Market-based electricity purchase cost allowance - 2009 review...Market-based electricity purchase...

Independent Pricing and Regulatory Tribunal

Market-based electricity purchase

cost allowance - 2009 review

Regulated electricity retail tariffs and charges for small customers 2007 to 2010

Electricity — Final Report and Determination

May 2009

Market-based electricity purchase cost allowance – 2009 review Regulated electricity retail tariffs and charges for small customers 2007 to 2010

Electricity — Final Report and Determination May 2009

ii IPART Market-based electricity purchase cost allowance – 2009 review

© Independent Pricing and Regulatory Tribunal of New South Wales 2009

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-921328-86-2 Det09-06

The Tribunal members for this review are:

Dr Michael Keating, AC, Chairman

Mr James Cox, Chief Executive Officer and Full Time Member

Ms Sibylle Krieger, Part Time Member

Inquiries regarding this document should be directed to a staff member:

Anna Brakey (02) 9290 8438

Fiona Towers (02) 9290 8420

Independent Pricing and Regulatory Tribunal of New South Wales PO Box Q290, QVB Post Office NSW 1230 Level 8, 1 Market Street, Sydney NSW 2000

T (02) 9290 8400 F (02) 9290 2061

www.ipart.nsw.gov.au


Electricity — Final Report May 2009

Market-based electricity purchase cost allowance – 2009 review IPART iii

Contents

1 Overview 1

2 Background and process 3 2.1 2007 determination 3 2.2 Process for 2009 review of market-based electricity purchase costs 6

3 2009 review of market-based electricity purchase cost allowance 7 3.1 Draft report 7 3.2 Submissions to draft report 7 3.3 Expert report 8 3.4 IPART’s 2009 final decision on market-based electricity purchase cost

allowances for 2009/10 10 3.5 Estimated average price increases for regulated customers on 1 July 2009 12

4 Alleviating customer impacts 15 4.1 Pension rates and energy prices 16 4.2 Measures to alleviate customer impacts 17 4.3 Recommendation to Minister 19 4.4 Preparations by standard retailers for the impacts of price changes 19

Appendices 21 A Submission by Minister for Energy 23 B Letters from Standard Retailers outlining preparations for 1 July price change 25

Market-based electricity purchase cost allowance – 2009 review IPART 1

1 Overview

The Independent Pricing and Regulatory Tribunal of NSW (IPART) is responsible for setting the regulated retail electricity tariffs charged by the Standard Retailers in NSW – Country Energy, EnergyAustralia and Integral Energy – to small retail customers on standard form customer contracts.1

On 14 June 2007, IPART released its determination on regulated electricity retail tariffs and charges for small customers 2007 to 2010 (the 2007 determination). IPART included an annual review of the market-based electricity purchase cost allowance (the review), to factor into the determination material step-changes in this allowance, if required. The annual review is a mechanical review in the sense that it does not involve any policy decisions and applies the pre-determined methodology that is set out in the 2007 determination.

Consistent with its March 2009 draft decision, IPART’s final decision is that the market-based electricity purchase cost allowance has exceeded the allowance provided for in the 2007 determination by 14, 15 and 16 per cent for EnergyAustralia, Integral Energy and Country Energy, respectively. This exceeds the 10 per cent threshold set out in the determination and, therefore, requires IPART to revise the allowance included in the retail prices from 1 July 2009.

As a result of the increase in the electricity purchase cost allowance alone, retail prices will increase by 6 per cent for EnergyAustralia and Integral Energy and 5 per cent for Country Energy. Network prices, which comprise around 45 per cent of the total retail bill, are likely to substantially increase as a result of the Australian Energy Regulator’s (AER’s) 2009-2014 distribution and transmission price determinations. Additionally, IPART has updated its inflation estimate.

In addition to both the network increases and wholesale price increases, retail electricity prices will need to increase because the price increases under IPART’s 2007 retail price determination are being phased in. The contributions of each of the three sources to price increases to the change in the electricity prices is shown in Table 1.1.2 These price increases are similar to those signalled in IPART’s March 2009 draft report.

1 Customers consuming less than 160 MWh per annum of electricity can be supplied under a

standard form customer contract and, therefore, be subject to a regulated tariff or can enter into a negotiated contract.

2 Because both the network and regulated retail prices are set using a weighted average price cap, the numbers set out in Table 1.1 are indicative only. The Standard Retailers, in setting their regulated tariffs, will include the actual network charges applicable. IPART will assess compliance with the actual regulated retail tariffs before they are implemented.

2 IPART Market-based electricity purchase cost allowance – 2009 review

Table 1.1 Average increase in typical bills for customers on regulated retail electricity tariffs after allowing for inflation, 1 July 2009 (%)

EnergyAustralia Integral Energy Country

Energy

Network price increases 10.4 9.3 9.8

Price increases due to transitioning in 2007 determination

5.3 5.9 3.0

Impact of increased market based electricity cost allowance from 2009 review

6.0 6.0 5.1

Total percentage increase 21.7 21.1 17.9

Note: Assumes typical annual usage without controlled load consumption of 5600kWh.

These increases do not include the increase in the NSW Climate Change Fund Levy or the Clean Coal Fund Levy announced in the 2008 NSW Mini-budget.

The price increases result from:

increased network charges, in accordance with the AER’s distribution and transmission determinations, which are passed through to retail tariffs,

increased wholesale energy charges, as described in this report in accordance with the annual review mechanism established in the 2007 determination

transitioning tariffs to fully cost reflective levels, as specified in the 2007 determination.

These price increases are substantial and have the potential to significantly impact on all households, especially low income households. IPART does not welcome such large price increases. The price increases reflect the minimum amount required to set tariffs at cost reflective levels, as set out in the terms of reference for the 2007 review.

