

The tariff classes proposed by each of the NSW distributors are mostly consistent.

Both Endeavour Energy and Essential Energy have proposed the same six tariff

classes. Ausgrid has proposed five tariff classes. These are summarised in Table 6-1.

Table 6-1 NSW distributors tariff classes

Customer type Tariff class Definition

Residential and small to

medium businesses

Low voltage energy LV Connection 230/400 V

Larger commercial and

light industrial

Low voltage demand216

LV Connection (230/400 V)

Industrial High voltage demand HV Connection (12.7 kV SWER, 11

or 22 kV)

Industrial Sub transmission Demand ST Connection (33, 66 or 132 kV)

Distributors Inter-Distributor Transfer217

Distributor Transfer

Unmetered Unmetered supply e.g.

public lighting

Unmetered

Industrial Transmission218

Any site connected to the

transmission network.

6.2 Residential and small business tariff assignment policies

215

NER, cl.6.18.3. 216

Applies to Endeavour Energy and Essential Energy only 217

Applies to Endeavour Energy and Essential Energy only 218

Applies to Ausgrid only.


We do not approve Endeavour Energy's and Essential Energy's assignment policies

for small customers. We are not satisfied that Endeavour Energy's and Essential

Energy's proposed tariff assignment criteria promotes efficient use of electricity

services as required by the Rules. Endeavour Energy's and Essential Energy's

proposed tariff statement demonstrates little change to existing tariff approaches. Both

businesses have proposed to continue their current 'opt-in' centred approach to tariff

reform, which despite being in place for a number of years has resulted in few

customers opting-in to time-of-use tariffs. For example, Endeavour Energy submitted

that:

Although we have offered our residential and general supply (small business)

customers optional time-of-use tariffs for over 10 years, we have seen little take

up of these alternatives with only 2,340 residential and general supply

customers opting for this voluntary tariff type.219

Given the lack of success in of the opt-in policy, we consider Endeavour Energy's and

Essential Energy's tariff statement proposals display insufficient progress towards the

use of more cost reflective tariffsto comply with the requirements of the rules.

Accordingly we consider Endeavour Energy's and Essential Energy's tariff assignment

policies do not contribute to the achievement of compliance with pricing principles.

We approve Ausgrid's proposed tariff assignment policies for small customers except

for its proposed assignment of new residential and new small business customers,

which distinguishes between those new customers with embedded generation and

those without embedded generation.

This means:

We are approving Ausgrid's proposal that existing customers with interval meters

(currently on a declining block tariff) are re-assigned to transitional tariffs. These

transitional tariffs have the same fixed charge as the declining block tariff, but the

usage rate is flat, set at a rate lower than the first block rate and higher than the

third block rate. We consider this approach will effectively transition customers to

time-of-use tariffs and avoid price shock.

We are not approving Ausgrid's proposal for new residential and small business

customers with interval meters which distinguished between those who do not have

embedded generation and those with embedded generation. Ausgrid proposed

that,

o Those without embedded generation will be assigned to a transitional flat

tariff with the choice to opt-in to a time-of-use tariff.

o Those with embedded generation will be assigned to a time-of-use tariff with

the choice to opt-in to a transitional flat tariff.

219

Endeavour Energy, Tariff Structure Statement, p.14


We are not convinced as to why customers without embedded generation should also

not be assigned by default to a time-of-use tariff. Customers with electric vehicles or air

conditioning could also benefit from a time-of-use tariff on which they are better able to

time their consumption and hence manage their bill impact. Taking into consideration

Ausgrid's current tariff structures and assignment polices, we consider that not

assigning customers without embedded generation by default to time-of-use tariffs,

does not reflect movement towards greater cost reflectivity, and therefore is not

compliant with the distribution pricing principles.

Our consideration of each of the distributors proposed tariff assignment policies are set

out below.

Ausgrid

Ausgrid proposed that its residential and small business declining block tariffs become

closed tariffs from 1 July 2018. Accordingly, Ausgrid has proposed changes to its tariff

assignment criteria for its residential and small business customers to take effect from

1 July 2018. These proposed changes are summarised below and in the figure below.


Figure 6-1 Overview of Ausgrid's proposed tariff assignments from 2018-19

Source: Ausgrid submission on issues paper


New residential and small business customers

Ausgrid proposed that new residential and small business customers who do not have

embedded generation will be assigned in the first instance by default to a transitional

flat time of use tariff (transitional flat tariff). Transitional flat tariffs have the structure of

a time-of-use tariff, with peak, shoulder and off-peak charging windows, but the cent

per kilowatt hour rate applied to each window is the same. Ausgrid proposed that these

new customers can also choose to opt-in to a time-of-use tariff. The time-of-use tariff

has different rates for the peak, shoulder and off-peak windows.

However, for new residential and small business customers with embedded generation

Ausgrid proposed that these customers will be assigned in the first instance by default

to a time-of-use tariff. These customers can choose to opt-in to a transitional flat tariff.

Existing residential and small business customers who currently have

interval meters

Ausgrid proposed that its existing residential and small business customers who

currently have an interval meter but are on declining block tariffs will be re-assigned to

a transitional flat tariff. These customers can also opt-in to a time-of-use tariff.

Existing residential and small business customers who currently have

basic meters

Existing residential and small business customers with a basic meter will continue to

be assigned to a declining block tariff.

If these customers change to an interval meter they will be re-assigned to a transitional

flat tariff. They can also opt-in to a time-of-use tariff.

Medium low voltage customers

For medium low voltage customers Ausgrid proposed to change the eligibility criteria to

replace the energy consumption criteria currently applying to medium and large sized

business customers with a criteria based on the size of the current transformer

connection.

For existing customers Ausgrid proposed to introduce transitional tariffs for medium

sized business customers who have a current transformer. Ausgrid will only assign

customers to this tariff if they choose to go on to it.

