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Electricity Distribution Business. Pricing Methodology - PDF Free Download
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1 Electricity Distribution Business Pricing Methodology Effective 1 April 2015
2 1. GLOSSARY Commerce Commission (Commission) EDB Electricity Authority (EA) Responsible for the regulation of EDBs as provided for under Part 4 of the Commerce Act 1986 Electricity Distribution Business Electricity Authority Code Electricity Industry Participation Code 2010 ICP IDD kva kw kwh Low fixed charge regulations Part 4 Qualifying Customers Transpower WACC Installation Control Point: A point of connection on a local network which the distributor nominates as the point at which a retailer will be deemed to supply electricity to consumers Electricity Distribution Information Disclosure Determination 2012, issued 1 October 2012 (Decision No. NZCC22) Kilo Volt-Amp: Measure of apparent electrical power usage at a point in time Kilowatt: Measure of instantaneous real electrical power usage Kilowatt hours: Measure of real electrical power usage per hour Electricity (Low Fixed Tariff Option for Domestic Consumers) Regulations 2004 Part 4 of the Commerce Act 1986 governing the regulation of EDBs as administered by the Commerce Commission Redeemable Preference Shareholders in the MainPower Trust Owner and operator of the national transmission grid Weighted Average Cost of Capital 1
3 2. INTRODUCTION This pricing methodology describes the approach MainPower New Zealand Limited ( MainPower ) has adopted to determine prices for consumers connected to its electricity distribution network, effective from 1 April The purpose of this document is to provide consumers and other interested stakeholders with relevant information on how prices have been set. This includes information on the price setting process and key inputs, assumptions, considerations, and decisions made in setting prices. The remainder of this pricing methodology is structured as follows: Section 3 summarises our 2015 pricing approach Section 4 provides background information relevant to the development of prices. This includes a brief overview of our pricing objectives, regulatory obligations, recent consultations with consumers, and our current pricing review and strategy. Section 5 sets out the methodology we have used to determine prices as at 1 April 2015, including the key considerations made in regards to determining target revenues, consumer groups, tariff structures, and final charges. Appendix A details the extent to which our pricing methodology is consistent with the Electricity Authority s ( EA ) electricity distribution pricing principles. Appendix B provides Directors Certification, as required by section of the IDD. Appendix C maps compliance against the Electricity Distribution Information Disclosure Determination 2012 (NZCC 22) (IDD) disclosure requirements applicable to pricing methodologies. Appendix D provides detailed information on tariffs, consumer statistics, and target revenues (by pricing region and tariff type). 2
4 3. PRICING SUMMARY Our underlying pricing methodology is the same as that which applied from 1 April The one exception is that the Wigram pricing region has been removed as the network was sold to Orion New Zealand Limited on 31 March Consumers on this network will now be charged for line services by Orion, through their retailer. The key steps taken to set 2015 prices are: the current pricing methodology was confirmed for this year against our pricing objectives and strategy, amongst other considerations the annual target revenue requirement to be recovered through prices in 2015/16 was determined as $52m in line with our costs pricing structures were confirmed. These include 2 pricing regions (now excluding Wigram, 6 standard consumer groups, and 1 non-standard connection target revenue was allocated to consumer groups and tariffs based on: o o our existing cost allocation approach connection and volume forecasts. This process is broadly illustrated in the figure below. Figure 1: Allocation of target revenue to pricing regions and consumer groups Target Revenue = $52m Residential Mainpower Region $48.3m Non-residential Large Irrigation Lighting Council Pumping Temporary SupplySupply Non-standard $1.6m Residential Kaiapoi Region $2.2m Non-residential Large Irrigation Lighting Council Pumping Temporary supply As a result of applying this methodology, and in order to recoup the 7.8% increase in our 2015/16 target revenue, we have made the following changes to prices in 2015: Variable charges (which comprise 93% of our line charge revenue) have increased by between 1.9% and 3.9%, with a 2.2% and 2.7% increase applying to most consumers in the MainPower and Kaiapoi regions, respectively. Fixed charges have not changed. 3
5 4. BACKGROUND About MainPower MainPower provides distribution lines services to approximately 38,000 consumers throughout the North Canterbury and Kaikoura regions. A number of rural towns, including Rangiora, Kaiapoi, Oxford and Kaikoura service these rural communities. Approximately 76% of our consumer base is residential, with the majority of the remaining being small commercial, farming or irrigation consumers. One large connection is offered non-standard pricing in recognition of its unique cost profile. MainPower is one of a number of community-owned electricity distribution businesses ( EDBs ) in New Zealand. Consumers in the communities of North Canterbury and Kaikoura own MainPower through the MainPower Trust and elect its trustees. MainPower also serves consumers in the old borough of Kaiapoi who are non-qualifying Customers of the Trust. Pricing regions are formed across the boundaries of these two areas. On 31 March 2015 MainPower sold its electricity network assets located at Wigram to Orion. Pricing and commercial objectives The key commercial and pricing objectives that guide our pricing decisions are as follows: Uniform variable pricing: We have adopted a general objective of applying a uniform variable charge to all tariff options within a particular pricing region, irrespective of consumer density, location, network configuration, or other load characteristics. There are a several exceptions to this general objective relating to tariff options that cater for specific