The Minister for Energy made a submission to IPART’s draft report, requesting IPART’s views as to the most effective way in which the impacts of any price increases on small customers could be alleviated. Subsequent to receiving the Minister’s submission, IPART conducted further analysis and met with key stakeholders. It recommends that the Government consider bringing forward the customer assistance measures that it has announced in its Energy Reform Strategy3, including:

increasing pensioner rebates from $112 to $130 per annum, indexed thereafter

extending energy rebates to include recipients of Carer Allowances (child under 16), Sickness Allowances and Special Benefits

introducing a “Customer Assistance Policy” for small domestic customers, and

increasing the level of funding under the current EAPA scheme to $100 million.

3 New South Wales Government, New South Wales Energy Reform Strategy – Defining an Industry

Framework, March 2009.


Further, IPART recommends that the Government should consider indexing the pensioner rebate to energy prices rather than the CPI as this more closely tracks the costs that the rebate is alleviating. A more equitable, but potentially more expensive alternative would be for the Government to consider making the pensioner rebate a percentage of the bill, rather than a fixed amount.4 In addition, IPART considers that the Government should examine expanding the eligibility criteria for the pensioner rebates to holders of Commonwealth Health Care Cards.

2 Background and process

2.1 2007 determination

In June 2007, IPART released its determination on regulated electricity retail tariffs and charges for small customers from 2007 to 2010.5 In undertaking its review and making its determination, IPART was guided by the terms of reference provided by the Minister for Energy. These terms of reference required IPART to, among other things:

Assess the costs of a hypothetical retailer, including the electricity purchase costs for the regulated load in each Standard Retailer’s supply district, and the retail costs and retail margin for a mass market new entrant.

Recognise retailers’ hedging, risk management and transaction costs, particularly given that the ETEF6 will be phased out during the determination period.

For 2010, IPART set R values (in $2006/07) that reflect the following factors:

The market-based electricity purchase costs, based on the Frontier Economics’ conservative point estimate for each business.

The volatility allowance.

Costs associated with greenhouse reduction and renewable energy requirements.

Retail operating costs (including customer acquisition costs) and retail margin.

NEM fees.

Energy losses.

4 The proportion of the bill that is covered by the rebate would need to be considered to examine

the impact on individual pensioners. 5 IPART, Promoting retail competition and investment in the NSW electricity industry, Regulated

electricity retail tariffs and charges for small customers 2007 to 2010 – Final Report and Final Determination, June 2007.

6 ETEF is the Electricity Tariff Equalisation Fund, put in place by the NSW Government. Standard Retailers contributed to and/or withdraw from the fund based on differences between the actual price they pay for electricity and the cost of electricity assumed in setting regulated retail tariffs.


IPART decided to set the R values for 2007/08 and 2008/09 to reflect a transition to the calculated hypothetical retailer costs in 2009/10.

2.1.1 Electricity purchase cost allowance

IPART engaged Frontier Economics to provide expert advice on the electricity purchase cost allowance included in its determination by specifically addressing the relevant matters set out in the terms of reference. Frontier Economics provided advice to IPART on:

The long-run marginal cost of electricity generation.

Market-based electricity purchase costs, based on analysis of the efficient mix of electricity purchasing instruments for each level of risk, derived using its proprietorial portfolio optimisation models (STRIKE). The results of this analysis formed an efficient frontier with the expected cost of the electricity portfolio on the vertical axis and the associated risk on the horizontal axis. Frontier Economics identified two points on each frontier – a conservative point, representing the lowest risk, highest cost point on the frontier, and an elbow point, representing a lower cost but higher risk portfolio.

In its determination IPART adopted Frontier Economics’ conservative point estimate of the market-based electricity purchase costs for calculating the R values.

Around the time that IPART released its draft report in April 2007 there were substantial increases in reported spot and contract wholesale electricity prices. These increases highlighted the relationship between critical inputs (such as water), plant availability and the market price of electricity.

IPART determined the market-based cost of electricity purchases, as set out in Table 2.1 and addressed the risk of a step-change in future wholesale electricity prices by conducting the annual reviews of this cost allowance prior to the roll-off of ETEF.


Table 2.1 IPART’s 2007 market-based cost of electricity purchase – Conservative point by time-of-use ($2009/10 /MWh)

Description 2009/10

Country Energy

Peak 64.8

Shoulder 71.1

Off-peak 30.9

All periods 48.1

EnergyAustralia

Peak 100.2

Shoulder 50.3

Off-peak 33.1

All periods 54.8

Integral Energy

Peak 109.0

Shoulder 49.7

Off-peak 35.1

All periods 57.5

Source: IPART, Promoting retail competition and investment in the NSW electricity industry, Regulated electricity retail tariffs and charges for small customers 2007 to 2010 – Final Report and Final Determination, June 2007, p 84, adjusted for inflation.

2.1.2 The annual review of market-based electricity purchase cost allowance and R values

After considering submissions to the draft determination and the supplementary advice provided by Frontier Economics, IPART decided to include annual price reviews of the market-based electricity purchase cost component. IPART’s intention was to provide for updated information on electricity purchase cost allowances to be incorporated into the prices as if it was known at the time of making the 2007 determination. Therefore, IPART limited the extent of these reviews, stating in its report:

The review will examine the market-based electricity purchase cost allowance only – it will NOT consider long-run marginal cost of electricity generation, the volatility allowance, green energy costs, NEM fees, retail operating costs, customer acquisition costs or the retail margin.

IPART will engage an expert to advise it on the appropriate future market-based electricity purchase cost allowance. It decided due to the relatively small amount of trade captured by d-cypha at the time of making the 2007 determination that IPART would not rely on that information, but would engage an expert to provide advice.


IPART will adopt a conservative approach to estimating the market-based electricity purchase cost and focus on changes to the spot and contract prices for electricity.

IPART will use the same load profiles as it used in the 2007 determination – it will not update the load profiles.

These reviews will commence by 1 March 2008 and 1 March 2009. IPART will release a draft report and consult with stakeholders prior to issuing its final decision by 20 May in each year.

If, in any year, the market-based electricity purchase cost allowance is at least 10 per cent higher or lower than IPART’s determined market-based electricity purchase cost allowance, then IPART will reconsider the transition path (to 2010 prices) and recalculate the R values.7 In doing so, it will consider:

the revised market-based electricity purchase cost allowance and

the transitioning of the tariffs to full cost reflectivity by 2009/10.