For existing customers Ausgrid proposed to introduce transitional tariffs within the low

voltage tariff class who have a current transformer. Ausgrid proposed to only assign

existing customers to this tariff if the voluntarily elect it. The proposed transitional tariff

for existing customers has the same rates as the current small business time-of-use

tariff. This will protect existing customers against bill shock as a result of re-

assignment. We are satisfied this approach contributes to the achievement of

compliance with the distribution pricing, subject to Ausgrid addressing our concerns on

the new eligibility criteria above.


below shows Ausgrid's proposed tariffs for current transformer connected customers.

Table 6-2 Ausgrid's proposed LV time-of-use tariffs for 2018-19

Network Tariff Fixed

c/day

Peak

c/kWh

Shoulder

c/kWh

Off-peak

c/kWh

Capacity

charge

c/kW/d

Transitional LV time-of-use

Capacity (CT Connection <

400Amps)*

125.22 21.95 5.71 1.98

CT<400 AMPS 614.77 3.69 1.59 1.36 35.84

CT400-1600 AMPS 1852.19 3.29 1.51 1.26 35.84

CT>1600 AMPS 2314.24 2.84 1.46 1.14 35.84

* Note: this transitional tariff has the same rates as the small business time-of-use tariff.

AER consideration

Ausgrid's proposed tariff assignment policy takes effect from 1 July 2018. This is

shortly after the commencement for the new framework for metering, which will require

that any new or replacement meter will need to be an advanced meter and be provided

on an unregulated basis from December 2017. The tariff class assignment rules

specifically allow metering to be considered in this circumstance.

New customers

We do not consider Ausgrid's proposed tariff assignment criteria for new residential

and small business customers contribute to the achievement of compliance with the


Ausgrid's proposal for new residential and small business customers with interval

meters distinguished between those who do not have embedded generation and those

with embedded generation. Those without embedded generation will be assigned to a

transitional flat tariff with the choice to opt-in to a time-of-use tariff. Those with

embedded generation will be assigned to time-of-use tariff with the choice to opt-in to a

transitional flat tariff.

Time-of use tariffs are more cost reflective than flat tariffs and better promote the

network pricing objective.220 Time-of-use tariffs also provide better signals to customers

regarding the timing of their consumption than flat tariffs. This better enables

customers to manage their bills through changing their consumption behaviour.221 New

customers are at the point where they can make efficient future decisions on the

appliances they install in their premises by having visibility on potential costs. This is

supported by the Energy Network Association (ENA).

220

6.18.5(a) 221

6.18.5(h)(3)


The ENA has supported the use of appropriate triggers and thresholds as an important mechanism to achieve the timely implementation of tariff reform to the benefit of Australian energy consumers.

Australian energy consumers face significant risks in a stalled implementation of cost-reflective pricing reform, through the potential for entrenched, unfair cross-subsidies between electricity customers and distorted incentives for investment. There are strong arguments for assigning customers to a cost-reflective tariff structure at the time of investment. It allows the customer considering the investment to appraise the costs and benefits of their decision at the relevant time. It avoids entrenching an implicit cross-subsidy to those customers taking up Distributed Energy Resources which was never intended by public policy or sought by the customer themselves but which results only from current volumetric tariff structures.

222

We consider the assignment of new customers to time-of-use tariffs, as proposed by

Ausgrid for customers with embedded generation is consistent with the pricing

principles. AGL223 and Red Energy224 submitted that they did not support mandatory

assignment. However, we note that Ausgrid has provided the option to opt-out of the

time-of-use tariff to the transitional flat tariff for a given period, should these customers

prefer a flat tariff structure. We consider this supports the customer impact principle.225

We are not convinced as to why customers without embedded generation should not

be assigned by default to a time-of-use tariff. Customers with electric vehicles or air

conditioning could also benefit from a time-of-use tariff on which they are better able to

time their consumption and hence manage their bill impact.

Ausgrid submits that customers with embedded generation have a different load profile

to customers without embedded generation, but have not provided evidence in

support. In the absence of evidence to support assigning customers with and without

embedded generation to different tariffs, we consider a more cost reflective and non-

discriminatory approach would be to have all new customers assigned by default to a

time-of-use tariff, with the option to opt-in to the transitional flat tariff. That is, we

consider that Ausgrid's proposal to assign customers without embedded generation to

a flat tariff does not contribute to the achievement of compliance with the distribution

pricing principles. Energy Australia submitted it is concerned that

Ausgrid’s intention to allocate customers to particular tariffs where there is no obvious difference in the cost of supply to that customer category. More generally, differential treatment of customers both within and between distribution areas will undermine acceptance of tariff reform thereby jeopardising reform objectives. A particular example is Ausgrid’s assignment of new customers with small scale embedded generation to a Time of Use tariff,

222

ENA Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May 2016, p.5-

6 223

AGL Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May 2016, p.4 224

Red Energy Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May

2016, 225

NER, cl.6.18.5(h)(3).


while new customers without embedded generation will be assigned to a declining block tariff.

226

We note Origin supported Ausgrid's proposal to assign new residential customers with

an interval meter to a time of use tariff.

We consider the decision to adopt volumetric TOU tariffs represents a sensible

first step along the reform spectrum. For this reason, Origin supports the

approach adopted by Ausgrid to assign new residential customers with an

interval meter to a volumetric time of use (TOU) tariff and in the case of

Endeavour and Essential an opt-in provision to a volumetric TOU tariff.227

Ausgrid is also proposing to introduce new default tariffs for new customers with a 3

phase connection who connect to Ausgrid's network after 1 July 2018. Ausgrid

considers this will result in customers with a 3 phase connection receiving more

consistent and appropriate network price signals and contributing more equitably to the

recovery of residual costs. The proposed tariffs are set out in Table 6-3 below.

Ausgrid's proposed tariffs for new 3 phase connection customers have a time-of-use

tariff structure. We consider Ausgrid's proposed new default tariff for new 3-phase

connections customers contributes to the achievement of compliance with the


Table 6-3 Ausgrid's proposed 3-phase tariffs for 2018-19


c/day

Peak

c/kWh

Shoulder

c/kWh

Off-peak

c/kWh

Residential 3-phase 43.90 25.06 5.55 2.41

Small business 3-phase 125.22 21.95 5.71 1.98

Note: the residential 3-phase tariff has the same rates as the residential time-of-use tariff. The

small business 3-phase tariff has the same rates as the small business time-of-use tariff.

