CONTENTS
1.0
PURPOSE ................................................................................................................... 2
2.0
OUR BUSINESS ......................................................................................................... 2
3.0
BACKGROUND .......................................................................................................... 3
4.0
THE AER’S DRAFT DECISION ................................................................................. 5
5.0
OUR RESPONSE ....................................................................................................... 7
6.0
5.1
The Residential Declining Block Tariff ........................................................... 7
5.2
Tariff assignment policy for small customers ............................................. 10
5.3
Charging windows ......................................................................................... 13
HAVE YOUR SAY .................................................................................................... 17
1.0 PURPOSE
The purpose of this paper is to invite stakeholder feedback on issues related to Endeavour
Energy’s draft Tariff Structure Statement and the Australian Energy Regulator’s response 1 to
that draft.
Endeavour Energy is particularly interested to understand stakeholder feedback on our
proposal to shift from a declining block tariff to a flat tariff; to introduce a default time of use
tariff for new customers; and appropriate transition timeframes.
Through tariff reform Endeavour Energy is seeking to achieve the right balance of
transparency, predictability, efficiency and equity in network prices for all customers.
2.0 OUR BUSINESS
Endeavour Energy is a ‘poles and wires’ business, responsible for the safe and reliable
supply of electricity to more than 950,000 customers or 2.3 million people in households and
businesses across Sydney’s Greater West, the Blue Mountains, Southern Highlands,
Illawarra and the South Coast. Detailed information about ‘who we are’, ‘what we do’ and our
role in the electricity supply network can be found on our ‘Who we are’ webpage at
www.endeavourenergy.com.au.
There are significant costs in maintaining a network of our size and complexity. This includes
investing in new assets, replacing older assets, vegetation management to reduce bushfire
and supply outage risks, and maintaining the existing assets so ‘we keep the lights on’.
We recover costs from retailers through network tariffs. Network tariffs comprise about 40
per cent of a typical customer’s electricity bill as shown below.
1
AER (August 2016): Draft Decision, Tariff Structure Statement Proposals, Ausgrid, Endeavour Energy and Essential Energy.
2 | Revised TSS - Issues Paper
3.0 BACKGROUND
The Tariff Structure Statement (TSS) is a new requirement, emerging from changes to the
National Electricity Rules (Rules). These changes require us to explain our proposed tariff
structures for the 2017-19 period, together with our strategy for the evolution of tariffs in the
medium term.
The Rules set out a range of formal obligations and considerations that must be contained in
the TSS. The objectives of these new requirements have simple and common sense
concepts behind them:
•
transparency for customers on how we calculate our prices
•
improved understanding for Endeavour Energy of the manner in which customers
want to use our network and the impact on them of changes in pricing reforms
•
transparency regarding our forward pricing reforms and
•
predictability for each individual customer on when the available prices or tariffs
may apply.
This issues paper is part of a series of steps we are taking on the path to further tariff reform
and finalising pricing structures for the 2017-19 period.
Prior to submitting our initial TSS proposal last November, Endeavour Energy, Essential
Energy and Ausgrid worked together to engage and seek feedback from various
stakeholders and consumers through a detailed engagement program.
Detailed information regarding the need for tariff reform, tariff classes, the types of tariffs and
meters available, and various issues raised by our stakeholders in relation to future pricing,
was published and discussed.
As a result of engagement we developed four key characteristics to consider when framing
out tariff strategy. They were: transparency; predictability; efficiency; and equity, and these
became the foundations of our TSS proposal.
If readers would like further information regarding this process, the issues raised by
stakeholders and and the types of tariffs we proposed, they are encouraged to read
our TSS Overview, or our TSS proposal which can both be found on our ‘Plans and
proposals’ webpage at www.endeavourenergy.com.au.
On 2 August 2016, the Australian Energy Regulator (AER) released its draft decision
on Endeavour Energy’s initial TSS. The decision and our response are outlined in the
following pages.
Endeavour Energy seeks feedback from stakeholders on our proposed response prior
to submitting a revised TSS as per the following timeline.
