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DRAFT DECISION
Tariff structure statement
proposals
Ausgrid
Endeavour Energy
Essential Energy
August 2016
© Commonwealth of Australia 2016
This work is copyright. In addition to any use permitted under the Copyright Act 1968,
all material contained within this work is provided under a Creative Commons
Attributions 3.0 Australia licence, with the exception of:
the Commonwealth Coat of Arms
the ACCC and AER logos
any illustration, diagram, photograph or graphic over which the Australian
Competition and Consumer Commission does not hold copyright, but which may be
part of or contained within this publication. The details of the relevant licence
conditions are available on the Creative Commons website, as is the full legal code
for the CC BY 3.0 AU licence.
Requests and inquiries concerning reproduction and rights should be addressed to the:
Director, Corporate Communications
Australian Competition and Consumer Commission
GPO Box 4141, Canberra ACT 2601
Inquiries about this publication should be addressed to:
Australian Energy Regulator
GPO Box 520
Melbourne Vic 3001
Tel: (03) 9290 1444
Fax: (03) 9290 1457
Email: [email protected]
2 New South Wales —Tariff structure statement— Draft decision
Contents
Contents .......................................................................................................... 2
Glossary........................................................................................................... 4
Request for submissions ............................................................................... 6
Draft decision .................................................................................................. 7
1 Background ............................................................................................. 25
2 Rule requirements .................................................................................. 34
3 Summary of NSW distributors' proposals ............................................ 38
3.1 Ausgrid ............................................................................................. 38
3.2 Endeavour Energy ........................................................................... 39
3.3 Essential Energy .............................................................................. 42
4 Tariff structures ...................................................................................... 45
4.1 Tariff design ..................................................................................... 45
4.2 Charging windows ........................................................................... 64
4.2.1 Time of day (business days) ......................................................... 65
4.2.2 Seasonality .................................................................................. 78
4.2.3 Charging windows for weekends/non-business days ................... 81
4.2.4 Harmonisation of charging windows ............................................. 84
5 Tariff levels .............................................................................................. 85
5.1 Calculation of long run marginal cost ............................................ 85
5.2 Recovery of residual costs ............................................................. 87
6 Tariff assignment policies ................................................................... 100
6.1 Tariff classes .................................................................................. 100
6.2 Residential and small business tariff assignment policies ........ 100
6.3 Large business tariff assignment policies .................................. 113
3 New South Wales —Tariff structure statement— Draft decision
A Our consultation process .................................................................... 116
A.1 Issues paper, submissions and information requests ............... 116
A.2 Public forum ................................................................................... 116
A.3 Other consultation ......................................................................... 117
B Ausgrid’s proposed tariff structures .................................................. 119
C Distributors' customer consultation and customer impact analysis124
C.1 Customer consultation .................................................................. 124
C.2 Customer impact analysis ............................................................ 126
4 New South Wales —Tariff structure statement— Draft decision
Glossary Term Interpretation
CoAG Energy Council The Council of Australian Governments Energy Council, the policy making council
for the electricity industry, comprised of Commonwealth, state and territory
governments.
Consumption tariff (usage tariff) A tariff based on energy consumed (measured in kWh) during a billing cycle.
Declining block tariff A tariff structure in which the per unit price of energy decreases in steps as energy
consumption increases past set thresholds.
Demand charge A tariff component based on the maximum amount of electricity used (measured in
kW or kVA), usually falling within a defined charging window or at any given time,
and usually reset either at the end of a month or a billing cycle.
Demand tariff A form of tariff that incorporates a demand charge component.
Distributor A Distribution Network Service Provider.
Fixed charge A tariff component usually based on a per day fixed price amount for connection to
the network.
Flat tariff A tariff incorporating a per unit consumption charge that does not vary regardless of
how much electricity is consumed or when consumption occurs.
Flat usage charge A per unit consumption charge that does not vary regardless of how much electricity
is consumed or when consumption occurs.
Inclining block tariff A tariff structure in which the per unit price of energy increases in steps as energy
consumption increases past set thresholds.
Interval meter A meter capable of measuring electricity usage in specific time intervals, such as 30
minute blocks.
LRMC Long Run Marginal Cost. Defined in the National Electricity Rules as follows:
"the cost of an incremental change in demand for direct control services provided by
a Distribution Network Service Provider over a period of time in which all factors of
production required to provide those direct control services can be varied".