Existing customers

Existing customers, unlike new customers, have already made investment decisions

based on current tariff structures. We consider a transitional tariff which moves towards

cost reflectivity best promotes pricing principles for existing customers that the impact

on customers must be considered228 and the tariff must be reasonably capable of being

understood.229 By being on a transitional tariff with a time-of-use structure but with flat

rates the customer is protected from any bill shock due to re-assignment. By having a

time-of-use structure the transitional flat tariff will better enable customers to see their

226

Energy Australia Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs,

May 2016, p.8 227

Origin Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May 2016,

p.1-2 228

6.18.5(h) 229

6.18.5(i)


consumption behaviour in each charging window. We consider this will promote pricing

principle which sets out that the tariff must be reasonably capable of being understood

by customers assigned to it.230

Ausgrid proposed that existing residential and small business customers who currently

have an interval meter but are on a declining block tariff will be re-assigned to a

transitional flat tariff. These customers can also choose to opt-in to a time-of-use tariff.

Ausgrid has designed its transitional flat tariffs so that an average customer is no better

or worse off in being re-assigned from the declining block tariff. The transitional flat

tariffs proposed by Ausgrid for existing customers with interval meters have the same

fixed charge as the declining block tariff and similar usage rates. Ausgrid's proposed

transitional and time-of-use tariffs for residential and small business customers are set

out in Table 6-4 below.

Table 6-4 Ausgrid's proposed residential and small business tariffs

2018-19


c/day

Block 1

c/kWh

Block 2

c/kWh

Block 3

c/kWh

Peak

c/kWh

Shoulder

c/kWh

Off-peak

c/kWh

Residential declining

block 35.27 11.60 8.97 8.35

Residential

transitional flat 35.27 9.14 9.14 9.14

Residential time-of-

use 43.90 25.06 5.55 2.41

Small business

declining block 126.88 10.73 10.51

Small business

transitional flat 126.88 10.62 10.62 10.62

Small business time-

of-use 125.22 21.95 5.71 1.98

Ausgrid submitted:

Ausgrid proposes to adopt a time-of-use structure for this transitional period

with a uniform price applied to energy consumption in the peak, shoulder and

off-peak periods. Ausgrid believes that this approach will provide these

customers with important information about their time-of-use energy

consumption patterns, but without imposing bill shocks on customers with poor

load profiles. Ausgrid expects that this approach will ensure that these

customers make an informed decision about whether to opt-in to the small

business time-of-use tariff.

230

6.18.5(i)


Ausgrid has designed the transitional time-of-use tariffs to ensure that these

customers will have access to their energy consumption in the peak, shoulder

and off-peak periods in the expectation that this will assist these customers to

more easily evaluate whether they will be better off financially under a more

cost reflective network time-of-use tariff. Ausgrid is hopeful this will result in an

increase in the voluntary uptake of the more cost reflective time-of-use tariffs

over the medium to longer term.231

For its existing residential and small business customers with a basic meter Ausgrid

proposed these customers will continue to be assigned to a declining block tariff. If

these customers change to an interval meter post 1 July 2018 they will be re-assigned

to a transitional flat tariff. They can also opt-in to a time-of-use tariff. We consider this

contributes to the achievement of compliance with the distribution pricing principles

and rule 6.18.3.

Medium low voltage customers

We are not approving Ausgrid's proposed tariff assignment criteria for medium low

voltage customers. Ausgrid currently assigns medium sized business customers with a

low voltage connection to tariffs using energy consumption as a criterion. Ausgrid

proposed to change the eligibility criteria for such customers with a criteria based on

the size of the current transformer connection. We are not satisfied this change to the

eligibility criteria contributes to the achievement of compliance with the distribution

pricing principles.232 We require Ausgrid to provide further information to justify this

change to the eligibility criteria for medium low voltage customers, having regard to our

concerns below.

We are open to the use of criteria other than consumption levels in tariff assignment

polices. However, we do not consider Ausgrid provided sufficient evidence justifying

the use of current transformer size as a criterion to assign customers to tariffs.

Ausgrid stated customers with similar connection characteristics would receive more

consistent and appropriate price signals using current transformer size as a criterion. In

turn, such customers would make the appropriate contribution to the recovery of

residual costs.233 Ausgrid's tariff structure statement did not explain the meaning of

'connection characteristics'. We therefore require Ausgrid's revised proposal to explain

the connection characteristics current transformer size represents. For example, do

customers with similar sized current transformers have similar peak demands? Or, are

they connected to the network with similar assets?

It is also unclear how the use of current transformer size to assign customers to tariffs

better reflects the distribution pricing principles than a consumption-based approach.

231

Ausgrid Response to AER information request 1, 29.04.2016. 232

NER, 6.18.5(a) and (g). 233



As we discuss below, we consider there are several complications in basing tariff

assignments on the size of a customer's current transformer connection.

While the size of the current transformer can be indicative of a customer's maximum

demand levels, determination of a current transformer's size is problematic. Current

transformers come in a wide range of sizes, so it is possible that customers with the

same demand levels could have different sized current transformers. In turn, these

customers would be assigned to different tariffs.

We also understand it is standard practice for meter providers to use a set of standard

current transformer ratios to minimise stock levels, reduce maintenance costs and

improve repair times.234 These company standard ranges are at the discretion of each

meter provider as long as they comply with the NEM metrology procedures. This

means different meter providers may elect to use different current transformers for

customers who otherwise have the same characteristics.

It is, therefore, unclear how the size of a customer's current transformer connection

better reflects a customer's contribution to network costs than its consumption level.