usage and cost profiles. These exceptions are detailed below. Rebates: Revenues collected from consumers that are considered surplus to our target revenue are returned to Redeemable Preference Shareholders (Qualifying Customers) of the MainPower Trust in the form of rebates. Rebates are credited to Qualifying Customers accounts on a monthly basis. Rebate decisions do not form part of this disclosure. Qualifying Consumers are advised in advance on an annual basis of the rebate levels that will apply for the coming year. Uniform pricing across the MainPower and Kaiapoi pricing regions: The total line service charge, net of Qualifying Customer rebates applicable to consumers within these pricing regions, are charged on a uniform basis. Charges after the disbursement of rebates are generally the same for consumers in both MainPower and Kaiapoi pricing regions. Price certainty and stability: Our pricing structure will provide a high level of certainty and understanding, while at the same time ensuring price stability without rate shock. Return on investment: Where the return on investment for MainPower is less than our Weighted Average Cost of Capital (WACC), any upward movement in charges will be calculated on the basis that the increase is applied equally across all groupings. Regulatory compliance: We will comply with all applicable regulations relating to pricing and pricing methodologies. We will also consider other regulatory guidance (i.e. the pricing principles) in our pricing decisions. In circumstances where there is a conflict between this guidance and our pricing objectives, priority is given to the pricing objectives. 4
6 Consumer expectations on price and quality We consult with our customers on an annual basis to gauge their general level of satisfaction with the distribution services we provide, as well as on price and quality expectations. During recent years, we have engaged external research consultants to undertake a comprehensive consumer survey in support of this. During 2014 over 1,500 consumers were surveyed. This included a representative sample of residential, commercial and large use consumers. The research showed very high levels of satisfaction across all consumer groups in terms of both reliability and quality of supply. The survey also confirmed high levels of consumer service. All consumers indicated that their power supply had stayed the same over the past 12 months. Most consumers stated that they would definitely not be willing to accept poorer levels of power quality and reliability in exchange for a lower price or discount. 7.5 out of 10 consumers stated that any increase in price would be too much to pay for an improvement in service. A further 20% stated that they would be willing to pay an extra $50 per year for an improved service. The survey results confirm a high level of satisfaction with respect to quality, reliability and price. We therefore conclude that no adjustments to the current balance of prices and quality are necessary. Regulatory requirements applicable to pricing methodologies MainPower s distribution business is subject to regulation under Part 4 of the Commerce Act 1986 ( Part 4 ), as administered by the Commerce Commission ( Commission ). Our consumer ownership means we are exempt from direct price control under Part 4. Consumer ownership and oversight provides the necessary incentives to set prices consistent with the purpose of regulation under Part 4, in the long term interests of our consumers. However, we remain subject to regulatory oversight in the form of information disclosures under the IDD, including being required to publish annual pricing methodologies. MainPower is also subject to industry regulations and pricing principles, as administered by the Electricity Authority ( EA ). In particular, the EA has developed a set of principles and information disclosure guidelines to assist EDBs. Under the IDD, EDBs must disclose the extent to which their pricing methodology is consistent with these pricing principles. The key regulatory requirements directly applicable to this pricing methodology are: Section of the IDD regarding the disclosure of pricing methodologies the EA s electricity distribution pricing principles and information disclosure guidelines the Electricity (Low Fixed Charge Tariff Option for Domestic Consumers) Regulations 2004 (the Low Fixed Charge Regulations ) Schedule 6.4 of Part 6 of the Code, which sets out pricing principles for distributed generation. This pricing methodology has been developed consistent with these requirements. Appendix A discusses the extent to which our prices are consistent with the EA s pricing principles. Appendix B provides Directors Certification against these requirements, as required by section of the IDD. Appendix C provides a check-list which records where in this document we have demonstrated compliance against the applicable IDD regulations. 5
7 Pricing review and strategy In 2013 we initiated a comprehensive review of our pricing methodology. It is our pricing strategy to complete this review and implement more efficient pricing structures over the next 5 years. This pricing strategy has not materially changed since our 2014 pricing methodology. Several factors influenced our decision to undertake a review of our pricing: new regulations and regulatory guidance regarding economically efficient distribution pricing significant growth in irrigation connections and demand across the North Canterbury region the impact of the Canterbury earthquakes on local demand. This includes significant growth in new sub-divisions in some areas but damage to communities and infrastructure in other areas the expected deployment of smart meters to the mass market and the potential pricing applications for this technology the potential increase in the connection of distributed generation to our network. the desire to review our long-serving pricing structures against our current commercial and pricing objectives, with consideration of recent innovations in pricing in the sector. The primary objective of the review is to investigate alternative pricing structures and price setting approaches which address some or all of these issues. In particular, we are investigating alternative approaches to align pricing more closely with: Economic and regulatory