This review is a forward-looking review and does not look at the actual costs of hedging incurred by the Standard Retailers.

2.2 Process for 2009 review of market-based electricity purchase costs

IPART engaged Frontier Economics to prepare a report outlining its expert opinion of the market-based electricity purchase cost allowance for 2009/10, which is available on the IPART website. This final report follows a draft report, released in March 2009.

Table 2.2 Process for 2009 review of market based electricity purchase costs

Date Event

12 March 2009 Consultants reports and Tribunal draft decision released

19 March 2009 Stakeholder information session on consultant’s draft report

14 April 2009 Submissions due

20 May 2009 Release final decision

7 The R values are set out in sections 7.3 and 7.4 of the 2007 determination.


3 2009 review of market-based electricity purchase cost allowance

3.1 Draft report

In March 2009 IPART released its draft decision, finding that the market-based electricity purchase cost allowance exceeded the allowance provided for in the 2007 determination by 14, 15 and 16 per cent for EnergyAustralia, Integral Energy and Country Energy, respectively. These are the same findings as this final report.

For its draft decision, IPART calculated average increases in the retail tariffs on the AER’s draft 2009-2014 distribution and transmission price determinations. The proposed distribution price increases were 24.3 per cent, 15.4 and 19.7 per cent for EnergyAustralia, Integral Energy and Country Energy, respectively for 2009/10.8

3.2 Submissions to draft report

Submissions were due on 14 April 2009. A total of 43 submissions were received, comprising:

28 submissions from individuals and one from Bellevue Gardens Retirement Village, focussed mainly on affordability, particularly for the elderly and people on low and fixed incomes.

Submissions from consumer groups, including Combined Pensioners and Superannuants Association of NSW, PIAC, Council on the Ageing, EWON, mainly focussed on affordability and bringing forward and expanding Government assistance measures.

Submissions from the industry, including Country Energy and Integral Energy, who agreed with the Tribunal’s findings and AGL, TRU Energy and Origin Energy, who believed that the allowance was too low and discussed use of d-cypha data. AGL has raised issues about the transparency and assumptions used by Frontier Economics (see section below for further discussion).

Submissions from organisations, including Eurobodalla Shire Council, Lithgow Shire Council and the Member for Port Macquarie, raising affordability concerns.

A submission from the Minister for Energy, requesting the Tribunal’s views on the most effective way in which the impacts of any price increases on small customers could be alleviated. This submission calls for the Tribunal to balance the objectives of ensuing cost reflectivity and requests that IPART considers the impact of these proposed increases on household budgets, particularly in light of the current global financial crisis.

8 Australian Energy Regulator, NSW draft distribution determination, 2009/10 to 2013/14, Draft

Decision, 21 November 2008, tables 31, 32 and 34.


3.3 Expert report

Frontier Economics has provided expert advice to IPART on its current views on the market-based electricity purchase cost allowance. Consistent with the approach taken in providing advice to IPART for the 2007 determination, Frontier Economics used its proprietorial models – STRIKE and SPARK - to estimate the market-based electricity purchase costs.9

The analysis provided by Frontier Economics10 concludes that market based energy purchase costs have increased by around 15 per cent, due to:

market uncertainty arising from the policies of governments, including greenhouse policies and ETEF

market uncertainty arising from the impact of the drought on generation capacity and output

the impact of these uncertainties on contracting behaviour, and

updated demand and supply forecasts and ownership changes within the generation market.

Table 3.1 sets out Frontier Economics’ recommended market-based electricity purchase costs allowances under two scenarios:

1. Where ETEF has ceased to exist by 30 June 2010 (current government policy).11

2. Where ETEF continues to cover the entire regulated load at 30 June 2010. This scenario reflects market uncertainty regarding the future of ETEF.

9 Frontier Economics, Draft methodology for energy cost consultancy and retail costs/margin

consultancy – Frontier Economics, October 2006, available on the IPART website. 10 Frontier Economics, Annual Energy Cost Review – Final Report, February 2009. 11 On 20 February 2009, the NSW Treasurer in consultation with the NSW Minister for Energy

amended the ETEF payment rules. The amended Payment Rules provide that up to and including 26 September 2009, 100 per cent of the standard retail suppliers’ regulated load will remain subject to the Electricity Tariff Equalisation Fund. From 27 September 2009, 40 per cent of the regulated load will be subject to the Fund. The 20 February announcement stated that at that time no decision had been taken to alter the timing of future stages of the phase out of the ETEF. This means that by 30 June 2010, ETEF is scheduled to cease to exist.


Table 3.1 Frontier Economics’ recommended market based electricity purchase cost allowances for 2009/10 compared to IPART’s allowance in its 2007 determination ($2009/10)

IPART’s 2007 determination

Frontier Economics’ April 2009 estimates

Percentage change

ETEF ceases by 30 June 2010

EnergyAustralia 54.8 62.8 14

Integral Energy 57.5 65.8 15

Country Energy 48.1 55.8 16

ETEF covers 100 per cent of regulated load at 30 June 2010




The allowances shown in Table 3.1 are different to those shown in IPART’s March 2009 draft report due to the use of an updated CPI figure of 4.35 per cent.

Percentages may not calculate due to rounding

Frontier Economics provided a supplementary report to IPART after considering the submissions to the draft report. In particular, Frontier Economics considered issues raised by AGL in its submission, including the assumptions on effective control over dispatch at specific power plants, and the availability of hydro plant. Frontier Economics did not consider that there was any material change to its recommendations and maintained its original position.

In relation to the delay in the commencement of the Carbon Pollution Reduction Scheme (CPRS), Frontier Economics stated12:

These new measures do not change the key consideration for the purposes of this annual review: that the CPRS will not operate during the 2009/10 tariff year.

… very early indications are that the announcement has not had a significant impact on market outcomes for 2009/10, but has had some impact on market outcomes for 2010/11 and beyond.

The Frontier Economics reports are available on the IPART website.