3 | Revised TSS - Issues Paper
KEY DATES
AER draft decision
2 August 2016
Endeavour Energy revised Tariff Structure Statement due
4 October 2016
Submissions on AER draft decision due
4 October 2016
Submissions on revised Tariff Structure Statement due
25 October 2016
AER final decision
27 February 2017
2017/18 annual pricing proposal
31 March 2017
AER decision on 2017/18 annual pricing proposal
17 May 2017
4 | Revised TSS - Issues Paper
4.0 THE AER’S DRAFT DECISION
On 2 August 2016, the AER released its draft decision on Endeavour Energy’s initial TSS 2.
The draft decision can be read in full on the AER’s website at www.aer.gov.au. The AER’s
Overall Assessment of Endeavour Energy’s TSS proposal, contained in the draft decision, is
below.
22
AER (August 2016): Draft Decision, Tariff Structure Statement Proposals, Ausgrid, Endeavour Energy and Essential Energy.
5 | Revised TSS - Issues Paper
6 | Revised TSS - Issues Paper
5.0 OUR RESPONSE
5.1
The Residential Declining Block Tariff
Endeavour Energy proposed to assign residential customers with accumulation meters to
Declining Block Tariffs (DBTs). 3 The AER was not satisfied that a DBT is efficient because,
in its opinion: 4
•
it does not provide efficient price signals to consumers to make use of spare
capacity within the NSW networks, in particular it does not provide a signal
regarding the timing of consumption and
•
it does not efficiently recover costs from customers. Specifically, the AER does
not consider that there is sufficient evidence to conclude that low consumption
users are less price sensitive than others. The AER is of the view that additional
evidence is required to justify that allocating more residual costs to the first block
is efficient. 5
Endeavour Energy believes that, by their very nature, non Time of Use (TOU) tariff
structures such as flat, increasing and decreasing block tariffs are poor at providing
customers with any form of price signal to promote efficient use of the network.
Endeavour Energy believes that the DBT offers a more efficient allocation of residual
charges than the alternate Flat Tariff and Inclining Block Tariff (IBT) structures.
In our initial TSS proposal we reasoned that the DBT lessens the need for significant fixed
charge increases, by recovering some of these residual costs from tariff components that
display similar efficiency properties to fixed charges.
Given that we do not have empirical evidence on the price elasticity of demand by tariff
component, Endeavour Energy used volume variance by tariff component as a proxy, noting
that setting tariffs in a manner that minimises our exposure to volume risk is in itself a
contribution to economic efficiency under a regulatory framework that places an annual cap
on revenue recovery.
Recovering residual costs from those tariff components that are least volatile reduces annual
revenue fluctuation (captured in the revenue cap ‘over and unders’ account and adjusted
through prices movement in the following year) and in-turn increases annual price path
3
ibid, pp 39-40.
4
ibid, p 47.
5
ibid, p 48.
7 | Revised TSS - Issues Paper
stability. Greater pricing stability provides certainty to consumers and improves efficient
consumption and appliance investment decisions over the longer term.
By way of example, the figure below illustrates the tariff component variability of the different
tariff components of our Residential DBT. It can be seen that tariff component volume
variability increases as energy block consumption increases.
Figure 1: Tariff component variability in the Residential DBT
Residential DBT
Tariff Component Variability
(FY11 to FY15)
9.0%
8.4%
Volume Variability
8.0%
7.0%
6.0%
4.6%
5.0%
3.5%
4.0%
3.0%
1.7%
2.0%
1.0%
0.4%
0.0%
Fixed
Energy Block 1 Energy Block 2 Energy Block 3
Total Energy
(Flat Tariff)
Tariff Component
While Endeavour Energy believes that the DBT is the ‘first best’ non-TOU tariff structure, the
AER has not accepted our argument that volume variability can be used as a proxy for
consumer price elasticity.
Endeavour Energy believes that the arguments against a DBT could equally be applied
against the IBT. That is:
•
it does not provide efficient price signals to consumers to make use of spare
capacity within Endeavour Energy, in particular it does not provide a signal
regarding the timing of consumption; and
•
it does not efficiently recover costs from customers. There is insufficient evidence
to conclude that high consumption users are less price sensitive than others.
Additional evidence would be required to justify that allocating more residual
costs to the second or third block is efficient.