principles and industry best practice. Our aim is to structure prices to promote more efficient usage of, and investment in, the network. This includes consideration of regulatory and industry guidance (for example: from the Electricity Networks Association) on efficient pricing as well as innovative pricing approaches adopted across the sector. Network cost drivers. We are progressing the development of a cost of supply model which allocates our annual target revenue requirement to regions, consumer load groups and tariffs based on appropriate cost-based allocators. This model will allow us to test different consumer group scenarios, tariff options (e.g. for fixed and variable combinations, peak/off-peak tariff structures) and cost allocators. It will also analyse price shock, helping us to formulate a plan to transition any price changes over time. Our commercial and pricing objectives, taking into account the current commercial conditions we face. We have engaged PricewaterhouseCoopers (PwC) to assist with this review. They are providing advice on economic pricing frameworks, best practice distribution pricing approaches, and pricing regulation. They will also provide modelling expertise for the cost of supply modelling. Our review is progressing. However, we are able to reveal potential options we are currently investigating, as set out in figure 2. At this stage, it is not clear how individual consumers will be affected, or whether these changes will progress. It may be necessary to transition some price changes over a longer period to avoid price shock to consumer bills. We plan to consult with consumers, retailers, and other affected parties to gain feedback on any proposed changes. As part of this, we will provide more detailed information on how consumers may be affected. Feedback received under this consultation will be considered prior to making a final decision on whether, or how, to amend prices. 6
8 A new pricing methodology will be issued before prices take effect. Retailers will be notified of any price changes within 45 business days consistent with our conveyance only use of system agreement. Consumers will be notified at least 20 business days prior to any changes taking effect. Although the various work streams are ongoing, the Board has determined that it is necessary to increase prices on 1 April 2015 in order to recover the underlying costs that the Company faces. Price changes are to be applied to existing tariff structures. The Board has also resolved that all significant structural changes to lines services pricing will be held over until such time as time-of-use metering (smart meters) is deployed throughout the region, in order to avoid unnecessary confusion and uncertainty. This deployment is being undertaken by On Metering Limited and commenced April Depending on the final outcomes of our review, we are planning to introduce new pricing structures for certain customer categories, most likely irrigation and larger industrial/commercial customers in the near future. We expect these will apply from the start of the 2015 irrigation season or possibly from 1 April
9 Figure 2: Potential changes to prices and impact on consumers Potential area of change Considerations Potential impact on consumers Aligning the calculation of the annual target revenue requirement with Part 4 regulation We have historically set our annual target revenue requirement to recover budgeted costs, including an appropriate commercial return on investment (as detailed in the next section). However, the Commission has now specified regulatory input methodologies for calculating EDB building block revenues, consistent with the purpose of Part 4 regulation. These are used in determining and monitoring EDB prices. While we are exempt from price regulation, we are required to disclose the components of our annual revenue consistent with the Commission s building blocks methodology. These methodologies provide useful guidance on how to set the revenue requirement consistent with the purpose of Part 4 in the long-term interests of our consumers. We are therefore considering aligning the calculation of our annual target revenue requirement more closely to the Commission s methodology and inputs. Aggregate prices will be set with reference to a framework for determining efficient and cost-reflective prices, as determined by New Zealand s independent economic regulator. Aligning pricing regions with the cost and consumer characteristics of different parts of the network Distinct pricing regions are being considered for different parts of our network. Our initial analysis suggests different cost and usage characteristics exist across our network. We are also considering the merits of merging the existing Kaiapoi pricing region with the main pricing regions. Currently, Kaiapoi is treated as a separate pricing area given it represents Non-Qualifying Consumers for the purpose of the MainPower Trust. Prices will be set overtime to align more closely with the costs of supplying distribution services to consumers in different regions. Prices in the Kaiapoi region will be the same as for other consumers in the Northern Canterbury region (gross of any rebate). Aligning consumer groups to load characteristics We are considering two main consumer load groups: a small group capturing the mass market; and a large load group capturing large users. These groups could replace the current residential and commercial load groups to align pricing more closely with network cost drivers. We will also retain our current irrigation and lighting consumer groups. Connections that use relatively more of the available capacity in the network will be charged relatively more compared to smaller loads. These objectives may result in consumers being allocated to new tariff options. Aligning prices with network costs As discussed above, we are developing a cost of supply model that allocates the components of target revenue to consumer groups. The key output will be a set of implied cost allocations for each consumer group and tariff option. This information will be used in making decisions on final prices and pricing structures. Prices will be more reflective of the costs of providing distribution services to individual consumer groups. 8
