ElectraNet public forums in Port Lincoln

November 2017

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HoustonKemp has been working with ElectraNet on a RIT-T assessment of options for electricity transmission upgrades on the Eyre Peninsula.  We have undertaken the wholesale market modelling for the RIT-T assessment and also applied real option valuation – the first time this has been done formally for a RIT-T.  Ann Whitfield, Tom Graham and Sam Forrest are presenting on this approach at the ElectraNet public forums in Port Lincoln (November 20) and Adelaide (November 27).  ElectraNet’s RIT-T assessment can be accessed here.

Posted on November 23, 2017 and filed under Reports.

An example of using data analytics in a competition matter

November 2017

Luke Wainscoat gave a presentation at the Rising Stars Workshop on the use of data analytics in competition matters. His presentation showed how a new and very detailed dataset of financial transactions could be used to help determine the geographic dimension of retail markets. The analysis indicated that the ACCC may have adopted an overly narrow geographic market in a statement of issues regarding a proposed supermarket acquisition. The presentation is available here.

Posted on November 20, 2017 and filed under Presentations.

Applying economics to the analysis of mergers and vertical restraints

October 2017

Luke Wainscoat gave a lecture on how economics can be applied to assess the effect that mergers and vertical restraints have on competition at the school of economics in the University of Sydney. His lecture sets out some of the economic analysis and techniques that can be used to examine whether a merger will substantially lessen competition.

Luke explained what vertical restraints are, and some of the main anti and pro-competitive effects that they may have on competition, before setting out a mechanism by which the vertical restraints that are likely to substantially lessen competition can be identified. Luke’s presentation is available here.

Posted on October 27, 2017 and filed under Presentations.

HSC Economics at Sydney University

August 2017

Ann Whitfield is pleased to be speaking at an upcoming event aimed at high school economics students considering studying economics at university. The event is to be held by the School of Economics at the Charles Perkins Centre, University of Sydney on Tuesday 5th September from 4pm. Ann is one of several economists who will be speaking at this event, which also includes a hands-on workshop session. For more information on the event, or to register to attend please click here.

Posted on August 21, 2017 and filed under Presentations.

The economics of regulation – some examples from Australia

August 2017

Luke Wainscoat gave a lecture on competition policy and how regulation is applied in Australia at the University of Sydney. This lecture is part of an undergraduate course in the school of economics on the economics of regulation. In the lecture Luke provided an introduction to competition policy and regulation before describing how airports, railways and electricity distributors are regulated in Australia. The lecture finished by providing an overview of the access regime in Australia. The slides to the lecture can be found here.

Posted on August 21, 2017 and filed under Presentations.

The development of electricity consumption

June 2017

Stuart Morrison recently assisted Adrian Kemp in preparing visuals for his talk at Power & Electricity World in Manila last month. Stuart created the chart below showing the relationship between electricity per capita, GDP per capita and total national emissions. The visualisation of this data reveals some interesting trends, including:

  • the momentous rise of electricity consumption per capita in China – especially over neighbouring Malaysia;
  • the decrease in Greece’s GDP per capita from 2009; and
  • the decrease in electricity consumption per capita in Australia – driven by take-up of rooftop solar-PV and more efficient appliances.
Posted on June 20, 2017 and filed under Presentations.

HoustonKemp economists recognised for their expertise

June 2017

HoustonKemp is proud to announce that some of our colleagues have been recognised as leading economic consultants in publications by Who’s Who Legal. Luke Wainscoat has been listed in Competition: Future Leaders 2017, which includes competition economists aged 45 or under, whilst Carol Osborne and Greg Houston have once again been named in Consulting Experts: Competition Economists 2017, which lists the best consultant expert witnesses and advisers on economics in the world.  

Who’s Who Legal describes Greg as a “talented” expert widely acclaimed for providing “top-drawer, case-winning economic analysis” in court proceedings and regulatory tribunals.

Posted on June 1, 2017 and filed under Announcements.

Federal Court decision on NSW/ACT electricity appeals

May 2017

The Full Federal Court has handed down its decision on the application brought by the Australian Energy Regulator for judicial review of the Australian Competition Tribunal’s review of the AER’s allowed revenue determinations in respect of Ausgrid, Endeavour Energy, Essential Energy and ActewAGL. The court rejected the AER’s appeal in respect of the operating costs and return on debt elements, but upheld its appeal in relation to the Tribunal’s finding on the value of imputation credits.

