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New Investment

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

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New Investment

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  1. New Investment Conference on ACCC Draft Statement of Principles for the Regulation of Transmission Revenues John Howarth Executive Manager Energy Infrastructure VENCorp 2 April 2004

  2. Contents • Why regulate State-owned enterprises who plan the transmission network? • Incentive regulation • What is the regulatory contract with an ex-ante capex? • What should be included in an ex-ante capex cap? • What about NEC process/consultation/disputes? • What should happen to capex not included in firm cap? • Off-ramps or force majeure • Conclusions

  3. Why Bother? • All planners are state owned and accountable to duly elected governments • Stakeholders can lobby government • Why have a national regulator define how much capex should be spent within a state by a state owned enterprise? • Lets all go home – haven’t we got more important things to do?

  4. Because • Transmission built inefficiently can destroy value and confidence in upstream investment • Transmission not built can also allow market power to extract exorbitant revenues • Transmission is not the only solution to load growth WE NEED TO STRIKE A BALANCE THROUGH GOOD INCENTIVE REGULATION

  5. Incentives • Don’t have to worry too much about regulatory incentives if the correct incentives are in place in terms of organisational governance • This is why the present and proposed arrangement for Victoria is different to other jurisdictions • If the decision to build assets is within the same organisation that earns a revenue from the assets then regulatory incentives become very important • Incentives to • Utilise existing assets • Employ alternative solutions to transmission investment • Time investments efficiently • Implement investments efficiently

  6. What is New Investment • In Victoria • Augmentation  $ 30 to 50 m per annum • Replacement  $ 60 m per annum • Support the business  $ 10 per annum • In NSW

  7. Ex-ante Estimates TransGrid Application

  8. Ex-ante Estimates Powerlink Application

  9. Ex-Ante Vs Ex-Post • Is it easier to verify efficiency looking forward or backward? • The best information to assess the efficiency of a project is at the time of the investment decision • Using a stick or carrot after the money is spent (ex-post) is inefficient • Trying to estimate conditions 5 years out is inaccurate and may lead to inappropriate incentives/service outcomes • Has ex-post worked? • QNI

  10. What is Ex-ante Regulatory Contract? • Needs to be a capped sum of money for a given level of service • Cannot measure transmission service even supply reliability over a 5 year time-frame • Measurable and accurate service definition is not yet possible for a transmission network particularly over a relatively short time frame compared to the asset lives

  11. What Could be Treated on an Ex-ante Basis? • Asset replacement • Business support • Augmentation to meet load growth that is indifferent to generation patterns (about 50% of Victorian augmentation but very dependent on network geography) • Relies on being able to set an efficient level of investment at the start of the regulatory period

  12. Other Concerns about Ex-ante • What happens to the consultation and dispute process in the NEC as TNSP gets the revenue anyway? • What is to stop projects not being undertaken and then put up for the next period?

  13. Those Projects Outside Ex-ante • VENCorp preference is for no ex-post optimisation but scrutiny on the regulatory test compliance at the time of the investment decision • Justified amount in regulatory test is the amount to be rolled into the asset base allowing efficiency gains and penalising overspends during implementation • This also allows full consultation/dispute process

  14. Off-ramps • Off-ramps required • Environmental changes • Taxes • Uncontrollable costs • i.e. Force majeure events • Need a test for materiality

  15. Conclusions • Ex-ante could work for asset replacement, business support and some augmentation indifferent to generation patterns • Large projects are best dealt with at the time of the investment decision and this requires the regulator to get their “hands dirty” • A national planner appears to me to solve some of these regulatory problems

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