10 Revising our approach to fixed charges Currently all controlled residential consumers are charged a low fixed charge of 15c per day to comply with the low fixed charge regulations. As part of our review, we are investigating the merits of creating a distinct residential low fixed tariff option targeted at consumers using less than 8,000kWhs per annum. For remaining consumers we are investigating fixed charges which proportionally align with the capacity of the consumer s connection. Consumers using 8,000kWhs per annum or more are likely to have a higher fixed component and lower variable component to their charges. Consumers using less than 8,000 kwhs per annum will continue to receive 15 cents per day low fixed charge. Their variable charge will be higher but will be set so that they are better off than under the standard tariff option. Introducing a peak demand charge for the large load group and irrigators The main service a distributor provides is capacity in the network. This is also a key driver of network costs. In recognition of this, we are investigating the merits of introducing a peak demand charge which would align our pricing to the service we provide and our costs of providing that service. It is not currently feasible to charge mass market consumers on a time of use basis 1, given the current meter fleet. However, we are investigating applying peak demand charges to larger consumers given many have time of use meters. Furthermore, smart meters are being rolled out across the mass market. Irrigators and consumers in the large consumer group will be charged based on peak usage characteristics in addition to consumption. 1 although we note the controlled tariff does partially permit this 9
11 5. PRICING METHODOLOGY This section describes our methodology for setting prices effective from 1 April It provides information on our approach to: calculating target revenue determining consumer groups allocating costs to consumer groups setting tariffs pricing non-standard consumer services; and pricing distributed generation.. Target Revenue We determine our target revenue requirement in order that revenue collected from prices will be sufficient to cover the operating and capital costs necessary to maintain capital and/or revenue reserves at a level considered appropriate by the Board. Figure 3 sets out our target revenue requirement for the 2015/16 pricing, relative to the 2014/15 pricing year. Prices have increased to recover an aggregate 7.8 % increase in our target revenue requirement. Figure 3: Components of Target Revenue 2015/16 ($000) 2014/15 ($000) Change (%) Administration and Overheads 9,459 8, % Operations and Maintenance 4,604 4,747 (3.0)% Transmission charges 13,733 13, % Depreciation 10,982 10, % Tax 5,124 4, % Return on investment 14,990 14, % Other Revenue (6,744) (8,198) (17.7)% Target Revenue Requirement from Prices 52,148 48, % Administration and Overheads include costs associated with managing the day to day business activities of our distribution business, such as management, accounting, finance and administration costs. This also includes local body rates and Electricity Act and Commerce Act levies. The increase in the administration and overheads costs for 2015/16 reflects MainPower s focus on health and safety; delivering a safe, secure 10
12 and reliable electricity distribution network, implementing intelligent network technologies; and taking a leadership role in the community. Operations and Maintenance captures costs associated with operating and maintaining the network, such as switching, planned and reactive maintenance and responding to faults. Transmission costs are Transpower charges associated with: connection of MainPower s distribution network to the national grid (including interconnection, connection and new investment contract charges) the grid system operator function (a service which Transpower provides). Depreciation represents the return of our original capital investment and is calculated based on the net book value of our distribution business. Tax represents budgeted tax expenditure attributed to our distribution business. Return on investment is calculated as a WACC return on average net book value. We use a post tax WACC estimate of 6.17% for this calculation. This estimate is derived using the Capital Asset Pricing Model and is based on the following assumptions: a risk-free rate of 5.0% (as per PwC s Appreciating Value cost of capital report, June 2014) a debt premium of 1.50% an asset beta of 0.34 as the measure of non-diversifiable business risk based on the Commerce Commission s estimate a debt equity ratio of 40:60 an investor tax rate of 28 per cent a post tax market risk premium of 7.5%. We note this is less than the current cost of capital of 7.19% applied by the Commerce Commission to EDBs regulated under the Default Price-Quality Path. Other revenue attributable to our distribution business is subtracted to determine the target revenue to recover from electricity distribution charges. Consumer groups Our standard tariffs are structured across 2 pricing regions and 6 standard consumer groups. We also have 1 non-standard consumer which is discussed further below. The 2 pricing regions were determined in order to recognise consumers in and outside of the MainPower Trust boundaries: MainPower Region (MP): includes all consumers connected to the distribution network that are not included in the Kaiapoi pricing region or Wigram pricing region. These are Qualifying Customers consistent with the MainPower Trust boundary. Kaiapoi Region (KE): All consumers connected to the electricity distribution network previously owned by Kaiapoi Electricity Limited, which was acquired by MainPower on 1 July These consumers are non-qualifying Customers but have a similar cost profile to consumers in the MP region. 11