Operating expenditure – Tribunal decision upheld

The court found that the Tribunal did not err in reaching a conclusion that the data relied upon by the AER for its economic benchmarking was not suitable for the purpose of determining operating expenditure and that there were limitations with the use of overseas data. It also did not accept the AER’s contention that the Tribunal’s directions left the AER with a lack of certainty on how to proceed – finding that a ‘bottom-up’ approach to setting operating expenditure could be justified both in law and by evidence.

A clear implication of the court’s decision is that the AER will need to reduce its reliance on benchmarking in a re-made decision as well as in future decisions, at least until the quality of its data improves. Given that the business’ actual operating expenditures have declined significantly since the AER’s original 2015 decision and their ‘revealed costs’ at the time, the means by which the AER re-makes its decision for the current period will also have important implications for its consideration of operating expenditures in subsequent regulatory periods. The decision that the AER makes on whether to re-instate the efficiency benefits sharing scheme for the current period (which it had set aside for some entities, on the basis of its benchmarking results) will be critical to these future arrangements.

Return on debt – Tribunal decision upheld and further guidance given

 The court stated that the benchmark efficient entity cannot be characterised as either regulated or unregulated, and so the Tribunal did not err in stating that it was not a regulated entity. Further, the court ruled that the Tribunal did not err in finding that the AER’s approach to the transition to a different method for determining the return on debt allowance was unreasonable.

Significantly, the court noted that that the NSW businesses already raised debt with effect similar to that of a trailing average, and that adoption of the trailing average would therefore impose no impacts on the service provider of the type that the AER needed to consider under the NER. The court stated that:

[572] Given that there were no such impacts, there was no need for the AER to take a step which, in the circumstances, r 6.5.2(k)(4) did not require for those service providers, namely a transition to the trailing approach of estimating the return on debt by adopting a mechanism to unwind hedging contracts…

These directions point strongly towards the immediate adoption of the trailing average for the NSW businesses and ActewAGL. However, it remains unclear exactly how they may be reflected in a re-made decision by the AER.

Value of imputation credits (gamma) – AER application for review successful

 The court upheld the AER’s contention that the Tribunal erred in its construction of the expression ‘the value of imputation credits’, which led the Tribunal to reject the AER’s preferred estimation methods. The court stated that:

[752] …it was not therefore a reviewable error for the AER to prefer one theoretical approach to considering the determination of gamma over another. This means that it is not an error of construction for the AER to focus on utilisation rather than on implied market value.

 The court’s observations and decision affirm the AER’s approach to placing substantial weight on the ‘equity ownership’ and ‘tax statistics’ approaches to estimating the value of distributed imputation credits. 

Where to from here?

It is now over two years since the AER made its decision on allowed revenues for these network services providers, while the charging period covered by the decision extends back to 2014. Notwithstanding the lengthy process to date, it will most likely take many months or longer for the guidance provided by the court to be turned into adjusted revenue allowances, and to be reflected in network charges. In the meantime, the AER has a 60 day window in which to decide whether any aspects of the full court decision warrant an application for special leave and so review by the High Court.  

Posted on May 25, 2017 and filed under Announcements.

Dispute over regulatory investment test outcome

May 2017

HoustonKemp provided an independent report in relation to the first formal dispute of a regulatory investment test outcome.  The review related to SA Power Network’s RIT-D assessment of the Kangaroo Island submarine cable.  We were asked by the AER to consider whether the RIT-D had been applied in accordance with the regulatory framework and, if not, whether this is likely to have materially affected the outcome.  Our report has been published by the AER is and available here.

Posted on May 22, 2017 and filed under Reports.

Powering Sydney's Future

May 2017

As part of its Powering Sydney’s Future (PSF) RIT-T assessment, TransGrid has published a report prepared by HoustonKemp on the issues to be considered in determining a commercial discount rate for a RIT-T application.  Our report also provides a “first-pass” indicative commercial discount rate that we consider appropriate to apply to the PSF RIT-T.  Our report can be accessed here.

