Table 3: Network charges pre 1 March 1996

1994-95 Existing BST

Estimated demand

Energy GWh

Network Charge 1994-95 MW (a) Total Peak &

Shoulder

$'000 p.a.

c/kWh

EnergyAustralia 4 642 22 707 11 532 166 459 0.73

Integral Energy 2 849 13 590 6 556 99 811 0.73

NorthPower 649 3 040 1 395 34 507 1.13

Advance Energy 432 2 041 928 21 965 1.08

Energy South 664 3 376 1 529 34 747 1.03

Far West Energy 55 334 148 3 200 0.96

Pacific Power Retail 834 5806 2472 4 638

-ACTEW 551 1 707 914 14 715 0.86

ACTEW (Snowy) - 670 361 4 958 0.74

Pacific Power Gen - - - 0

-Snowy Gen - - - 0

-Total 10 675 53 270 25 833 385 000 0.72

Notes:

(a) The MW demand is an estimate of the diversified maximum demand.

Independent Pricing and Regulatory Tribunal Report No 2.1, 1996

14 Network pricing for generators: firm access

Under the "firm access" proposal being considered by the National Grid Management Council, the network service provider would, as a minimum, only charge generators for costs associated with network entry equipment plus a small non location based charge. This revenue would be incorporated into TransGrid’s maximum revenue calculation.

Generators may also opt to purchase "firm access" rights with a cost up to the maximum of the long run marginal cost to the network service provider. The firm access proposal is intended to allow generators to manage risks associated with potential network constraints. Network constraints may prevent the generators from supplying into the trading pool. Part of the firm access payments may be used by TransGrid to insure itself with a third party against the risks of network constraints. It is understood that the generators’ payments for firm access will be outside of the regulated revenue requirement.

The level of firm access being paid by a generator to TransGrid will depend on the perceived probability of a constraint and the estimated level of spot prices should a constraint occur. The firm access proposal provides generators and network service providers with locational pricing signals. Generators in high risk areas would be paying higher costs for access which would be reflected in electricity prices.

Generators in less risky areas would have a cost advantage. New generators would be encouraged to locate in areas where there were no constraints to reduce the cost of firm access.

At this stage it is understood that the firm access proposals may not be in place at the start of the national market. This potentially places some risks on the generators in the case of constraints on the network.

Arrangements for direct customer transmission costs

Pacific Power has four contracts direct with retail customers for the supply of energy. These contracts were negotiated on the basis of not recovering the same level of fixed costs as for all other customers. The contracts were negotiated prior to the separation of the generation and transmission charges.

The full cost of transmission to these direct customers has been calculated at around

$36 million. The Tribunal has directed that Pacific Power contribute $20 million to the transmission costs for the direct customers. Given that these contracts were based on marginal costs, the Tribunal considers it is appropriate that the split of the revenues between generators and TransGrid reflects opportunity costs rather than fully distributed costs.

Arrangements for transmission costs of tripartite contracts

In previous years contracts were established between large customers and the main generator for the supply of energy. The energy usually also flowed through a distribution network. A payment for use of the distribution system was paid to the local distributor.

Independent Pricing and Regulatory Tribunal Report No 2.1, 1996

15

The negotiated price for the contracts included energy, transmission and distribution bundled together. As with direct customer contracts, these contracts were negotiated on the basis of not recovering the same level of fixed costs as for all other customers.

The vertical separation of generation and transmission has required the costs allocations of the tripartites to also be reviewed. It has been decided that Pacific Power will pay the full CRNP costs (averaged within a distributor's area) associated with transmission for the tripartite contracts.

Market and system operator, and other revenues

Charges for the market and system operator will be recouped through pool fees.

The Tribunal is not responsible for setting the fees for these functions.

TransGrid is also able to derive revenue from services such as capital contributions, recoverable works and other miscellaneous charges. If concerns are raised, the Tribunal may be required to investigate TransGrid's charging practices for the non-regulated services.

Contestability

The National Electricity Code, provides for parts of the network owner’s business to be considered as “excluded” and “non-regulated” activities. When the Tribunal is assured that a contestable market exists for connection charges, then this revenue will be excluded from the regulated revenue for TransGrid. Contestable connections charges will be negotiated between the generator and the connection provider and will be outside the regulated revenue.

Treatment of losses

Energy losses are a cost (variable) of transportation of energy. Energy losses (or in some cases gains) are incurred in the transportation of energy.

In the NSW market, transmission losses will be traded through the market. Energy purchasers will need to ensure that sufficient energy is purchased to cover metered consumption by customers plus system losses. Losses are not a monopoly service as they relate to purchases in the wholesale market which will be competitive in the future. However, the Tribunal has agreed with industry participants that loss factors will be calculated as set out in the following.

Loss factors for each distributor supply point will be calculated by TransGrid based on modelled results for each supply point. The calculated loss factor would be averaged within the distributor's boundaries to provide a single loss factor for each distributor. This mirrors the approach used for transmission charges. Losses on the transmission system average about 2% of sent out energy. Losses to Far West Energy will be limited to the next highest rural distributors’ loss value.

The calculated loss factors are based on marginal losses. This will result in over-recovery of charges by TransGrid which will be reallocated back to distributors in the settlement process.

Independent Pricing and Regulatory Tribunal Report No 2.1, 1996

16 Losses for inter-distributor transfers

The Tribunal understands that TransGrid proposes to handle the settlement of losses for inter-distributor transfers⁴. The Tribunal suggests that the affected distributors and TransGrid should negotiate the appropriate loss factors.

Access to the NSW transmission network

In changes to the Tribunal's legislation, the Tribunal has responsibility for regulating NSW access regimes. Under section 12 of the Independent Pricing and Regulatory Tribunal Act, 1992, the Tribunal may be asked to investigate access to the TransGrid transmission network, connection agreements and possibly the arrangements for access to the spot market/ trading market. In this determination, the Tribunal has been mindful of compliance with the access laws in place under the Competition Policy Act, 1995.

Negotiation

The Tribunal's preferred approach to network access and connection agreements is to allow negotiation among the involved parties. The Tribunal believes that negotiation is desirable to allow agencies some flexibility in managing the use of the system and pricing policies.

However, in recognition of the natural monopoly position of the network business, the Tribunal's determination sets an overall cap on TransGrid's revenue and maximum reference prices for different points of supply. Scope is to be provided for negotiation of prices below these maximum prices but TransGrid would not be able to recover forgone revenue from other customers. Another issue is that negotiated prices should not fall below avoidable costs, otherwise an economic cross subsidy occurs.

The Tribunal intends to work with the industry on developing guidelines for negotiation below maximum network prices. This would specify circumstances where negotiations may be desirable and outline factors to be considered. The Tribunal would expect negotiated prices to be published and available to other customers with the same circumstances. Negotiation can provide scope for a more flexible approach to pricing to reduce distortions under the CRNP averaging approach.

In situations where disputes arise during negotiations mediation and, possibly, arbitration, may be necessary.

TransGrid, legally, is no longer in a monopoly position for the provision of network services. The Tribunal considers that increasing contestability of the market can be achieved by allowing customers to bypass - i.e. set up their own transmission infrastructure. This provides a constraint on inappropriate pricing.

4 Inter distributor transfers occur when one distributor receives energy through another distributor's network.

I

P

R

T

Schedule 1

DETERMINATION OF MAXIMUM PRICES TO BE CHARGED UNDER

SECTION 11(1) OF THE INDEPENDENT PRICING AND REGULATORY