13 Within these pricing regions, we recognise 6 standard consumer groups: Residential: A residential consumer group has been adopted in order to show compliance with the low fixed charge regulations, which apply only to domestic consumers. Non-residential and large users: Non-residential and large users are treated as a separate consumer group in order to: o o recognise the different connection load usage profiles of these consumers (e.g. lower weighted average load factor), relative to residential consumers facilitate our approach to complying with the low fixed charge regulations (i.e. by separating residential and non-residential consumers) Irrigation: This group was added in response to significant growth in irrigation in North Canterbury, mainly resulting from dairy conversions. It recognises the unique summer demand peaking load profile of these consumers and incentivises efficient utilisation of available capacity in the network. Lighting: This group was established to recognise the distinct night-time only usage profile and dedicated assets attributable to lighting connections. Council Pumping: Council pumping is a separate consumer group in the MP and KE pricing region that recognises their high peak load but less frequent use. Temporary supply: This consumer group recognises the need for temporary supply connections (e.g. related to construction) as well as the additional costs associated with servicing this group. Figure 4 summarises the tariffs offered for each pricing region and consumer group. Key statistics for each pricing region and tariff option are presented in Appendix D. This includes information on: tariffs, including fixed and variable tariffs, by distribution and transmission components target revenue and allocations of target revenue to pricing regions and tariffs pricing history ICPs, installed kva, consumer statistics, including delivered kwh consumption and chargeable peak demand. 12
14 Figure 4: MainPower Tariff options Tariff Option Consumer Group Description and rationale Residential Controlled Supply Residential A tariff option offered to residential consumers that allows a portion of their load (i.e. hot water heating) to be interrupted for part of the day as required for network operations. This tariff is priced lower than the uncontrolled tariff option to incentivise consumers to offer controllable load. This lower price recognises the benefits to all consumers relating to timely management of faults and in reducing peak demand related costs. This tariff is offered as a low user and standard tariff option but both are priced the same to comply with the low fixed charge regulations. Residential Uncontrolled Supply Residential A tariff option targeted to residential consumers that do not offer controllable load (i.e. hot water heat). The pricing of this option recognises the additional network costs created by not being able to interrupt supply to manage faults and peak demand. This tariff is offered as a low user and standard tariff option but both are priced the same to show compliance with the low fixed charge regulations. Residential Night Special Residential A special discounted tariff option which applies to consumption during the off-peak night period between 9.30pm to 7.30am. This tariff incentivises consumers to shift load to the off-peak night period, recognising the associated benefits in reducing peak demand. This tariff is offered as a low user and standard tariff option. Non-Residential General Supply and Large User Group Nonresidential and Large Users This tariff option is offered to non-residential consumers, typically being large users. A higher daily fixed charge is applied to take into account the lower weighted average load factor of these consumers. Irrigation Irrigation A tariff option targeted to irrigators in the MP and KE pricing regions. These consumers are charged a fixed daily charge per kw of installed motor capacity connected. This recognises the relationship between network capacity costs and the relatively size of irrigation motors connected to the network. Lighting Lighting Various tariff options applying to Street Lighting, Right of Way Lighting, and Under Veranda Lighting (all priced the same). Council Pumping Council Pumping A tariff offered in the MainPower and Kaiapoi pricing regions for connection of Council pumping facilities. Council pumping is priced based on the uniform pricing rule. Temporary supply Temporary Supply A tariff option applying to temporary connections to the network. Priced higher than standard supply, this tariff option recognises the additional costs in managing temporary connections. It also appropriately incentivises consumers to shift to a standard tariff option as soon as is practical. 13
15 Allocation of Costs to Consumer Groups The allocation of costs to consumer and tariff groups recognises the predominant rural consumer base as well as consumers continued confirmation and support for our uniform charging regime. Operating costs are, wherever possible, directly attributed to consumer groups that solely create the need for these costs. Remaining shared operating costs are allocated to consumer groups using allocation rules based on key drivers of cost, as follows: Figure 5: Cost allocators Cost Item Allocation basis Rationale Administrative and Overhead costs Consumption An allocator based on connections or consumption is considered appropriate, given these costs are broadly shared by all users. We have used consumption to recognise that larger consumers typically have a higher level of cost associated with them. Operation and Maintenance costs Net assets employed While maintenance expenditure may arise for a variety of reasons (ie planned versus reactive maintenance), over time these costs are typically proportional to the value of assets installed. Aligning maintenance costs to net assets employed recognises this cost relationship. Rates Net assets employed This recognises that rates are levied on the capital value of the network. Levies Consumption This partly recognises the basis upon which these costs are charged to MainPower. For example, electricity levies are calculated based on MWhs and ICPs. Capital Costs Directly attributed to pricing regions using asset register records Allocation basis seeks to represent relative utilisation of each network region. Allocated to tariff options by kwh consumption Transmission charges Directly attributed to pricing regions based on grid connections associated with each pricing region Allocated to tariff options by kwh consumption Transpower charge on basis of grid connection. Consumption represents the relative utilisation of the transmission grid. Tariff Setting Tariffs are set to recover cost allocations to each consumer group and tariff option using forecast volumes and current pricing structures. Appendix D sets out the tariffs applying to each tariff option including the expected target revenue to be recovered from each tariff. 14