 

Posted on May 9, 2017 and filed under Reports.

Retail margin methodology

May 2017

HoustonKemp has prepared a report for ActewAGL Retail, in relation to the ICRC’s draft decision to change the methodology for determining the retail margin component of regulated electricity standing offer prices. We considered the adequacy of the ICRC’s approach in light of the factors that may be expected to affect the costs recovered by the retail margin, the rationale provided by the ICRC and the approach adopted by other regulators. Our conclusion is that the ICRC’s central assumption that retail margin costs move in line with changes to CPI is not supported by any evidence, and our own assessment indicates that there are other drivers of these costs.  Our report is available here.

Posted on May 4, 2017 and filed under Reports.

Expert report on proposed merger

May 2017

Greg Houston prepared an expert report for Minter Ellison in relation to the application before the Australian Competition Tribunal by Tabcorp for authorisation to acquire Tatts. The report examines the effect of the proposed merger on competition, and the public benefits that are likely to arise. Greg was assisted by a number of our team including Luke Wainscoat, Sarah Turner, Daniel Young, Sam Forrest, Stuart Morrison and Sarah Nelson. The report is available here.

National Disability Insurance Agency price review

March 2017

We are very pleased to be helping the National Disability Insurance Agency (NDIA) with the review of its price controls. Sam Forrest, Luke Wainscoat, Adrian Kemp and Greg Houston will design an impact assessment framework to assess potential changes to the NDIA’s price controls. They will draft a consultation paper on the options being considered and apply the impact assessment to prepare recommendations to the NDIA on the changes it should make to its price controls in 2017/18. For more information on the review please click here.

Posted on March 9, 2017 and filed under Announcements.

Five fixes for the NEM

February 2017

Load shedding in South Australia on Wednesday 8 February and successive ‘close shaves’ in NSW and Queensland as the heatwave spread north have exposed serious weaknesses in the national electricity market (NEM).

For some time now, it has been fashionable to blame South Australia’s near 40 per cent renewable (wind) generation mix for outages in that state. However, reliability problems in regions with much less renewable generation underlines that the challenges facing the power system are much more complex and extend far beyond South Australia.

The NEM’s ‘energy only’ market design means that generators get paid when they are called to run, but not otherwise. It was and remains a fundamentally sound basis for organising generation markets.[1] However, the consequences of some poorly-conceived interventions in that market design are now starting to show.

At the time of its instigation, the bi-partisan renewable energy target (RET) seemed straight-forward: mandate that purchasers of wholesale electricity buy an increasing proportion from renewable sources, and impose stiff penalties for non-compliance. Few appreciated that subsidising one form of generation amounted to imposing a tax on all others.

Compounded by weak demand growth since 2009, the RET has driven a steady exodus of fossil fuel generators from the market. Some aging, CO2 heavy, coal-fired plants had in any case passed their time and needed to go if carbon reduction targets are to be met. But several much newer, CO2 light, gas-fired plants have also been mothballed – squeezed between high domestic gas prices and electricity market revenues deflated by subsidised wind turbines.

These forces have caused the once contemplated role of gas as the ‘transition fuel’ to a much lower carbon generation mix not to materialise, so that we now have a sub-optimal generation portfolio with too few highly reliable, shoulder- and peak-period generators.

With the planned closure of the giant 1600 MW Hazelwood plant next month, market rules and operating protocols must be adapted quickly if the past week’s problems are not to be much worse come the summer of 2017/18.

Here are five suggestions warranting close attention:

1.       The protocols and norms by which market operator AEMO makes decisions need careful review, so that the system is run more conservatively and with greater emphasis on the consequences of ‘getting it wrong’ – for example, in assessing capacity requirements in South Australia, AEMO assumes a contribution towards peak demand from wind of nine per cent, yet when demand was high last Wednesday the weather delivered only half that amount. On its face, a much more cautious approach is needed.

2.       Greater caution as to target levels of supply reliability would also assist the case for AEMO invoking its ‘reliability and emergency reserve trader’ powers more frequently and, longer term, for much stronger interconnection between NEM regions. Heatwaves rarely hit all of the south eastern states simultaneously, and providing for greater diversity of supply across regions is critical.