This leaves only the Flat Tariff structure available to Endeavour Energy given the available
information.
In light of the AER’s decision we have developed the following view and would like to hear
from you regarding this revised approach.
8 | Revised TSS - Issues Paper
Our view:
To replace the DBT with a Flat Tariff structure as the
default non-TOU tariff for residential customers.
Why:
The AER does not consider the evidence is available
to support a DBT. An IBT tariff structure would require
similar, yet equally unavailable evidence.
1. We are interested in your views on the replacement of the existing DBT with a Flat
Tariff structure for the Residential non-TOU tariff.
If Endeavour Energy were to transition the existing DBT to a Flat Tariff structure, the period
over which this transition should occur, and the corresponding impacts on customer bills,
must be considered.
The figure below illustrates the expected network bill impacts of a one, two and three-year
transition period.
Figure 2: Illustrative DBT to Flat Tariff transition
Illustrative DBT to Flat Tariff Transition
Annual Network Bill Impact for Period of Transition
16.0%
Note: Modelling assumes a CPI increase in annual revenue requirement
14.0%
Annual Network Bill Impact (%);
Distribution of Residential Customers (%)
12.0%
10.0%
8.0%
Distribution (%)
1 year
6.0%
2 years
3 years
4.0%
2.0%
-2.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
21,000
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
33,000
34,000
35,000
36,000
37,000
38,000
39,000
40,000
0.0%
-4.0%
Annual Consumption (kWh)
It is Endeavour Energy’s initial view that a two-year transition period would allow the timely
removal of the DBT structure while mitigating the impact on our customers’ network bills.
9 | Revised TSS - Issues Paper
A two-year transition would also achieve the desired Flat Tariff structure by the end of this
TSS period.
It should be noted that Figure 2 above assumes a CPI increase in annual average prices.
Any variation to this assumption will need to be considered when implementing the transition
strategy.
Our view:
Attempt to transition from the DBT to a Flat Tariff
within two years.
Why:
A two year transition period would successfully
mitigate customer bill impacts while achieving the
desired Flat Tariff structure by the end of the current
TSS period.
2. We are interested in your views on the appropriateness of a two-year transition
period for the replacement of the existing DBT with a Flat Tariff structure for the
Residential non-TOU tariff.
3. Do stakeholders accept that the two-year transition may need to be extended to
better manage customer bill impacts should the annual average price increase
exceed CPI?
5.2
Tariff assignment policy for small customers
Endeavour Energy proposed that residential and small business customers with interval or
smart meters can opt-in to tariffs that include fixed and time-of-use components (a TOU
tariff). 6
The AER believes that TOU 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. 7 In other words the AER considers TOU tariffs to be preferable to Flat, IBT or DBT
structures because they lead to more efficient use of resources and investment.
6 ibid, p 40.
7 ibid, p 45.
10 | Revised TSS - Issues Paper
The AER considers that the opt-in policy proposed by Endeavour Energy has not been
successful in moving customers to time-of-use tariffs. 8 Therefore, it considers that the opt-in
policy shows ‘insufficient progress towards the use of more cost reflective tariffs’. 9
The AER said that Endeavour Energy should promote customer assignment to more cost
reflective tariffs where interval metering is present, 10 and that this can be done in a number
of ways including: 11
•
introducing demand-based tariffs on an opt in basis for customers with
appropriate metering
•
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, or
•
maintaining TOU tariffs (instead of demand tariffs), but making these TOU 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 AER also note that the:
•
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 the AER considers there is opportunity for distributors to reform
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.
Endeavour Energy agrees that TOU tariffs are a more cost reflective pricing signal than nonTOU pricing signals and are therefore, superior in this regard to Flat, DBT and IBT
structures.
8 ibid, p 101.
9 ibid, p 101.
10 ibid, p 111.
11 ibid, pp 17-18.
11 | Revised TSS - Issues Paper
To give effect to the AER’s desire to progress towards the use of more cost reflective tariffs
Endeavour Energy proposes to adopt a revised TOU tariff assignment policy to coincide with
the metering rule change i.e. it would apply as of 1 July 2018 and would not be applied
retrospectively.