16 MainPower has adopted the following uniform charges that apply to most consumers in each pricing region: The 15 cent per day low fixed charge applies to all controlled residential consumers irrespective of use. This approach complies with the low fixed charge regulations. Variable distribution and transmission line services are charged by way of a uniform consumption charge within each pricing region. KE variable charges are set to equal MP variable charges net of rebates. This structure is adopted to set a baseline tariff for the majority of consumers. A number of exceptions to these general pricing rules are made to recognise specific cost attributes or consumer profiles as well as to encourage specific usage behaviours: The Residential Night Special variable charge is calculated for each pricing region at approximately 80% of the Residential Controlled Supply variable distribution charge and approximately 10% of the Residential Controlled Supply transmission charge. These discounted prices are set to provide an incentive for consumers to shift load to the off peak night period between 9.30pm to 7.30am, thereby reducing utilisation of available service capacity during the day. The total variable charge for the Residential Uncontrolled Supply - Low User Option is calculated at approximately 133% of the Residential Controlled Supply total variable charge. The Residential Uncontrolled Supply fixed distribution charge has also been determined at 60 cents per day. These higher charges incentivise consumers to shift to the Residential Controlled Supply tariff option and offer controllable load. The fixed distribution charge for Non-Residential General Supply and Large User tariff options has been determined at 50 cents per day. This takes into account the higher costs associated with connection assets for these consumers and the lower weighted average load factor of this consumer group. Revenue collected from all consumer groups by way of fixed distribution charges is limited to 10% of the total fixed and variable distribution revenue. Actual percentages will vary year on year and between consumer groups as a result of changes in load factor and other load characteristics. The variable distribution charge applicable to Temporary Supply tariffs is maintained at approximately the same rate as the Residential Uncontrolled Supply - Low User Option variable distribution charge. A fixed charge of $1.00 per day also applies. This structure recognises the additional costs we face in managing temporary supply connections and appropriately incentivises consumers to shift to a standard tariff option. The fixed charge applicable to Irrigation consumers is 2 cents per day per kw of motor size connected (i.e. 50 cents per day for a motor size of 25 kilowatts) in recognition of capacity related costs. No fixed daily charge is applicable to Street Lighting, Right-of-Way Lighting or Under Veranda Lighting tariff options. Costs are recovered through a variable charge. The variable distribution charge applicable to General Supply consumers within the MP pricing region is discounted on a sliding scale basis where consumption exceeds 500,000 kwhs per annum. For consumption between 500,000 kwhs per annum and 1,000,000 kwhs a discount of between cents per kwh to cents per kwh is applied on a straight line basis. A discount of cents per kwh applies for all consumption above 1,000,000 kwhs. The variable distribution line service charge applicable to General Supply consumers within the KE pricing region where consumption exceeds 500,000 kwhs per annum is also discounted on a sliding 15
17 scale basis. For consumption between 500,000 kwhs per annum and 1,000,000 kwhs a discount of between cents per kwh to cents per kwh is applied on a straight line basis. A discount of cents per kwh applies for all consumption above 1,000,000 kwhs. Non-Standard Pricing Only 1 non-standard consumer is connected to our distribution network. The consumer is situated close to a Transpower GXP and takes direct supply from the grid through MainPower s connection assets and equipment. Prices are set for this consumer to recover the actual costs we incur as follows: Transmission charges are passed on directly to the consumer as billed by Transpower. This is possible as the consumer is the only significant connection at the GXP they are connected to. Transmission charges account for 88% of lines charges, given their limited usage of distribution assets. Distribution asset and equipment costs deployed at the connection (which have not already been recovered through capital contributions) are recovered fully through prices. This includes depreciation and a return on investment. Operations and maintenance costs incurred in relation to the connection are directly recovered each year in prices. Administration costs are recovered based on actual costs incurred. Distribution costs are recouped through a daily fixed distribution charge. Transmission charges are recouped on the same basis that Transpower bills MainPower (although this is expressed on a cents per kwh basis in our pricing schedule). Prices have been determined on this basis to discourage uneconomic bypass to the transmission grid. The fixed price seeks to minimise price volatility for both parties. Target revenues expected to be recovered from non-standard prices are detailed in Appendix D. Our obligations and responsibilities in the event of an interruption to this consumer are no different to that of other large standard consumers connected to our network. The consumer does have a higher level of circuit redundancy built into their connection that could result in quicker restoration times but the obligations and responsibilities to restore supply are no different. This level of redundancy is reflected in prices through the higher associated cost of the connection assets and equipment. We will consider all requests for non-standard contracts on application based on the commercial merits of the proposal. Criteria by which we typically might decide to enter into a non-standard contract include: the consumer is at risk of bypassing the network to an alternative network or energy source the consumer has requested a non-standard connection or specialist equipment which cannot be accommodated into our standard pricing structures or capital contributions policy the consumer requests non-standard pricing structures to mitigate risk which might otherwise impair their decision to connect to the network. 16