Further, competition for metering is already operating for new customers with type 4

meters (Ausgrid could assign these customers to the current transformer tariffs).235 We

are not aware of any requirements for a meter provider to notify the distributor of the

current transformer ratios they elected to use. This would introduce complications and

costs for Ausgrid when allocating customers to the relevant tariff under the new

eligibility criterion.

For existing customers Ausgrid proposed to introduce transitional tariffs within the low

voltage tariff class who have a current transformer. Ausgrid proposed to only assign

existing customers to this tariff if the voluntarily elect it. The proposed transitional tariff

for existing customers has the same rates as the current small business time-of-use

tariff. This will protect existing customers against bill shock as a result of re-

assignment. We are satisfied this approach contributes to the achievement of

compliance with the distribution pricing, subject to Ausgrid addressing our concerns on

the new eligibility criteria above.


We are not satisfied that Endeavour Energy's and Essential Energy's proposed tariff

assignment criteria for residential and small business customers promotes efficient use

of electricity services as required by the Rules. Endeavour Energy's and Essential

Energy's proposed tariff statement demonstrates little tariff reform progress. Both

234

Current transformer (CT) manufacturers produce a large range of CT products of varying accuracy and capacity.

We understand meter providers typically select a specific set of CT products from one (or occasionally more)

provider. By standardising on a smaller subset of CT products the meter provider will support reduced stock levels,

reduced maintenance costs and improved repair times. 235

Ausgrid, Tariff structure statement: Attachment 2: General description of Ausgrid’s default network use of system

tariffs, 27 November 2016, p. 8–10; Ausgrid, ES3: Part A: Metering installation requirements, July 2015, p. 1.


businesses have proposed to continue their current 'opt-in' centred approach to tariff

reform, which despite being in place for a number of years has resulted in 98 per cent

of Endeavour Energy's residential customers still being on tariffs which are not cost

reflective, along with 97 per cent of small business customers. For Essential Energy 97

per cent of residential customers are on tariffs which are not cost reflective, along with

86 per cent of small business customers.

Given the lack of success in of the opt-in policy, we consider Endeavour Energy's and

Essential Energy's tariff statement proposals display insufficient progress towards tariff

reform to comply with the cost reflectivity requirements of the rules. Accordingly we

consider Endeavour Energy's and Essential Energy's tariff assignment policies do not

contribute to the achievement of compliance with pricing principles.

The commencement of the new framework for metering requires any new meters that

are installed to be interval meters. From December 2017 the rules allow metering to be

considered as a determining criterion for tariff assignment. Given these rule changes

we consider there is opportunity for distributors to reform their tariff assignment policies

to make more efficient use of the network. This can be achieved by promoting

customer assignment to more cost reflective tariff where interval metering is in place.

Other distributors have proposed changes to their tariff assignment policies which we

have generally found to be acceptable, subject to minor amendments. These

approaches include Ausgrid, ActewAGL and SAPN

We note that while some other distributors (e.g. the Queensland distributors) have also

proposed to rely on opt-in centred approaches, they have at least showed greater tariff

reform by introducing a more cost reflective form of opt-in tariff, being a demand based

tariff.

Endeavour Energy and Essential Energy did not propose any changes to their

customer tariff assignment criteria.

Endeavour Energy’s customer assignment is as follows:

Low voltage Energy Tariff class

The default tariffs for residential and small business customers that consume less than

160MWh/annum are:

A declining block tariff for residential customers, and

An inclining block tariff for small to medium commercial customers

Where the customer has installed an interval meter a time-of-use energy tariff is

available to customers on a voluntary opt-in basis.

Specifically:

Opt-in time-of-use residential and small business tariffs,


Opt-in controlled load tariffs – available to any residential and small

business customers where the electricity load is separately metered and

controlled at a connection point.

Low voltage demand tariff class

Within the low voltage demand tariff class Endeavour Energy plans to offer

A LV time-of-use demand tariff (default tariff for customers that consume

more than 160MWh per annum); and

A LV time-of-use transitional demand tariff (a mandated transitional tariff

for customers whose annual consumption requires a demand based

tariff, but who cannot be directly transferred to the LV TOU demand tariff

due to a lack of metering capable of supporting this tariff). This tariff is

not available on customer or retailer request.

Essential Energy's proposed tariff assignment criteria are as follows:

Residential and small business customers

Residential and small business customers will be assigned to a default declining block

tariff. However, opt-in TOU tariffs are available for any customers that have a meter to

support the tariff.

Medium sized businesses

Medium sized businesses will continue to be assigned to one of the following tariffs:

Low voltage time of use average daily demand

Low voltage time of use three rate demand

Low voltage time of use demand alternative

Since submitting its proposal Essential Energy has subsequently told the AER that it is

aware of approximately 1700 medium/large business customers who should be on

either demand or time-of-use tariffs, but are currently assigned to the wrong tariff.236

Essential Energy is concerned that re-assigning these customers to their correct tariff

may create bill shocks. Essential Energy has flagged they may introduce transitional

tariffs in their revised tariff statement proposal to address this issue. However, in their

initial tariff statement proposal did not address this issue or propose any transitional

tariffs.

236

Essential Energy advised in particular customers who consume over 160MWh per annum are required to be on a

demand based tariff, and customers who consume over 100MWh are required to be on a TOU tariff. There are

around 1100 customers currently consuming over 160MWh that need to be moved to demand tariffs, and another

600 that need to be moved from the DBT to TOU. These changes may result in significant bill increases. Essential

Energy has advised that they plan to consult with directly affected customers and consumer groups, provide

information to and educate directly affected customers on demand and TOU based tariffs and develop transitional

tools including a transitional tariff to assist the worst affected customers.


6.3 Large business tariff assignment policies

We approve the NSW distributors' tariff assignment policies for large customers. We

are satisfied the NSW distributors proposed tariff assignment criteria for large

customers contribute to the achievement of compliance with the distribution pricing

principles. This is because the NSW distributors proposed to assign large customers to

time-of-use and demand tariffs. These tariffs provide signals regarding the timing of

consumption and network capacity we consider this promotes efficient use of the

network.