Minimum demand charge Where a customer is charged for a minimum level of demand during the month or
billing period, irrespective of whether their actual demand reaches that level.
NEO The National Electricity Objective, defined in the National Electricity Law as follows:
"to promote efficient investment in, and efficient operation and use of, electricity
services for the long term interests of consumers of electricity with respect to—
(a) price, quality, safety, reliability and security of supply of electricity; and
(b) the reliability, safety and security of the national electricity system".
Network pricing objective The network pricing objective is that the tariffs that a distributor charges in respect
of its provision of direct control services to a retail customer should reflect the
distributor's efficient costs of providing those services to the retail customer.
NER, the Rules National Electricity Rules.
Smart meter A digital meter which records consumption in short intervals such as 30 minute
blocks and is capable of being read remotely. May facilitate other services (e.g. in–
home information display; load control).
Tariff A tariff is levied on a customer in return for use of an electricity network. A single
5 New South Wales —Tariff structure statement— Draft decision
Term Interpretation
tariff may comprise one or more separate charges, or components.
Tariff assignment policy Policies and procedures a distributor will apply in assigning retail customers to tariffs
or reassigning retail customers from one tariff to another.
Tariff class assignment policy Policies and procedures a distributor will apply in assigning retail customers to tariff
classes or reassigning retail customers from one tariff class to another.
Tariff structure Tariff structure is the shape, form or design of a tariff, including its different
components (charges) and how they may interact.
Tariff charging parameter The manner in which a tariff component, or charge, is determined (e.g. a fixed
charge is a fixed dollar amount per day).
Tariff class A class of retail customers for one or more direct control services who are subject to
a particular tariff or particular tariffs.
Time of use tariff A tariff incorporating usage charges with varying levels applicable at different times
of the day, days of the week, or seasons. A time-of-use tariff will have defined
charging windows in which these different usage charges apply. These charging
windows might be labelled the 'peak' window, 'shoulder' window, and 'off-peak'
window.
Usage charge A tariff component based on energy consumed (measured in kWh). Usage charges
may be flat, inclining with consumption, declining with consumption, variable
depending on the time at which consumption occurs, or some combination of these.
6 New South Wales —Tariff structure statement— Draft decision
Request for submissions
This document sets out our draft decision on the tariff structure statements submitted
to us by Ausgrid, Endeavour Energy and Essential Energy.
Copies of the proposed tariff structure statements are available on the AER’s website
www.aer.gov.au.
We invite submissions from interested parties on our draft decision.
Submissions should be emailed to [email protected] before 5pm on Tuesday,
4 October 2016. Enquiries may be emailed to the same AER email address.
Alternatively, submissions may be mailed to:
Mr Chris Pattas,
General Manager, Networks
Australian Energy Regulator GPO Box 520 Melbourne Vic 3001
We prefer all submissions be publicly available to facilitate an informed and
transparent consultative process. Submissions will be treated as public documents
unless otherwise requested. Parties wishing to submit confidential information are
requested to:
clearly identify the information that is the subject of the confidentiality claim
provide a non–confidential version of the submission.
All non-confidential submissions will be placed on the AER website.
7 New South Wales —Tariff structure statement— Draft decision
Draft decision
Ausgrid
Our draft decision is to not approve the tariff structure statement submitted to us
by Ausgrid as we do not consider it to be fully compliant with the rules.
This draft decision sets out why and in what respect we consider the proposed
tariff structure statement submitted by Ausgrid to be non-compliant. We invite
further submissions from stakeholders to assist us in arriving at our final decision.
Endeavour Energy
Our draft decision is to not approve the tariff structure statement submitted to us
by Endeavour Energy as we do not consider it to be fully compliant with the rules.
This draft decision sets out why and in what respect we consider the proposed
tariff structure statement submitted by Endeavour Energy to be non-compliant.
We invite further submissions from stakeholders to assist us in arriving at our
final decision.
Essential Energy
Our draft decision is to not approve the tariff structure statement submitted to us
by Essential Energy as we do not consider it to be fully compliant with the rules.
This draft decision sets out why and in what respect we consider the proposed
tariff structure statement submitted by Essential Energy to be non-compliant. We
invite further submissions from stakeholders to assist us in arriving at our final
decision.