12 Frontier Economics, Annual energy cost review, Response to submissions from stakeholder,

May 2009, p 5.


3.4 IPART’s 2009 final decision on market-based electricity purchase cost allowances for 2009/10

After considering submissions to its draft decision and consistent with its draft report, IPART’s final decision is to revise market based electricity cost purchases. IPART will adopt Frontier Economics’ scenario based on the existing Government policy on the treatment of ETEF (ie, it will cease to exist by 30 June 2010). Therefore, the 10 per cent threshold has been met and as a result the market-based electricity purchase cost allowance and R values set out in the 2007 determination will be reset.

In coming to this decision, IPART has considered the Frontier Economics expert reports. IPART acknowledges the supply and demand changes in the market, particularly the ownership changes, and the uncertainties (and resulting changes to contracting behaviour) that market participants in NSW currently face. IPART acknowledges the delay to the introduction of the CPRS, announced by the Prime Minister on 4 May 2009. While this is an example of the uncertainties that face the electricity market, the timing of the CPRS falls outside the 2009/10 period under review and has not had a material impact on 2009/10 prices, as noted by Frontier Economics.

The final recommendations on the market based electricity purchase cost allowances presented by Frontier are broadly consistent with the prices observed by recent d-cypha data. In its 2007 determination IPART decided to base its decision on expert advice rather than publicly available information on future electricity wholesale prices, such as that provided by d-cypha. This is because, at the time, trading in future contracts was a relatively small proportion of physical demand and there were doubts about whether d-cypha indexes adequately represented electricity wholesale prices. Since then trading in electricity future contracts has expanded considerably and d-cypha indexes are more likely to be representative of future electricity wholesale prices. In their submissions some industry stakeholders called for IPART to rely on d-cypha data rather than expert advice. However, to be consistent with the methodology established in 2007, IPART has based its decision on advice from its expert, Frontier Economics. Frontier Economics’ report which is available on IPART’s website, includes comparisons between its conclusion regarding future electricity wholesale prices and d-cypha data.

Table 3.2 sets out IPART’s market-based electricity purchase cost allowances for 2009/10. The increased cost allowances will be used to reset the R values set out in the 2007 determination. The R values will be used in calculating the weighted average price cap that will be used to regulate the prices that each Standard Retailer charges customers on regulated retail tariffs. Table 3.3 illustrates the revised R values that will be used to calculate the 1 July 2009 price change.


Table 3.2 IPART’s draft market based electricity purchase cost allowances for 2009/10 compared to the allowances in the 2007 determination ($2009/10 /MWh)

IPART’s 2007 determination

IPART’s 2009 final decision

Percentage change (%)




Source: IPART, Promoting retail competition and investment in the NSW electricity industry, Regulated electricity retail tariffs and charges for small customers 2007 to 2010 – Final Report and Final Determination, June 2007 p 83 and Frontier Economics, Annual energy cost review, Final Report, February 2009, p 24.

Note: IPART’s final decision on the market-based electricity purchase cost allowance is the same as its March 2009 draft decision, although IPART has updated the inflation estimate, resulting in slightly higher allowances in $2009/10.

Per centages may not calculate due to rounding.


Table 3.3 R values in each year of the determination

Description 2009/10

($2007/08)2009/10

($2009/10)

EnergyAustralia

Fixed R 88.6 94.6

Variable R:

Single rate and time of use 83.7 89.4

Controlled load A 50.3 53.7

Controlled load B 67.4 72.0

Integral Energy

Fixed R 88.6 94.6

Variable R:




Country Energy

Fixed R 88.6 94.6

Variable R:




3.5 Estimated average price increases for regulated customers on 1 July 2009

In addition to the price increases already set out in the 2007 determination, the price changes for 1 July 2009 include:

the higher market based electricity purchase cost allowance, and

higher network price increases than IPART forecast in its 2007 determination, reflecting the AER’s April 2009 final determination for the NSW distribution and transmission network service providers.

3.5.1 Transmission and distribution price increases

In April 2009, the AER released final determinations for the NSW transmission and distribution businesses that will be included in tariff increases on 1 July 2009.

The final determination for the distribution businesses specifies substantial distribution price increases on 1 July 2009, followed by ongoing real price increases through until 2013/14. Table 3.4 sets out the average distribution price increases for 1 July 2009 established under the AER’s draft and final determinations.


Table 3.4 Average real distribution price increases under the AER’s NSW distribution price review (%)

Draft report Final report

EnergyAustralia 24.3 17.9

Integral Energy 15.4 12.6

Country Energy 19.7 13.4

Source: Australian Energy Regulator, NSW draft distribution determination, 2009/10 to 2013/14, Draft Decision, 21 November 2008, tables 31,32 and 34; Australian Energy Regulator, NSW distribution determination, 2009-10 to 2013-14, Final Decision, 28 April 2009, tables 21,22 and 24.

TransGrid has advised the NSW distributors of the transmission charges applicable for 2009/10. 13

The combined impact of the transmission and distribution price increases will on average increase the regulated retail tariffs by 10.4 per cent, 9.3 per cent and 9.8 per cent for EnergyAustralia, Integral Energy and Country Energy, respectively14 (as set out in Table 3.5). The 2009/10 regulated retail prices will be set using the actual network tariffs, which will be available in June 2009. Specifically, the regulated retail tariff allows for the network tariffs to be passed through to customers.

3.5.2 Wholesale and retail cost increases

The 2007 determination set a transition path, which provided for tariffs to be fully cost reflective by 2009/10. Therefore, during the period from 2007 to 2010, electricity prices were increasing in real terms. The increased market-based electricity cost allowances flagged under this decision (set out in section 3.2) will further increase regulated retail tariffs, as illustrated in Table 3.5.

3.5.3 Transition path

In its 2007 determination, IPART specified that where the market based electricity purchase cost allowance met the threshold for change, it would determine revised fixed and variable R values taking into account the new cost allowance and the transitioning of regulated retail to full cost reflectivity by 2009. Accordingly, the Tribunal has included the revised market based electricity purchase cost allowances in the R values. IPART has set the 2009/10 tariffs at the cost reflective level.