We consider Ausgrid's proposed transmission connected tariff for new customers will

result in savings to the customer as it will no longer pay for costs related to the

distribution network. We consider this contributes to the achievement of compliance

with pricing principles that the revenue recovered from the tariff reflects the distributor's

efficient costs.237

We are satisfied that the tariff assignment criteria proposed by the NSW distributors for

their large business customers contribute to the achievement of compliance with the

distribution pricing principles. The NSW distributors' tariff structures for large

customers include time-of-use and capacity tariffs.

For larger customers it is easier to identify the costs associated with providing

electricity compared to smaller customers where the prices are more averaged. The

tariff structures for large customers are better able to reflect the costs of the network

through charging windows and capacity charges. Endeavour Energy and Essential

Energy proposed to assign their large customers to the high voltage and sub-

transmission tariffs based on their size, connection to the network and metering. We

consider Endeavour Energy and Essential Energy's tariff assignment criteria for its

large customers contribute to the pricing principles.

Our consideration of each of the distributors proposed tariff assignment policies are set

out below.

Ausgrid

We are satisfied that the tariff assignment criteria proposed by Ausgrid for its large

business customers contribute to the achievement of compliance with the distribution

pricing principles.

Ausgrid did not propose to change its tariff assignment criteria for large customers

except for transmission connected customers.

Ausgrid proposed to introduce a transmission connected default tariff for new

customers from 1 July 2018 as set out in Table 6-5. Ausgrid proposed that new

customers connected to Ausgrid's network will be assigned to a standard transmission

237

6.18.5(f) and (g)


use of system (TUOS) only tariff, rather than the current sub-transmission voltage time-

of-use tariff. Ausgrid submits that this will result in greater efficiency as these

customers will not incur a distribution use of system charge when they do not

contribute to the costs of operating that segment of the network.

Table 6-5 Ausgrid's proposed Transmission connected time-of-use

capacity tariffs for 2018-19


c/day

Peak

c/kWh

Shoulder

c/kWh

Off-peak

c/kWh

Capacity

charge

c/kW/d

Transitional LV time-of-use

Capacity (CT Connection <

400Amps)*

0 1.25 1.25 1.25 3.10

Ausgrid's proposed tariff assignment criteria for high voltage customers are:

The high voltage time-of-use capacity (system) tariff is the default tariff for all new

business customers that satisfy the eligibility.

The high voltage time-of-use capacity (substation) tariff is an optional tariff available

to all distribution customers that satisfy the eligibility criteria and which have an

exclusive dedicated feeder connection to a transmission node identity transmission

substation.

The high voltage capacity (substation) tariff is only available to business customers

with Type 3 or better metering.

For sub-transmission customers Ausgrid's proposed tariff assignment criteria are:

The sub-transmission voltage time-of-use capacity (system) tariff is the default tariff

for all new distribution customers that satisfy the eligibility criteria.

The sub-transmission voltage time-of-use (substation) is an optional tariff available

to all distribution customers that satisfy the eligibility criteria and which have an

exclusive dedicated feeder connection to a transmission node identity transmission

substation.

Individually calculated network tariffs are available to all existing customers that

either:

o Satisfy the eligibility criteria to be assigned to the transmission connected

tariff class; or

o Satisfy the eligibility criteria to be assigned to the high voltage tariff class or

sub-transmission voltage tariff class and consume more than 40 GWh per

annum or have a maximum demand in excess of 10 MW.


We are satisfied that the tariff assignment criteria proposed by Endeavour Energy and

Essential Energy for their large business customers contribute to the achievement of

compliance with the distribution pricing principles.


Endeavour Energy did not propose any changes to its tariff assignment criteria for

large customers. Accordingly for high voltage customers Endeavour Energy will offer:

A high voltage demand tariff this is the default tariff; and

An individually calculated high voltage time-of-use demand tariff

The individually calculated high voltage time-of use demand tariff is a mandated,

customer specific tariff where the customer’s:

Electricity consumption has been equal to or greater than 100 GWh in total for the

36 months preceding the application; or

Electricity consumption has been equal to or greater than 40 GWh per annum in

each of the financial years preceding the application; or

Monthly peak demand has been equal to or greater than 10 MVA for 24 of the 36

months preceding the application.

For its sub-transmission customers Endeavour Energy proposed:

A sub-transmission time-of-use demand tariff as the default tariff; and

An individually calculated sub-transmission demand tariff

The individually calculated high voltage time-of-use demand tariff is a mandated,

customer specific tariff where the customer’s:

Electricity consumption has been equal to or greater than 100 GWh in total for the

36 months preceding the application; or

Electricity consumption has been equal to or greater than 40 GWh per annum in

each of the financial years preceding the application; or

Monthly peak demand has been equal to or greater than 10 MVA for 24 of the 36

months preceding the application.

Essential Energy did not propose any changes to its tariff assignment criteria for large

customers. Accordingly for high voltage customers Essential Energy offers:

High voltage time-of-use monthly demand applies to business customers whose

consumption is connected to the high voltage distribution system and metered at

high voltage.

High voltage time-of-use average daily demand applies to business customers

whose consumption is connected to the high voltage distribution system and

metered at high voltage. Available to customers who have a monthly load factor

greater than 60 per cent for at least 4 of the most recent 12 months coinciding with

a minimum on season anytime monthly demand of 1500 kVA

For subtransmission customers Essential Energy offers:

Sub-transmission 3 rate demand. Applicable to connections at a sub-transmission

voltage.


A Our consultation process

This appendix details our consultation process and lists stakeholders who provided us

with written submissions in response to the distributors' tariff statement proposals and

our issues paper.

A.1 Issues paper, submissions and information requests

We published an issues paper in March 2016. This summarised key aspects of

Ausgrid, Endeavour Energy and Essential Energy's tariff statement proposals. It

highlighted issues we consider relevant to our assessment and invited stakeholder

submissions.