3.       The generator playing field must be levelled so that the structural disadvantage imposed by the RET on forms of generation that can be scheduled with very high reliability (eg, fossil-fuelled and solar-thermal units) is eliminated, thereby improving the incentives to invest in this form of capacity. There should be no need to throw out the energy-only market design, but there is opportunity for market-saving innovation, perhaps by introducing a price premium for output from scheduled generation, paid for by a discount on the output from semi-scheduled generators (mostly, wind) that only ‘turn up when they can’.

4.       The market price cap should be raised so that it more closely reflects the cost to customers of losing load, and encourages peaking plant to be more available – even if deployed for just a few days per year. For the energy only market design to work as intended, it must not prevent peak period prices from reflecting the high cost of load shedding or non-supply. Ensuring the demand side of the market can see and respond to high price events would also assist energy consumers to make informed choices on peak days.

5.       Lastly, the Victorian and NSW governments could assist by easing their moratoria on gas exploration and development, and facilitating arrangements that enable land-owners to share a greater proportion of the potential value of onshore gas reserves. Improved availability would take the pressure off domestic gas prices and strengthen the viability of gas-fired generation.

The first four of these measures would all add to the cost of generating and delivering electricity, and so the prices paid by consumers, while the fifth is also far from popular. However, the cost to consumers and the economy as a whole of an unreliable power system is a much higher price to pay. Decarbonising our energy system involves hard choices, and time is running out for those choices to be made.  

 

[1] By contrast, generators in Western Australia (not part of the eastern states market) get paid just for being available, and WA consumers now pay a high premium for capacity they do not need.

 

Greg Houston was interviewed in relation to the challenges facing the NEM on ABC’s 7.30, Monday 13 February. See: http://www.abc.net.au/7.30/content/2017/s4619264.htm

Article originally published on LinkedIn
Posted on February 14, 2017 and filed under Articles.

Best paper at the Renewable Energy World Asia 2016 conference in Seoul

November 2016

Ehson Shirazi was invited to prepare a paper for, and present at, the Renewable Energy World Asia 2016 conference in Seoul earlier this year. His paper explores the opportunities created by solar PV and batteries, and specifically how these technologies broaden the policy options available to South East Asian governments for the removal of long standing fuel and electricity subsidies, and hence the transition to a more cost effective and efficient power system.

Ehson showed that if South East Asian governments invested the money that would otherwise be used to fund future electricity subsidies towards the cost of installing renewable generation for customers that would have benefited from those subsidies, then this will reduce the customers’ reliance on thermal generation, and so negate any increase in electricity bills that would occur if the subsidy was not provided. This would then allow the subsidies to be removed far quicker than traditional subsidy rationalisation programmes, with little or no impact on customers. His analysis is supported by an empirical case study from Malaysia.

Ehson was awarded the ‘Best Paper’ award for the renewable energy track at the conference. A copy of his paper and presentation slides can be found here and here.

Posted on November 14, 2016 and filed under Presentations.

VCR estimates and transmission reliability

November 2016

We were engaged by TransGrid to determine Value of Customer Reliability (VCR) estimates suitable for customers experiencing low probability but high impact supply outages in the Sydney CBD and Inner Suburbs regions.  We were asked to determine these VCR estimates by drawing on existing, publicly available VCR studies.  The values we derived were $90/kWh for Inner Suburbs customers and $150-$192/kWh for customers in the Sydney CBD. 

IPART has subsequently adopted our $90/kWh estimate in recommending reliability standards to apply to the Inner Sydney transmission network from 1 July 2018, available here.

Posted on November 2, 2016 and filed under Reports.

New Singaporean office

November 2016

We are pleased to announce the relocation of our Singaporean office to Asia Square Tower 1. The move to a new, permanent location reflects our ongoing commitment to expanding our presence in Singapore and the wider southeast Asian region. We hope to welcome you to our offices in the near future.

Posted on November 1, 2016 and filed under Announcements.

Reforming remote and regional road funding

October 2016

Adrian Kemp and Martin Chow led a team of HoustonKemp economists that examined potential road funding reform options and the implications of these reforms for remote and regional roads for Austroads. The report also provided a snapshot of current and past road related revenue, expenditure and funding to inform the debate. A copy of report can be found here.

Posted on October 27, 2016 and filed under Reports.