13 The AER determined that the transmission final decision would result in an average increase of

4.8 per cent per annum in real terms ($2008/09). However, TransGrid has advised the distribution businesses that the increases in transmission charges in 2009/10 will be in excess of 20 per cent due to an increase in the revenue cap, a continuing falling in the value of the National Electricity Market trading residues returned to customers through transmission charges and an adjustment for the network support pass through approved by the AER in May 2008.

14 These indicative network price increases have been estimated in consultation with the Standard Retailers.


Effectively, IPART does not need to have regard to transitioning because the requirement is to achieve cost reflective levels in 2009/10.

3.5.4 Estimated nominal average price increases to regulated retail tariffs on 1 July 2009

As a result of the increase in the electricity purchase allowance alone, retail prices will increase by 6 per cent for EnergyAustralia and Integral Energy and 5 per cent for Country Energy. Network prices, which comprise around 45 per cent of the total retail bill, will substantially increase as a result of the Australian Energy Regulator’s (AER’s) 2009-2014 distribution and transmission price determinations. The AER has determined distribution price increases of 17.9 per cent, 12.6 and 13.4 per cent for EnergyAustralia, Integral Energy and Country Energy, respectively for 2009/10. The AER determined that the transmission final decision would result in an average increase of 4.8 per cent per annum in real terms ($2008/09).15 However, increases in transmission charges in 2009/10 will be significantly higher than 4.8 per cent.

In addition to both the network increases and wholesale price increases, retail electricity prices will need to increase because the price increases under IPART’s 2007 retail price determination are being phased in. The contribution of each of the three factors to the change in the electricity prices is shown in Table 3.5.

The estimates included in this final report have been updated for a higher level of inflation than that used in the draft report. The 2007 determination specifies the inflation to be used to set prices.

This increase equates to an additional average weekly electricity bills of $3.53, $3.89 and $3.92 for customers of EnergyAustralia, Integral Energy and Country Energy, respectively.16

15 Australian Energy Regulator, TransGrid transmission determination 2009-10 to 2013-14, Final

decision, 30 April 2009, p xiii. 16 Assumes typical annual usage (without controlled load) of 5600kWh.


Table 3.5 Indicative increases for regulated customers, by Standard Retailer after allowing for inflation, 1 July 2009 (%)

EnergyAustralia Integral Energy Country

Energy

Network price increases 10.4 9.3 9.8

Price increases due to transitioning in 2007 determination

5.3 5.9 3.0

Impact of increased market based electricity cost allowance from 2009 review

6.0 6.0 5.1

Total percentage increase 21.7 21.1 17.9

Note: Assumes typical annual usage (without controlled load) of 5600kWh.

These increases do not include the increase in the NSW Climate Change Fund Levy or the Clean Coal Fund Levy announced in the 2008 NSW Mini-budget.

Because both the network and regulated retail prices are set using a weighted average price cap, the numbers set out in Table 3.5 are indicative only. IPART has applied an average increase to the network charges applied to small retail customers and the regulated retail tariffs, however, each of these businesses have the discretion to increase individual tariffs by more of less than the average increase. Further, 2009/10 network prices will not be finalised until June 2009. The Standard Retailers, in setting their regulated tariffs, will include the actual network charges applicable. IPART will assess compliance with the actual regulated retail tariffs before they are implemented.

4 Alleviating customer impacts

As set out in section 3, the Minister for Energy made a submission to IPART’s draft report, requesting that IPART ensure that, when calculating the proposed increases in regulated retail tariffs from 1 July 2009, it considers the impact of the proposed increases on household budgets, particularly in light of the current global financial crisis.

In forming this final decision, IPART has implemented the process and scope that it established in the 2007 determination. This is important for regulatory certainty. The Tribunal based its 2007 determination on the terms of reference provided by the then Minister for Energy. This decision provides the minimum price increases required to establish cost reflective prices, consistent with the cost items set out in the terms of reference.

Further, the Minister requested IPART’s views as to the most effective way in which the impacts of any price increases on small customers could be alleviated. Subsequent to receiving the Minister’s submission, IPART conducted further analysis, considered issues raised in submissions and met with key stakeholders.


4.1 Pension rates and energy prices

To monitor the impact of its price determinations on households, IPART introduced an index of household charges in 1993. This index measures, for an average household, the cumulative changes in the prices of the services it regulates, using Australian Bureau of Statistics (ABS) data on household expenditure to calculate the relative expenditure (weightings) for electricity, gas, water and public transport (rail, bus and ferry)1. The majority of households spend less than 4 per cent of total expenditure on these services. This proportion is higher for low income households than high income households: for example, according to the 2003/04 Household Expenditure Survey the poorest 20 per cent spend 4.9 per cent on these services compared to 3.1 per cent for the richest 20 per cent (Figure 4.1). This means that IPART’s price determinations have a bigger impact on the household budgets of low income household than high income households.

Figure 4.1 Share of expenditure on services by income quintile

Data source: 2003/07 Household Expenditure survey by income quintile (Australia wide). The Australian Bureau of Statistics does not provide expenditure by income quintile for NSW or Sydney.

IPART commissioned NATSEM to provide data on the incomes of hypothetical households for the period from 1995/96 until 2008/09 for:

single aged pensioners with no private income

couple aged pensioners with no private income, and

“supported” single parents with 2 children (aged 5 and 7).

IPART then compared indices of the incomes of the hypothetical households with an index of energy charges. Figure 4.2 illustrates that over this period, energy charges have increased faster than the income of aged pensioners, but slower than the income of a sole parent with two children earning 50 per cent of average weekly earnings.

The NATSEM data commissioned by IPART are available on the IPART website.