Seventeen submissions were received in response to the businesses proposals and

our issues paper. The majority of submissions addressed all three businesses

proposals and/or our issues paper. The exceptions are Southern Sydney Regional

Organisation of Councils’ submission addressed Ausgrid's proposal only and Central

NSW Councils’ submission addressed Essential Energy's proposal only.

Submissions were received from the following stakeholders:

1. AGL

2. Ausgrid

3. Central NSW Councils (Centroc)

4. Cotton Australia and NSW Irrigators’ Council (NSWIC)

5. Energy Consumers Australia (ECA)

6. Endeavour Energy

7. Energy Australia

8. Energy Networks Association (ENA)

9. Essential Energy

10. Energy and Water Ombudsman NSW (EWON)

11. Jemena

12. NSW Council of Social Services (NCOSS)

13. Origin Energy

14. Public Interest Advocacy Centre (PIAC)

15. Red and Lumo Energy

16. Solar Citizens

17. Southern Sydney Regional Organisation of Councils (SSROC)

A.2 Public forum


We held a public stakeholder forum in Sydney on 6 April 2016. Presentations were

made at the forum by AER the Board, AER executive, AER staff, Public Interest

Advocacy Centre (PIAC) and Energy Australia. The forum was attended by

representatives of the following:

1. ActewAGL

2. AEMC

3. AGL Energy

4. Ausgrid

5. City of Sydney - City Infrastructure and Traffic Operations

6. Cotton Australia

7. Department of Industry, Innovation and Science

8. Endeavour Energy

9. Energia

10. Energy and Water Ombudsman NSW

11. Energy Australia

12. Energy Consumers Australia

13. Essential Energy

14. Ethnic Communities Council of NSW

15. Houston Kemp

16. Jemena

17. Living Utilities Lend Lease

18. Lumo

19. Macquarie Securities Group

20. Next Energy

21. NSW Department of Industry

22. NSW Irrigator's Council

23. Origin

24. Public Interest Advocacy Centre

25. Solar Citizens

26. TransGrid

27. Western Sydney Regional Organisation of Councils

A.3 Other consultation

We issued information requests to each of the NSW businesses, seeking information

not provided in their tariff statement proposals to inform our considerations.


Information requests issued:

Ausgrid238

Endeavour Energy239

Essential Energy240

We received responses to our information requests,

Ausgrid241

Endeavour Energy242

Essential Energy243

We also met with Essential Energy on 28.04.2016.

238

04.04.2016, 24.05.2016 239

24.05.2016 240

23.04.2016 241

29.04.2016; 07.06.2016;10.06.2016; 17.06.2016; 28.06.2016 242

31.05.2016; 08.06.2016; 09.06.2016 243

30.05.2016; 08.06.2016; 09.06.2106


B Ausgrid’s proposed tariff structures

Table B-1 sets out Ausgrid’s proposed tariffs for the low voltage tariff class.

Table B-2 sets out Ausgrid’s proposed tariffs for its other tariff classes.

Table B-1 Ausgrid’s proposed tariffs for the low voltage tariff class

Proposed tariffs Customer type Assignment

Meter type


Residential (EA010) New/existing customers with single phase connection

without a small scale embedded generator Default/ opt out Type 6

Declining block +

fixed Closed from 1 July 2018.

Small business (EA050) New/existing customers with single phase connection

without a small scale embedded generator Default/ opt out Type 6

Declining block +

fixed Closed from 1 July 2018.

Controlled load 1 (EA030) Available to LV customers on EA010, EA025, EA050,

EA225, EA302, EA334, or EA335 Opt-in

Separately

metered Flat usage + fixed

Controlled load 2 (EA040) Available to LV customers on EA010, EA025, EA050,

EA225, EA302, EA334, or EA335 Opt-in

Separately

metered Flat usage + fixed

Residential TOU (EA025)

New customers with single phase connection and a

small scale embedded generator; existing customer with

single phase connection and type 5 meter

Default / opt out Type 4 or 5 Usage + fixed Opt in for EA332 customers.

Small business TOU

(EA225)

New customers with single phase connection and a

small scale embedded generator; existing customer with

single phase connection and type 5 meter



LV TOU capacity CT 100–

400 Amps (EA302)

New business customers with a 3 phase current

transformer connection between 100–400 Amps Default (no opt out) Type 4 or 5

Demand + usage +

fixed

Formerly named ‘LV 40–160

MWh (system) tariff’. Existing

customers with the relevant

CT connection can opt in to

this tariff.

LV TOU capacity CT 400 to

1600 Amps (EA305)

New business customers with a current transformer

connection between 400–1,600 Amps; existing EA310

customers with 400–1,600 Amp connection

Default (no opt out) Type 3 or 4 Demand + usage +

fixed

Formerly named ‘LV 160–

750 MWh (system) tariff’.

Existing customers with the

relevant CT connection can

opt in to this tariff.

LV TOU capacity CT > 1600

Amps (EA310)

New business customers with a current transformer

connection above 1,600 Amps Default (no opt out)

Type 3 or

better

Demand + usage +

fixed

Formerly named ‘LV > 750

MWh (system) tariff’. Existing

customers with the relevant

CT connection can opt in to

this tariff.

Transitional residential 3

phase (EA330)

Existing customers with a 3 phase connection on

declining block tariff (EA010) Default / opt out Type 6

Declining block +

fixed

Transitional small business 3

phase (EA331)

Existing customers with a 3 phase connection on

declining block tariff (EA050) Default / opt out Type 6

Declining block +

fixed

Transitional residential TOU

(EA332)

New customers with single phase connection without a

small scale embedded generator; existing customers

with single phase connection on declining block tariff

(EA010)

Default / opt out Type 4 or 5 Transitional flat

usage + fixed

Transitional small business

TOU (EA333)

New customers with single phase connection without a


with single phase connection on declining block tariff

(EA050)

Default / opt out Type 4 or 5 Transitional flat

usage + fixed

Residential <100 Amps 3

phase TOU (EA334)

New customers with a 3 phase WC connection with a


with a 3 phase WC connection on single phase tariff

(EA025)



Small business <100 Amps

3 phase TOU (EA335)

New customers with a 3 phase WC connection with a

small scale embedded generator; existing EA225 or

EA302 customers with 3 phase WC connection


Transitional LV TOU kW

capacity 100–400 Amps

(EA336)

Existing EA225 customers with CT connection Default / opt out Type 4 or 5 Demand + usage +

fixed

Demand charge is zero as a

transition.