8 New South Wales —Tariff structure statement— Draft decision
Overall assessment
Ausgrid
Our draft decision is to not approve Ausgrid's tariff statement proposal. This is
because there are some elements of Ausgrid's proposal which we are not satisfied
contribute to the achievement of compliance with the distribution pricing principles.
Completeness of tariff structure statement
Ausgrid's tariff statement proposal largely incorporates each of the required
elements:
tariff classes
policies and procedures for assigning customers to tariffs
tariff structures
tariff charging parameters
the approach taken in setting tariffs, and
indicative pricing schedules.
Ausgrid's tariff assignment policy was not complete or sufficiently clear in its
proposal. Ausgrid has provided greater clarity to us in response in an information
request and through its submission on our issues paper. We require Ausgrid to
incorporate these clarifications in its revised tariff structure statement.
Compliance with the distribution pricing principles
There are many elements of Ausgrid's proposal we consider contribute to the
achievement of compliance with the distribution pricing principles. These include:
It exhibits modest movement towards cost reflectivity, incorporating time-of-use
tariff options for small customers, complementing existing cost reflective tariffs
for large customers
It demonstrates Ausgrid accounted for customer impacts by:
o sequencing the timing of its assignment policy changes to commence
shortly after the metering rule change is in place(1)
o introducing tariffs to transition customers towards more cost reflective
tariff structures
o transitioning towards the recovery of residual costs from fixed charges.(2)
The introduction of the transmission-use-of-system only tariff for customers
connected to its transmission network. This will result in greater efficiency as
these customers will not incur a distribution-use-of-system charge.
9 New South Wales —Tariff structure statement— Draft decision
(1) AEMC, Rule determination—National Electricity Amendment (Distribution Network Pricing Arrangements)
Rule 2014, November 2014.
(2) Residual costs are the portion of allowed revenue that the distributor cannot recover through tariff
components that are based on LRMC. We discuss this in detail in chapter 5.
However, we are not satisfied that the following elements of Ausgrid's tariff
statement proposal contribute to the achievement of compliance with the
distribution pricing principles:
The inclusion of declining block tariffs— we are not satisfied such tariffs reflect
the efficient recovery of costs and provide efficient price signals to consumers.
We require Ausgrid to submit further evidence in support of declining block
tariffs; or, amend its declining block tariffs to have a flat rate structure.
The proposed charging windows—we consider Ausgrid did not provide
adequate evidence to justify the length of its peak and shoulder hours. We
require Ausgrid to provide further evidence in support of its proposed charging
windows; or, amend its charging windows to demonstrate greater movement
towards cost reflectivity.
The assignment of new residential and small business customers which
distinguishes between those new customers with embedded generation and
those new customers without embedded generation. We consider new
customers without embedded generation should also benefit from a time-of-use
tariff structure. We require Ausgrid to treat the assignment of new residential
and new small business customers with and without embedded generation
equally.
The change from the use of energy consumption to current transformer
connection as a basis of allocating medium and large customers with a low
voltage connection to particular tariffs.. We require Ausgrid to provide further
justification for using the size of the current transformer connection as the
eligibility criteria for assigning customers to tariffs.
10 New South Wales —Tariff structure statement— Draft decision
Endeavour Energy
Our draft decision is to not approve Endeavour Energy's tariff statement proposal.
This is because there are some elements of Endeavour Energy's proposal which we
are not satisfied contribute to the achievement of compliance with the distribution
pricing principles.
Completeness of tariff structure statement
Endeavour Energy's tariff statement proposal incorporates each of the required
elements:
tariff classes
policies and procedures for assigning customers to tariffs
tariff structures
tariff charging parameters
the approach taken in setting tariffs, and
indicative pricing schedules.
Compliance with the distribution pricing principles
There are elements of Endeavour Energy's proposal we consider contribute to the
achievement of compliance with the distribution pricing principles. These include:
It exhibits modest movement towards cost reflectivity, incorporating time of use
tariff options for small customers, complementing existing cost reflective tariffs
for large customers
It demonstrates that Endeavour Energy has accounted for customer impacts by
transitioning towards the recovery of residual costs from fixed charges.(1)
New low voltage transitional demand tariff for customers whose annual
consumption requires a demand tariff, due to lack of supportive metering, or
where the expected bill impact of a direct transition to low voltage time-of-use
tariff is deemed excessive.