Figure 4.2 Indices of energy charges and income for pension recipients, 1995-96 to 2008-09

100

110

120

130

140

150

160

170

180

190

1995/96 1997/98 1998/99 2000/01 2001/02 2003/04 2005/06 2007/08 2008/09

Energy charges Single aged pensioner Couple aged pensioners Sole parent earning 50% of AWE

4.2 Measures to alleviate customer impacts

IPART considered issues raised in submissions and met with representatives from key consumer groups17, to discuss customer assistance/protection measures, including the Government’s consumer protection package linked to privatisation and expanding the eligibility of rebates. This package includes18:





Stakeholders had a strong consensus that these measures commence earlier to alleviate the impact of the 1 July price increases.

17 Stakeholders included NCOSS, EWON, PIAC, Council for the Ageing, Combined Pensioners

and Superannuants Association of NSW and industry representatives. 18 New South Wales Government, New South Wales Energy Reform Strategy – Defining an Industry

Framework, March 2009.


Further, there was discussion among stakeholders about whether the eligibility for the pensioner rebate should be extended to Commonwealth Health Care Card holders. The recipients of the following allowances are eligible for a Commonwealth Health Care Card:

Newstart Allowance

Exceptional Circumstances Relief Payment

Special Benefit

Sickness Allowance

Partner Allowance

Widow Allowance

Youth Allowance

Parenting Payment (Partnered)

maximum rate of Family Tax Benefit Part A

Mobility Allowance (if not receiving Disability Support Pension)

Carer Allowance (for a child under 16 years with a disability - the card is for the direct benefit of the child only).

The Commonwealth Health Care Card is also available to people who:

are a foster carer with the card is issued in the name of the foster child

are a low income earner19 (the Low Income Health Care Cards)

are a former holder of a Carer Allowance (child) Health Care Card.

Without the benefit of readily available robust data, IPART has estimated an indicative cost of expanding the eligibility of the pensioner rebate to all Commonwealth Health Care Card holders to be around $40 million. This estimate would require further analysis.

Other issues raised by stakeholders included:

Whether the delivery mechanism for EAPA vouchers needs to be reviewed.

Whether the pensioner rebate should be linked to an electricity price index rather than the CPI.

Whether the pensioner rebate should be a percentage of the bill rather than a fixed amount.

In Victoria, the fixed electricity charge cannot be higher than the usage charge for relevant concession card holders. This would protect customers that try to cut usage to save money, but cannot avoid the service availability charge.

19 As an example, a single or couple with one child must earn less than $783 gross per week to be

eligible for the low income health care card.


4.3 Recommendation to Minister

Based on its own analysis and the views of stakeholders, IPART recommends that the Government consider commencing the following additional customer assistance measures on 1 July 2009, including:





Further, IPART considers that the Government should consider indexing the pensioner rebate to energy prices rather than the CPI as this more closely tracks the costs that the rebate is alleviating. A more equitable, but potentially more expensive alternative would be for the Government to consider making the pensioner rebate a percentage of the bill, rather than a fixed amount.20 In addition, IPART considers that the Government should examine expanding the eligibility criteria for the pensioner rebates to holders of Commonwealth Health Care Cards.

4.4 Preparations by standard retailers for the impacts of price changes

Due to the significant price increases on 1 July, IPART sought information from the Standard Retailers about current programs and additional preparations that they are undertaking to handle the impact of the price increases on customers. Preparations for the customer impact are underway in each Standard Retailer, including expansions of their hardship programs and providing information and other services to customers. Their responses to IPART are set out in Appendix B.

20 The proportion of the bill that is covered by the rebate would need to be considered to examine

the impact on pensioners.


Appendices


A Submission by Minister for Energy


B Letters from Standard Retailers outlining preparations for 1 July price change


Determination No. 6, 2009

Contents

Market-based electricity purchase cost allowance – 2009 review IPART iii

Contents

Preliminary 1 1 Background 1 2 Application of this determination 2 3 Schedules 2

Schedule 1 Market-Based Electricity Purchase Cost 3 1 Application 3 2 Revised Market Based Electricity Purchase Cost 3

Table 1 4

Schedule 2 Revised Fixed R and Revised Variable R 5 1 Application 5 2 Revised Fixed R 5 3 Revised Variable R 5

Tables 2 and 3 6

Schedule 3 Definitions and Interpretation 7 1 Definitions 7 2 Interpretation 11

Preliminary


Preliminary

1 Background (a) On 14 June 2007, the Independent Pricing and Regulatory Tribunal

(IPART) released Determination No. 1 of 2007 (the 2007 Determination) under section 43B of the Electricity Supply Act 1995 (NSW), pursuant to a referral from the Minister for Energy dated 30 June 2006.

(b) The 2007 Determination specified the methodology for determining the Regulated Retail Tariffs and Regulated Retail Charges that Standard Retail Suppliers may charge Small Retail Customers:

(1) whose Premises are in the Standard Retail Supplier’s Supply District; and

(2) who are Supplied electricity at those premises by the Standard Retail Supplier under a Standard Form Customer Supply Contract,

during the period from 1 July 2007 to 30 June 2010.

(c) In clause 16 of the 2007 Determination, IPART included a mechanism for an annual review of the Market Based Electricity Purchase Cost Allowance.

(d) Pursuant to clause 16.2(a) of the 2007 Determination, IPART has:

(1) conducted a review of the Market Based Electricity Purchase Cost Allowance for each Standard Retail Supplier for the 2009/10 Year; and

(2) determined the revised amount which IPART considers reflects the Market Based Electricity Purchase Cost Allowance for each Standard Retail Supplier for the 2009/10 Year (each a Revised Amount) as a result of that review.

(e) The Revised Amount for each Standard Retail Supplier for the 2009/10 Year is more than 10 per cent higher than the Market Based Electricity Purchase Cost Allowance set out in clause 16.1(b) of the 2007 Determination for that Standard Retail Supplier.

(f) Accordingly, pursuant to clause 16.2(b) of the 2007 Determination:

(1) each Revised Amount has been taken as the Market Based Electricity Purchase Cost Allowance for the relevant Standard Retail Supplier for the 2009/10 Year (the Revised Market Based Electricity Purchase Cost Allowance); and

(2) the Tribunal has determined a revised tcFixedR and a revised

tijVariableR for each Standard Retail Supplier for the 2009/10 Year for

the purposes of clause 7.3 and 7.4 of the 2007 Determination (the Revised t

cFixedR and the Revised tijVariableR respectively).