18 Distributed Generation Pricing There are a limited number of small scale distributed generators connected to our network. These generation units are less than 10kW, generally under 2kW, and are typically associated with an existing ICP (i.e. photovoltaic solar panels supplementing distributed electricity supply). These connections rarely export electricity into the network. We do not charge for small scale distributed generation connected to the network or make payments in regards to avoided costs. This decision reflects the following considerations: the low number of connections of this type the low cost to connect small scale distributed generation to the network the low volumes of electricity exported to the network from these connections the avoided costs (both in relation to transmission and distribution costs) which are associated with the reduced peak demand these generation units provide. While we do not typically incur costs associated with the physical connection of small scale distributed generation, where we do, these costs will be met via contributions consistent with our capital contributions policy. We have had several enquiries in regards to the connection of larger scale distributed generation and are also considering our own investments in an embedded wind farm near Mt Cass. Despite this, discussions have not progressed to a stage where distribution charges have been discussed. We plan to develop a distributed generation pricing methodology for large scale generation as required. 17
19 APPENDIX A: ELECTRICITY AUTHORITY PRICING PRINCIPLES This appendix describes the extent to which our pricing methodology is consistent with the EA s pricing principles, pursuant to section 2.4.3(2) of the IDD. We have reviewed our pricing methodology against the pricing principles and are of the view that our pricing methodology is broadly consistent with the principles. We also signal how alignment with the principles may be refined and improved following our pricing review. Pricing Principle Extent of consistency (a) Prices are to signal the economic costs of service provision, by: (i) being subsidy free (equal to or greater than incremental costs, and less than or equal to standalone costs), except where subsidies arise from compliance with legislation and/or other regulation; The incremental costs of connecting an additional consumer to the network include the costs of connection assets specific to the consumer, incremental operating and maintenance costs, and upstream reinforcement costs required to accommodate the additional connection. MainPower s Network Extensions and Upgrades and Capital Contributions Policy is the primary mechanism by which we ensure that prices recover incremental capital cost. We seek capital contributions for new connections and asset upgrades when the expected distribution revenue from a connection is less than the incremental capital costs (including a share of any upfront or future network augmentation costs). Distribution prices will therefore be in excess of incremental capital costs. A copy of this policy can be found on our website at: The remaining incremental operational expenditure is recovered in distribution prices. Simple regression analysis shows us that over the last 10 years new connections have on average increased operating costs by $270 per annum (real $2013), across all connection sizes. This estimate is likely to overstate incremental costs as it includes non-consumer related cost increases, such as recent regulatory and safety compliance costs. Our fixed charge will recover a proportion of these 18
20 costs regardless of the level of consumption ($54 per annum in the case of controlled residential, and $182 per annum for non-residential). This will likely recover incremental costs for smaller connection sizes, which would usually contribute less towards operational costs. Revenue received from variable charges, which broadly increases proportional to the size of the connection and associated costs, will in most cases recover remaining incremental costs. For example, a consumer on the Residential Controlled Supply tariff would only need to use 2,266kWh per annum to recoup the average incremental cost identified above. This also highlights that crosssubsidies may exist at very low levels of usage due to the application of the low fixed charge regulations. Prices are also likely to be less than stand alone cost. We understand stand alone cost to mean the cost to the consumer of bypassing the network with alternative supply arrangements (e.g. connection to the grid through its own distribution assets, or alternative fuel or generation sources). For most mass market consumers the costs of moving off-grid to a standalone energy solution (eg rooftop PV) is currently priced at a premium to distributed electricity supply. This is because the large economies of scale associated with network investments mean distribution networks currently remain competitive on price. Large consumers are likely to be better placed to bypass the network at a lower overall stand alone cost. As an example, our largest connection is on a non-standard contract to discourage bypass of our network to the transmission grid. The non-standard arrangements ensure it is economic for this consumer to remain connected to the network by pricing below the stand alone cost of connecting directly to the grid. We are looking to estimate stand-alone costs for different pricing regions and consumer groups as part of our cost of supply modelling project. These will hopefully be provided in future pricing methodologies. (ii) having regard, to the extent practicable, to the level of available service capacity; and The primary service distributors provide is access to capacity. This principle sets out that distributors should recognise this primary driver in setting prices and pricing structures. The recent Canterbury earthquakes triggered a significant population shift north from the city of Christchurch to the surrounding areas of Rangiora and Kaiapoi. In 2014 alone, the number of connections on our network increased by 2.75% (2013 6%). In 19