Transitional LV TOU kVA

capacity 100–400 Amps

(EA337)

Existing EA305 customers with 100–400 Amp

connection Default / opt out Type 3 or 4

Demand + usage +

fixed

No customers in this

segment (included for

completeness only).


capacity 400–1,600 Amps

(EA338)

Existing EA302 customers with 400–1,600 Amp

connection Default Type 4 or 5

Demand + usage +

fixed



completeness only).


capacity > 1,600 Amps

(EA339)

Existing EA305 customers with ≥ 1,600 Amp connection Default Type 3 or 4 Demand + usage +

fixed



completeness only).

Transitional residential TOU

3 phase (EA351)

New customers with a 3 phase connection without a


with 3 phase connection on declining block tariff

(EA010)

Default / opt out Type 5 Transitional flat

usage + fixed

Transitional small business

TOU 3 phase (EA352)

New customers with a 3 phase connection without a


with 3 phase connection on declining block tariff

(EA050)

Default / opt out Type 5 Transitional flat

usage + fixed

LV connection (Stand-by)

(EA325) Existing customer Default

Type 4 or

better

Demand + usage +

fixed Closed tariff

Source: Ausgrid, Tariff structure statement, 27 November 2015; Ausgrid, Tariff structure statement: Appendix 2: General description of Ausgrid’s default network

use of system tariffs, 27 November 2015; Ausgrid, Response to AER TSS issues paper: Attachment 2, May 2016.


Table B-2 Ausgrid’s proposed tariffs for the high voltage, subtransmission and transmission tariff classes

Proposed tariffs Customer type Assignment

Meter type


Hig

h v

oltage

HV TOU capacity (system)

(EA370) New/existing HV business customers Default

Type 3 or

better

Demand + usage +

fixed

HV TOU capacity

(substation) (EA380)

HV business customers with an exclusive dedicated

feeder connection to a TNI transmission substation Opt-in

Type 3 or

better

Demand + usage +

fixed

Individually calculated

network tariff

HV customer consuming > 40GWh annually or have

maximum demand > 10 MW Opt-in

Type 3 or

better Various

HV connection (Stand-by)

(EA360) Existing customer Default

Type 3 or

better

Demand + usage +

fixed Closed tariff

Subtr

ansm

issio

n

Subtransmission voltage

TOU capacity (system)

(EA390)

New/existing customers assigned to the

subtransmission tariff class Default

Type 3 or

better

Demand + usage +

fixed

Subtransmission voltage

TOU capacity (substation)

(EA391)

Subtransmission customers with an exclusive dedicated

feeder connection to a TNI transmission substation Opt-in

Type 3 or

better

Demand + usage +

fixed


network tariff

Subtransmission customer consuming > 40GWh

annually or have maximum demand > 10 MW Opt-in

Type 3 or

better Various

Tra

nsm

issio

n

Transmission voltage TOU

capacity (system) (EA501)

New/existing customers assigned to the transmission

tariff class Default

Type 3 or

better

Demand + usage +

fixed New tariff


network tariff

Transmission customer connected to a TNI substation

transmission connection point in Ausgrid’s network area Opt-in

Type 3 or

better Various


Source: Ausgrid, Tariff structure statement, 27 November 2015; Ausgrid, Tariff structure statement: Appendix 2: General description of Ausgrid’s default network

use of system tariffs, 27 November 2015; Ausgrid, Response to AER TSS issues paper: Attachment 2, May 2016.


C Distributors' customer consultation and

customer impact analysis

This appendix details the NSW distributors consultation process and comments on

their customer impact analysis as outlined in their tariff structure statements.

C.1 Customer consultation

We consider that the NSW distributors' customer consultation could be improved by

starting discussions earlier and providing more information about alternative models

focused around potential customer impact.

Ausgrid, Endeavour Energy and Essential Energy all undertook customer consultation

in a three phase process. This consisted of:

Phase 1: 2013-15

Discussion on tariff reform in 2013-14

Tariff conversation triggered via a range of presentations, workshops, roundtables

and other consultations conducted by NNSW and the three distributors

Phase 2: September—November 2015

One-to-one interviews with key tariff structure statement (TSS) stakeholders to

inform preferred engagement process

Release and distribution for comment of a TSS Issues paper from NNSW

TSS stakeholder roundtables and TSS stakeholder forum

one-on-one interviews with key TSS stakeholders

comments and submissions from NNSW TSS public consultation Have Your Say

online portal (hosted by NSW government)

Social media dialogue and feedback

Distributors engagement with customer consultative committees, Local

Government Areas, other stakeholder groups.

Phase 3:

Feedback to stakeholders on their submissions to the issues paper

Development of plain English TSS for customers

Submit draft TSS to AER for review

Complete quantitative and qualitative research

Embed engagement on tariffs in community engagement plans for each network

business

Conversation with customers continues.


This consultation process is best summarised in the following figure.

Figure C-1 NSW distributors' consultation process

Stakeholders were critical of the NSW distributors’ consultation process before lodging

their tariff statements. At the public forum, the deficiency of the NSW distributors’

consultation process and their declining block tariffs were the two major issues that

occupied most of the forum and where there was widespread agreement among

stakeholders. Several stakeholders at the public forum described the NSW distributors

as following the ‘DAD’ (‘decide’, ‘announce’, defend’) approach to consultation. At the

forum, the NSW distributors acknowledged they need to improve their consultation

process for the second round of tariff structure statement proposals.