Preliminary


(g) In determining the Revised tcFixedR and the Revised t

ijVariableR for each

Standard Retail Supplier for the 2009/10 Year, IPART has taken into account:

(1) the Revised Market Based Electricity Purchase Cost Allowance for each Standard Retail Supplier; and

(2) the transitioning of Regulated Retail Tariffs to full cost reflectivity by the 2009/10 Year.

2 Application of this determination (a) This determination sets out the Revised Market Based Electricity

Purchase Cost Allowance, the Revised tcFixedR and the Revised t

ijVariableR

for Standard Retail Suppliers for the 2009/10 Year.

(b) This determination commences on the later of 1 July 2009 and the date that it is published in the NSW Government Gazette.

3 Schedules (a) Schedule 1 and the table in that schedule set out the Revised Market

Based Electricity Purchase Cost Allowance for each Standard Retail Supplier for the 2009/10 Year.

(b) Schedule 2 and the tables in that schedule set out the Revised tcFixedR

and the Revised tijVariableR for each Standard Retail Supplier for the

2009/10 Year.

(c) Schedule 3 sets out the definitions and the interpretation provisions.

Schedule 1 Market-Based Electricity Purchase Cost


Schedule 1 Market-Based Electricity Purchase Cost

1 Application This schedule sets out the Revised Market Based Electricity Purchase Cost Allowance for each Standard Retail Supplier for the 2009/10 Year.

2 Revised Market Based Electricity Purchase Cost

The Revised Market Based Electricity Purchase Cost for each Standard Retail Supplier for the 2009/10 Year is the relevant amount set out in Table 1.

Table 1


Table 1

Table 1 Revised Market Purchase Cost for the 2009/10 Year ($/MWh)

Description

2009/10

($2007/08)

2009/10

($2009/10)




Schedule 2 Revised Fixed R and Revised Variable R


Schedule 2 Revised Fixed R and Revised Variable R

1 Application This schedule sets out:

(a) the Revised tcFixedR ; and

(b) the Revised tijVariableR ,

which will apply to each Standard Retail Supplier for the 2009/10 Year for the purposes of clauses 7.3 and 7.4 of the 2007 Determination.

2 Revised Fixed R

The Revised tcFixedR for each Standard Retail Supplier for the 2009/10 Year, is

the relevant amount set out in Table 2.1

3 Revised Variable R

The Revised tijVariableR for each Standard Retail Supplier for the 2009/10 Year,

is the relevant amount set out in Table 3.

1 The Revised t

cFixedR is the same as the tcFixedR set out in clause 7.3 of the 2007 Determination.

Tables 2 and 3


Tables 2 and 3

Table 2 Revised Fixed R for the 2009/10 Year ($ per customer per year)

Description 2009/10

($2007/08)

2009/10

($2009/10)




Table 3 Revised Variable R for the 2009/10 Year ($/MWh)

Description 2009/10

($2007/08)

2009/10

($2009/10)

EnergyAustralia

Standard and time of use 83.7 89.4



Integral Energy




Country Energy




For the purpose of Table 3 above:

(a) standard and time of use rates apply to all of a Customer’s electricity consumption other than a Customer’s Controlled Load;

(b) controlled load A rates apply in respect of a Customer’s Controlled Load where that load is active only during Off-Peak Periods; and

(c) controlled load B rates apply in respect of a Customer’s Controlled Load where that load is active both during Off-Peak Periods and at times other than Off-Peak Periods.

Schedule 3 Definitions and Interpretation



1 Definitions

1.1 General definitions

In this determination:

2007/08 Year means the period from 1 July 2007 to 30 June 2008.



Controlled Load mean a load which is active only at certain times, where such times are determined and controlled by the network.

CPI means the consumer price index, All Groups for the weighted average of eight capital cities as published by the Australian Bureau of Statistics, or if the Australian Bureau of Statistics does not or ceases to publish the index, then CPI will mean an index determined by IPART that is its best estimate of the index. ΔCPI07 means the change in CPI between the 2006 and 2007 calendar years, calculated as follows:

1

2006200620062006

2007200720072007

07

DecSepJunMar

DecSepJuneMar

CPICPICPICPI

CPICPICPICPICPI

where CPI is as defined above and where the corresponding subtext (for example Jun2007) means the CPI for the quarter and of the year indicated (in the example, the quarter ending in June of the year 2007).

ΔCPI08 means the change in CPI between the 2007 and 2008 calendar years, calculated as follows:

1

2007200720072007

2008200820082008

08

DecSepJunMar

DecSepJuneMar

CPICPICPICPI

CPICPICPICPICPI

where CPI is as defined above and where the corresponding subtext (for example Jun2007) means the CPI for the quarter and of the year indicated (in the example, the quarter ending in June of the year 2007).



Customer means a Small Retail Customer under a Standard Form Customer Supply Contract. For any purpose under this determination that involves counting or determining the number of customers, each relevant NMI is to be regarded as one customer.

Derivative has the meaning given to that term in the Corporations Act 2001 (Cth).

Distribution System has the meaning given to that term in the ESA.

Energy Losses means the physical losses of energy arsing during the transporting of energy over transmission systems and Distribution Systems.

ESA means the means the Electricity Supply Act 1995 (NSW).

Green Premium means an amount voluntarily payable by a customer that is intended to result in, or contribute towards, one or more Green Energy Outcomes. Where a Tariff for the Supply of such electricity does not separately identify the component attributable to Green Energy Outcomes, the green premium is that part of the Tariff that exceeds the Tariff that would apply to a Customer in the same circumstances were it not for the Green Energy Outcomes.

Green Energy Outcomes means:

(a) an increase in the amount of electricity that is generated from renewable energy sources or other sources of energy that provide improved environmental outcomes; or

(b) additional investment in technologies that reduce or offset greenhouse gas emission attributable to electricity generation; or

(c) reduced consumption of electricity.

IPART Act means the Independent Pricing and Regulatory Tribunal Act 1992 (NSW).