The increase in the threshold between the first and second block of the inclining
block tariff from 10MWh to 120MWh. This will encourage larger customers to
move to a more efficient demand tariff.
11 New South Wales —Tariff structure statement— Draft decision
(1) Residual costs are the portion of allowed revenue that the distributor cannot recover through tariff
components that are based on LRMC. We discuss this in detail in chapter 5.
However, we are not satisfied that the following elements of Endeavour Energy's
tariff statement proposal contribute to the achievement of compliance with the
distribution pricing principles:
The inclusion of declining block tariffs— we are not satisfied such tariffs reflect
the efficient recovery of costs and provide efficient price signals to consumers.
We require Endeavour Energy to submit further evidence in support of declining
block tariffs; or, amend its declining block tariffs to have a flat rate structure.
The proposed charging windows—we consider Endeavour Energy did not
provide adequate evidence to justify the length of its peak and shoulder hours.
We require Endeavour Energy to provide further evidence in support of its
proposed charging windows; or, amend its charging windows to demonstrate
greater movement towards cost reflectivity.
Its 'wait and see' approach—Endeavour Energy proposed limited changes to its
current tariff arrangements and displays limited reform towards more cost
reflective pricing, particularly for residential and small business customers.
Specifically, this relates to Endeavour Energy's continuation of the current opt-in
approach for tariff assignment to time-of-use tariffs for small customers. There
has been low uptake of time-of-use tariffs under this approach. We require
Endeavour Energy to amend its tariff assignment policy (and/or other aspects of
its tariff statement proposal) to take greater steps towards transitioning to cost
reflective tariffs in its revised proposal, particularly for residential and small
business customers.
12 New South Wales —Tariff structure statement— Draft decision
Essential Energy
Our draft decision is to not approve Essential Energy's tariff statement proposal.
This is because there are some elements of Essential Energy's proposal which we
are not satisfied contribute to the achievement of compliance with the distribution
pricing principles.
Completeness of tariff structure statement
Essential Energy's tariff statement proposal incorporates each of the required
elements:
tariff classes
policies and procedures for assigning customers to tariffs
tariff structures
tariff charging parameters
the approach taken in setting tariffs, and
indicative pricing schedules.
Compliance with the distribution pricing principles
There are elements of Essential Energy's proposal we consider contribute to the
achievement of compliance with the distribution pricing principles. These include:
It exhibits modest movement towards cost reflectivity, incorporating time of use
tariff options for small customers, complementing existing cost reflective tariffs
for large customers
It demonstrates Essential Energy accounted for customer impacts by
transitioning towards the recovery of residual costs from fixed charges.(1)
However, we are not satisfied the following elements of Essential Energy's tariff
statement proposal contribute to the achievement of compliance with the
distribution pricing principles:
The inclusion of declining block tariffs— we are not satisfied such tariffs reflect
the efficient recovery of costs and provide efficient price signals to consumers.
We require Essential Energy to submit further evidence in support of declining
block tariffs; or, amend its declining block tariffs to have a flat rate structure.
The proposed charging windows—we consider Essential Energy did not provide
adequate evidence to justify the length of its peak and shoulder hours. We
require Essential Energy to provide further evidence in support of its proposed
charging windows; or, amend its charging windows to demonstrate greater
movement towards cost reflectivity.
13 New South Wales —Tariff structure statement— Draft decision
(1) Residual costs are the portion of allowed revenue that the distributor cannot recover through tariff
components that are based on LRMC. We discuss this in detail in chapter 5.
Background
Each distributor must propose a tariff structure statement and submit it to us for
assessment. Our role is to determine if a proposed tariff structure statement complies
with the requirements of the National Electricity Rules (the Rules).1 The Rules require a
tariff structure statement to include a number of specific elements, such as the
structure of each tariff, charging parameters, and the policies a distributor will apply in
assigning or re-assigning customers to particular tariffs.2 A tariff structure statement
must also be consistent with the distribution pricing principles.3 The distribution pricing
principles require distributors to set cost reflective tariffs but also to take account of the
impact on customers in transitioning to more cost reflective tariffs.