We understand that the consultation process for phase 1 and phase 2 was managed

by Networks NSW, whereas the consultation process on the second round of tariff

structure statement proposals will be managed by the individual distributors.

The Energy and Water Ombudsman NSW (EWON) stated that it shares some of the

concerns that have been raised by other stakeholders about the quality of that NSW

distributors’ consultation process, which it took part in. EWON stated for the next round

of tariff structure statement proposals, it expects early discussions about tariff design

and full information about alternative models focused around potential customer

impact, and in particular potential impacts on vulnerable customers.244

EnergyAustralia would like to see meaningful reform starting immediately; particularly

as it believes the introduction of fully cost reflective tariffs to all residential and small

business customers should occur over a reasonably long timeframe (i.e. over two or

three regulatory periods). This period allows for the complexity of the tariffs, current

customer perceptions, and the importance of certainty and stability in tariff structures.

244

Energy and Water Ombudsman NSW (EWON) Submission: AER issues paper: Tariff structure statement

proposals: NSW electricity DNSPs, May 2016, p.4-5.


Customers require certainty and stability in order to make significant changes to their

consumption profiles and appliance mix, and to invest in infrastructure that helps them

manage their consumption.245

EnergyAustralia views the proposals in South Australia and Queensland, where the

stock of smart meters is also relatively small, as feasible alternatives for the NSW

networks. This relates to both the approach (the gradual introduction of demand

charges for residential and small business customers) and the manner in which reform

will occur (voluntary or where there is a particular trigger).246

Energy Consumers Australia (ECA) submitted that it has been disappointed with the

quality of the consultation by the NSW networks for the current round of tariff structure

statements.

In bringing these concerns to the attention of the AER and the businesses in question, ECA’s is keen to contribute to the development of significantly improved processes for the next round of TSS development. We encourage the NSW networks to approach the task of engaging with consumers to improve outcomes for all participants, including networks.

247

The Public Interest Advocacy Centre (PIAC) submitted that it has some concerns

about how the consultation was conducted.

Firstly, we are concerned that the overall timeline for consultation was too narrow and limiting. PIAC, as all consumer advocates submitting to the process, require time to develop policy positions and consult our consumer reference panel and representative members. It is difficult for us to do this if we are only given four weeks to prepare submissions after the release of the TSS. PIAC brings a representative consumer voice to network processes. To do this we need time to engage with the relevant stakeholders that we represent, and effectively participate in the consultation process.

248

C.2 Customer impact analysis

We consider Endeavour Energy and Essential Energy could improve their customer

impact analysis by including all their tariffs in their customer impact analysis and by

also showing the change in tariffs in absolute dollar terms.

We consider all of the NSW distributors customer impact analysis could be improved

by including the following:

For each tariff where there is an option to opt-in to another tariff a comparison

between the tariffs could be made. For example at the residential and small

245


May 2016, p.7 246


May 2016, p.3 247

Energy Consumers Australia (ECA) Submission: AER issues paper: Tariff structure statement proposals: NSW

electricity DNSPs, May 2016 p.12 248

Public Interest Advocacy Centre (PIAC Submission: AER issues paper: Tariff structure statement proposals: NSW

electricity DNSPs, 6 May 2016, p.3-4


business level a comparison between the declining block tariffs and the time-of-use

tariffs could be made.

The analysis of time-of-use tariffs could show different profiles of peak and off-peak

usage so that customers can see how changing their behaviour can influence their

bill.

An example of customer impact comparison between types of tariffs at the residential

level between the declining block tariff and the time-of-use tariff is set out in the

following figure.

Figure C-2 Residential customer consumption 5 MWh per annum

The customer impact analysis provided by each of the NSW distributors is limited. Of

the three distributors Ausgrid provided the most information regarding customer

impact. This included figures showing customer impact under Ausgrid's indicative

tariffs for 2018-19 compared to current 2015-16 tariffs in absolute dollar terms and in

percentage terms. The analysis showed the customer impact for each level of annual

consumption. An example of Ausgrid's customer analysis is set out below in Figure C-3

and Figure C-4.

700

720

740

760

780

800

820

840

860

880

900

Block tariff TOU P18% S29%OP53%

TOU P20% S35%OP45%

TOU P33% S33%OP33%

Do

lllar

s p

er

ann

um


Figure C-3 Customer impact under Ausgrid's indicative network use of

system prices - declining block tariff FY 2015-16 vs FY2018-19


Figure C-4 Customer impact under Ausgrid's indicative network use of

system prices - residential declining block tariff - percent terms FY 2015-

16 vs FY 2018-19

Ausgrid provided this analysis for each of its proposed tariffs. Ausgrid also provided the

same analysis for a high volume and low volume scenarios.

Endeavour Energy's customer impact analysis was limited to its residential declining

block tariff and its small business (general supply) inclining block tariff. It showed only

the percentage change in bills for customers on these tariffs for each of the financial

years 2016-17, 2017-18 and 2018-19, as set out below in Figure C-5. It did not show

the change in absolute dollar terms. We consider additional information showing the

change in dollar terms would provide customers with a better understanding of the bill

impact and would be easier for customers to understand. Further we consider the

customer impact analysis should have been extended to all of Endeavour Energy's

tariffs.


Figure C-5 Endeavour Energy's indicative pricing impact

Essential Energy's customer impact analysis is limited to the impact in percentage

terms to average annual MWh for the different customer groups as set out below:

Residential declining block tariff and time-of-use customers consuming 5MWh per

annum,

Non-residential declining block tariff and time-of-use consuming 8MWh per annum,

LV demand customers consuming 496MWh per annum,

HV demand customers consuming 5.7GWh per annum, and

Subtransmission customers consuming 13.2GWh per annum.

It does not show the change in absolute dollar terms or the impact on customers with

either higher or lower consumption. We consider Essential Energy could improve its

customer impact analysis by including all their tariffs in their customer impact analysis

and by also showing the change in tariffs in absolute dollar terms.


Figure C-6 Essential Energy customer bill impacts by tariff type year on

year change

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