IPART means the Independent Pricing and Regulatory Tribunal of New South Wales established under the IPART Act.

kWh means kilowatt hours.

MWh means megawatt hours.

Market Based Electricity Purchase Cost Allowance for a Standard Retail Supplier for a Year means an allowance made by IPART for that Standard Retail Supplier’s costs of purchasing electricity under Wholesale Supply Arrangements in order to Supply electricity under its Regulated Load but not including any Volatility Allowance, Green Energy Costs, NEMMCO Fees, any costs related to Energy Losses or any other costs related to the Standard Retail



Supplier’s retail supply business or the recovery of any retail margin relating to that business.

NEMMCO means the National Electricity Market Management Company Limited ACN 072 010 327.

NEMMCO Direction Fees means fees imposed by NEMMCO under clause 3.15.8 of the NERs.

NEMMCO Fees means NEMMCO Participant Fees, NEMMCO Direction Fees and NEMMCO Reserve Trader Fees.

NEMMCO Participant Fees means "Participant fees" as defined under the NERs.

NEMMCO Reserve Trader Fees means fees imposed by NEMMCO under clause 3.15.9 of the NERs.

NERs means the National Electricity Rules approved in accordance with the National Electricity Law set out in the Schedule to the National Electricity (South Australia) Act 1996 (SA).

NMI means National Metering Identifier, and is defined in the NERs.

Off-Peak Periods means:

(a) in relation to a Standard Retail Supplier’s Time of Use Tariffs, those periods that the Standard Retail Supplier applied as off-peak periods for that purpose, as at 30 June 2007, or any variations to those times which are notified to IPART, applied and published by the Standard Retail Supplier on its website; and

(b) in relation to a Standard Retail Supplier’s Controlled Load Tariffs, those periods (whether fixed or variable) that the Standard Retail Supplier from time to time applies as off-peak periods for that purpose.

Premises has the meaning given to that term in the ESA.

Regulated Load, for a Standard Retail Supplier, means the load for all Customers in that Standard Retail Supplier’s Supply District, as used by IPART in making the 2007 Determination.

Regulated Retail Charge means a security deposit, late payment fee or fee for a dishonoured cheque of an amount specified in the 2007 Determination.

Regulated Retail Tariff means a tariff for or in relation to the supply of electricity charged by a Standard Retail Supplier to a small Retail Customer under a Standard Form Customer Supply Contract, excluding

(a) Green Premiums; and



(b) Regulated Retail Charges,

which may include a number of Regulated Retail Tariff Components (if offered by the Standard Retail Supplier as a single Tariff).

Regulated Retail Tariff Components means a component of a Regulated Retail Tariff, for example:

(a) a time of use tariff might have 4 components, for example:

(1) peak, shoulder and off-peak components (each expressed in cents/kWh); and

(2) a service availability charge (expressed in cents/day); and

(b) an inclining block tariff might have 3 components, for example:

(1) a price (expressed in cents/kWh) for that part of the consumption which is between 0 and X kWh;

(2) another (higher) price (also expressed in cents/kWh) for that part of the consumption that exceeds X kWh; and

(3) a service availability charge (expressed in cents/day).

Revised t

cFixedR means Revised tcFixedR as defined in clause 1(f)(2)

(Background) of the Preliminary section of this determination.

Revised tijVariableR means Revised t

ijVariableR as defined in clause 1(f)(2)

(Background) of the Preliminary section of this determination.

Revised Market Based Electricity Purchase Cost Allowance means the Revised Market Based Electricity Purchase Cost Allowance defined in clause 1(f)(i) (Background) of the Preliminary section of this determination.

Revised Amount means Revised Amount as defined in clause 1(d)(2) (Background) of the Preliminary section of this determination.

Small Retail Customer has the meaning given to that term in the ESA.

Standard Form Customer Supply Contract has the meaning given to that term in the ESA.

Standard Retail Supplier has the meaning given to that term in the ESA, namely EnergyAustralia, Integral Energy, and Country Energy.

Supply District has the meaning given to that term in the ESA.

Supply has the meaning given to that term in the ESA.



Tariff means, depending on the context:

(a) a price (or set of prices for difference components); and/or

(b) the set of circumstances in which (including the group of persons to whom) that price or set of prices will apply.

Time of Use Tariff means a Regulated Retail Tariff for which different rates apply depending upon the time of consumption.

Volatility Allowance means an allowance for the risks associated with price variation caused by normal system volatility to be taken into account through an allowance for the cost of holding working capital required to withstand the resulting cash flow variations.

Wholesale Supply Arrangements has the meaning given to that term in the ESA and includes any Derivatives relating to electricity supplied under such an arrangement.

Year means the 2007/08 Year, the 2008/09 Year or the 2009/10 Year.

2 Interpretation

2.1 General provisions

In this determination:

(a) a construction that would promote the purpose or object expressly or impliedly underlying the ESA is to be preferred to a construction that would not promote that purpose or object;

(b) the reference to an Act, legislation or law includes regulations, rules, codes and other instruments under it and consolidations, amendments, re-enactments or replacements of them;

(c) words importing the singular include the plural and vice versa;

(d) where a word is defined, other grammatical forms of that word have a corresponding meaning;

(e) headings are for convenience only and do not affect the interpretation of this determination;

(f) a reference to a person includes any company, partnership, joint venture, association, corporation, other body corporate or government agency; and

(g) a reference to any agency or body (including a Standard Retail Supplier), which ceases to exist or is reconstituted, renamed or replaced, or has its powers or functions removed is a reference to the body or agency which replaces it or which substantially succeeds to its powers or functions.



2.2 Prices exclusive of GST

All prices and calculations under this schedule are exclusive of GST. A Standard Retail Supplier may charge Customers an additional amount equal to the GST payable by the Standard Retail Supplier in respect of any Taxable Supply to which the amounts relate.

2.3 Clarification Notice

IPART may publish a clarification notice in the NSW Government Gazette to correct any manifest error or to clarify any part of this determination as if that clarification notice formed part of this determination.

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