Under this revised policy, and effective 1 July 2018, we would propose that:
•
new customers (all of whom will have interval meters under the metering rule
change) be assigned to the default TOU with the option to opt-out to the nonTOU tariff, and
•
existing customers with interval meters be assigned to the non-TOU tariff with the
option to opt-in to the default TOU.
It is recognised that a TOU transition path will need to be developed for existing customers
with interval meters; however, this will be part of our considerations for the next TSS
commencing on 1 July 2019.
Our view:
New customers connected to the network after 1 July 2018
should be assigned directly to a TOU tariff with the option to
opt-out to a non-TOU tariff.
Existing customers connected to the network before 1 July
2018 remain assigned to the non-TOU tariff, with the option
to opt-in to a TOU tariff.
Why:
Endeavour Energy agrees that TOU tariffs send a more cost
reflective pricing signal and are superior in this regard to
DBT, IBT and Flat Tariff structures.
4. We are interested in your views on our proposed TOU assignment. Are there
scenarios where an existing customer should be assigned on an opt-out basis to
the TOU tariff?
For example, after 1 July 2018 should an existing customer be assigned on an optout basis if:
•
they consume above an annual usage threshold OR
•
they opt to install a technology capable of feeding energy back into the
network OR
•
they opt to upgrade their connection capacity?
12 | Revised TSS - Issues Paper
5.3
Charging windows
Endeavour Energy calculates the timing of peak, shoulder and off-peak periods, and our
high and low seasons using historic peak demand at the total network level. Endeavour
Energy’s proposed charging windows as set out in our proposed TSS are shown below.
Figure 3: Endeavour Energy’s proposed charging windows
The AER responded that Endeavour Energy has not achieved the appropriate balance
between greater cost reflectivity and customer ability to respond in setting its charging
windows because: 12
•
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
•
Endeavour Energy apply off peak rates for all hours of weekends and public
holidays 13
•
the times of peak hours on weekdays should be different between summer and
winter and
•
Endeavour Energy did not provide sufficient evidence and reasoning to justify its
method for determining the threshold between peak, shoulder and off peak hours.
Endeavour Energy is of the view that given the non-locational nature of our tariffs, the use of
network peak demand to determine charging windows is appropriate, but consideration must
12
ibid, p 72.
13
ibid, p 83.
13 | Revised TSS - Issues Paper
be given to the potential localised congestion in specific parts of our network. For example,
in the colder Blue Mountains region the demand profile more accurately reflects a winter
heating peak rather than prevalent summer cooling peak, and it is the summer peak which
most strongly influences our system peak demand profile.
Endeavour Energy identifies the peak, shoulder and off-peak periods by observing those half
hour periods where demand is within 10% (peak) and 20% (shoulder) of the maximum
network peak demand.
When planning to augment the network, or employ demand management alternatives in
response to peak demand growth, Endeavour Energy reviews the proportion of time within a
year that a network asset exceeds its firm rating. When the proportion of time exceeds 1%,
this would normally be the trigger to consider augmentation or demand management
options.
Figure 4: Average network load duration curve
Average LDC
(FY13 to FY16)
105%
100%
Average LDC (FY13 to FY16)
95%
% of maximum Demand
Peak: 90% of demand; 0.2% of time
90%
85%
Shoulder: 80% of demand; 1% of time
80%
75%
70%
65%
60%
0%
1%
2%
3%
4%
5%
% of time
As illustrated by the network Load Duration Curve (LDC) above, it can be seen that 1% of
time corresponds to a demand level of 80% of the maximum i.e. observed demand is within
20% of the maximum network peak demand. It is at this point that network augmentation
decisions are made and where our charging window signals to customers and retailers that
shoulder and peak rates are more reflective of cost at these times.
Figure 5 below demonstrates that Endeavour Energy’s proposed peak period accurately
targets the top 10% of demand periods observed in our network over the past four years.
The shoulder period accurately reflects those times where demand is between 10% and
20% of maximum network peak demand. Figure 5 demonstrates that Endeavour Energy’s
14 | Revised TSS - Issues Paper
proposed high and low seasonal definitions target the peak periods observed in our network
over the past four years.