21 addition, irrigation demand is also rising as a result of numerous dairy farm conversions. This growth is putting pressure on available network capacity across our network. For instance, our peak load in 2014 was 105MVA ( MVA). Signalling available service capacity in our prices is therefore important and a significant focus of our pricing review. We currently do not explicitly define consumer groups by the level of available service capacity. However, the distinction made between low users, residential, nonresidential, and large users does proxy different consumer capacity profiles. Similarly, Residential Controlled and Night Special tariff options are designed to incentivise behaviours that reduce demand at the peak or during fault events. This reduces the pressure on available service capacity as well as defers investments in new capacity. The Irrigation tariff is priced based on the installed kw capacity of irrigation motors and is designed to signal limited capacity in the high voltage distribution system. We are continuing to upgrade our 11kV circuits to 22kV to support the substantial growth in irrigation demand. This tariff option, as well as capital contributions sought from irrigators, signals that upstream capacity is limited. One area being investigated as part of our pricing review that might improve alignment with this principle is the potential introduction of consumer groups defined by load characteristics. As discussed above, we are investigating a small and large load group aligned to the typical load profiles of consumers connected to our network. (iii) signalling, to the extent practicable, the impact of additional usage on future investment costs. This principle asserts that behaviour which creates additional investment costs for distributors should be recognised in pricing, and that costs should accordingly be recouped from those consumers that create them. The key drivers of future network investment costs relates to new connections and system capacity growth. Over the next 5 years capex is expected to remain high before reducing to more normal levels (see graph below). These investments stem mainly from growth in the residential population and use of irrigation. 20
22 (Real 2014$'000) 12,000 10,000 8,000 6,000 4,000 Forecast Growth Related Capex ( ) Consumer connection (gross of capital contributions) System growth 2, We ensure we recoup incremental connection and upstream reinforcement costs through our capital contributions policy, as discussed above. The use of a consumption based variable charge is another pricing approach which recognises additional usage of capacity. While kwh consumption is only a proxy for capacity utilisation, it provides a strong signal that additional usage of the network creates additional costs overtime. As part of our review, we are considering the merits of peak time pricing, particularly for the large load group. This may align pricing more closely with this principle. Large consumers typically have time of use meters making it practical to charge on peak usage. By contrast, it is impractical to price the mass market other than on consumption given the current fleet of non timeof-use meters. Mass market pricing more closely aligned with peak capacity usage may be investigated as new smart meters are deployed on our network. The Residential Night Special tariff option provides incentives for consumers who take up this option to shift their demand to the off-peak night period. The Residential Controlled Tariff signal provides incentives to consumers that offer up interruptible load which can be used to manage faults and reduce peak demand. In combination, these tariff options appropriately signal the impact of additional usage on investment costs. As discussed above, the Irrigation tariff signals capacity constraints on the 11kV 21
23 network attributable to this fast growing consumer group by levying a higher fixed daily charge on relatively larger irrigation motors. (b) Where prices based on efficient incremental costs would under-recover allowed revenues, the shortfall should be made up by setting prices in a manner that has regard to consumers demand responsiveness, to the extent practicable. This principle sets out the economic principle of Ramsey Pricing. This principle asserts it is economically efficient to charge more to those consumers that have a higher willingness to pay and less to those with a lower willingness to pay. As a practical example, this principle suggests that a business that must operate or face significant shutdown costs would pay relatively more than a consumer who is willing to have their supply interrupted. This is considered economically efficient as those consumers that demand a service the most, pay the most. In competitive markets, consumers that pay more will typically demand a higher level of service. In practice, it is difficult to apply willingness to pay considerations explicitly given the difficultly in measuring consumer demand responsiveness. However, our recent consumer surveys confirm that 7.5 out of 10 consumers would not be willing to pay more for a higher quality of supply. 20% of consumers would be willing to pay $50 per year for higher quality of service. This suggests, in general, a low willingness to pay for higher value services. We consider the willingness to pay principle can be practically applied by allowing consumers to self-select tariffs that balance their willingness to pay with the quality of supply they receive. For instance, the Residential Uncontrolled Tariff option is priced higher recognising a higher willingness to pay for consumers that do not want their hot-water load interrupted. Similarly, the Residential Night Special tariff is targeted to consumers who are willing to limit their demand at the peak in preference for a lower off peak charge. Our non-standard pricing also partially recognises willingness to pay considerations by consumers that are readily able to bypass the network. (c) Provided that prices satisfy (a) above, prices should be responsive to the requirements and circumstances of stakeholders in order to: (i) discourage uneconomic bypass; This suggests Principle A takes priority over these considerations. This allows for a discount on price or other incentives being offered to consumers at 22