Figure 5: Time of day charging windows
Distribution of Total Network Demand (Day)
(Within 10% and 20% of the maximum demand for the network)
1.05
Normalised Maximum Demand
Off-peak (OP)
Shoulder (Sh)
OP
Sh
Peak
1.00
0.95
Summer (10%)
0.90
Summer (20%)
0.85
Winter(20%)
0.80
0:00
23:00
22:00
21:00
20:00
19:00
18:00
17:00
16:00
15:00
14:00
13:00
12:00
11:00
9:00
10:00
8:00
7:00
6:00
5:00
4:00
3:00
2:00
1:00
0.75
Hrs
Data: FY 12/13, 13/14, 14/15 & 15/16
Figure 6: Peak periods by month
Distribution of Total Network Demand (Month)
(Within 10% and 20% of the maximum demand for the network)
Normalised Maximum Demand
1.05
Low
High (HS)
(Summer)
1.00
High
Low
(Winter)
HS
0.95
0.90
0.85
0.80
12
11
10
9
8
7
6
5
4
3
2
1
0
0.75
Months
Data: FY 12/13, 13/14, 14/15 & 15/16
Summer (10%)
Summer (20%)
Winter(20%)
Endeavour Energy accepts that there is scope to review our time of day pricing definitions;
however a decision on time of day pricing definitions should not be undertaken lightly and
without stakeholder involvement.
15 | Revised TSS - Issues Paper
A change in time of day pricing definitions, including the introduction of seasonal pricing, has
wide ranging pricing and billing consequences for our small business, commercial and
industrial customers already supplied on a TOU tariff. From an implementation perspective,
changes to time of day definitions may require billing system changes for both Endeavour
Energy and retailers.
Given the potential significance of these changes Endeavour Energy, does not believe the
45-day window between the AER’s draft TSS decision and Endeavour Energy’s submission
of a revised TSS affords either Endeavour Energy or stakeholders the time to properly
consider revised time of day definitions.
As Endeavour Energy has only a limited number of residential customers on TOU tariffs, the
removal of the weekend shoulder rate for this customer segment (thus bringing the time of
day timing definition into alignment with the non-residential definition) would be achievable
within this TSS period and could be timed to coincide with our proposed change to our TOU
tariff assignment policy as outlined in this paper (i.e. 1 July 2018).
Once this alignment is achieved, Endeavour Energy will commit to undertaking the detailed
analysis needed to inform this discussion as part of the next TSS period.
Our view:
A change in time of day pricing definitions has wide ranging
pricing and billing consequences. Endeavour Energy agrees
that better targeted TOU tariffs could improve cost
reflectivity however there is only limited scope to properly
review our time of day definitions prior to the submission of
our revised TSS.
Why:
The 45-day window between the AER’s draft decision and
Endeavour Energy’s deadline to submit a revised TSS does
not provide Endeavour Energy or its stakeholders the time
to properly assess and consider revised time of day
definitions, and the impacts of these potential changes on
residential customers, businesses and retailers.
5. We are interested in your views on our proposed approach to review our time of
day charging windows as part of the next TSS period commencing 1 July 2019. Do
you believe that residential and non-residential charging windows should be aligned?
16 | Revised TSS - Issues Paper
6.0 HAVE YOUR SAY
We want to hear from you regarding this paper.
Please provide feedback by 5pm Friday 23 September 2016.
You can provide feedback by emailing our Manager, Network Regulation. His details are:
Jon Hocking
Manager, Network Regulation
Email: [email protected]
Phone: (02) 9853 4386
Please contact Jon if you would like to seek clarification on issues raised in this paper, or
would like to request a meeting or webinar.
If you are submitting a formal response to this issues paper, please indicate whether you are
responding on behalf of an organisation by submitting your response on company
letterhead.
If you would like your response to remain confidential, please clearly indicate this in your
response, otherwise all responses will be regarded as being approved for full disclosure.
A copy of all responses will be available on our website.
Alternatively you can contact us via:
Email:
[email protected]
Enquiries:
133 718 (business hours)
Visit:
www.endeavourenergy.com.au
Follow us on twitter:
@endeavourenergy.com.au
17 | Revised TSS - Issues Paper