The distribution pricing principles are new and result from a long process of reform
initiated by Australian (Commonwealth, state and territory) governments. Those
reforms are intended to establish tariffs which better reflect the costs incurred by
distributors by customer decisions to use electricity at specific times or locations.4 This
is because a distributor's forward looking costs are primarily driven by building network
capacity to alleviate network congestion and provide a safe and reliable network during
periods of peak demand. Network costs are not primarily driven by usage outside of
peak demand periods.
1 NER, cl. 6.12.3(k)
2 NER, cl. 6.18.1.A(a). Stakeholders should note that, while tariff statements include indicative tariff levels (the dollar
amount), actual tariff levels are determined through an annual pricing approval process. Our review of tariff
statement proposals is focussed on tariff structures and intended movements in tariff levels based on these
structures, not on the actual tariffs levels. The first annual pricing approval process which will apply this tariff
structure statement is for tariffs that will take effect on 1 July 2017. 3 NER, cl. 6.18.5
4 AEMC, Rule determination - National Electricity Amendment (Distribution Network Pricing Arrangements) Rule
2014, November 2014.
Its 'wait and see' approach— Essential Energy proposed limited changes to its
current tariff arrangements and displays limited reform towards more cost
reflective pricing, particularly for residential and small business customers.
Specifically, this relates to Essential Energy's continuation of the current opt-in
approach for tariff assignment to time-of-use tariffs for small customers. There
has been low uptake of time-of-use tariffs under this approach. We require
Essential Energy to amend its tariff assignment policy (and/or other aspects of
its tariff statement proposal) to take greater steps towards transitioning to cost
reflective tariffs in its revised proposal, particularly for residential and small
business customers.
14 New South Wales —Tariff structure statement— Draft decision
Cost reflective tariffs will mean customers will be more aware of these network costs
and may be able to respond, for example, by shifting some of their electricity usage out
of the periods of peak demand on the network. Reducing peak demand will mean there
is less need for new investment to maintain a safe and reliable electricity network. This
will help defer costly network investments and place downward pressure on network
charges over the longer term.
The distribution pricing principles are not prescriptive. They do not specify particular
tariff structures or transitional arrangements. We consider a range of approaches are
likely to comply with the distribution pricing principles. Hence, we do not seek to
enforce a single approach across all distributors. Instead, we assess the particular tariff
structure statement submitted by a distributor for compliance with the Rules. Each tariff
structure statement should show movement towards more cost reflective tariffs, taking
into account customer impacts, as the distribution pricing principles require.5
The following sections summarise our key findings and conclusions from our
assessment of the NSW distributors' tariff structure statements against the
requirements of the distribution pricing principles and other tariff provisions in Part I of
the NER. This discussion covers both the elements that we have approved and those
we have not approved.
Completeness of tariff structure statements
A distributor must include the following elements within its tariff structure statement:
the tariff classes into which its customers will be grouped
the policies and procedures the distributor will apply for assigning customers to
tariffs or reassigning customers from one tariff to another (including applicable
restrictions)
the structures for each proposed tariff
the charging parameters for each proposed tariff, and
a description of the approach that the distributor will take in setting each tariff in
each annual pricing proposal during the regulatory control period.6
A distributor must also accompany its proposed tariff structure statement with an
indicative pricing schedule which sets out, for each tariff for each regulatory year of the
regulatory control period, the indicative price levels determined in accordance with the
tariff structure statement.7
We are satisfied that the NSW distributors' tariff statement proposals contain each of
the broad topics as required under the Rules.
5 NER cl. 6.18.5
6 NER, cl.6.18.1A(a)
7 NER, cl.6.18.1A(e)
15 New South Wales —Tariff structure statement— Draft decision
However we are not satisfied that all elements are complete or have been described
with sufficient clarity in Ausgrid's tariff statement proposal. While Ausgrid provided the
information above, we consider their tariff statement proposal was incomplete with
regard to their tariff assignment policies. Ausgrid provided additional information to us
regarding tariff assignment policies in response to an information request.8 We require
Ausgrid to include such information in their revised proposal for completeness and
transparency.
Compliance with distribution pricing principles
A distributor's tariff structure statement proposal must comply with the distribution
pricing principles and other applicable requirements in the Rules. We are not satisfied
the NSW distributors' tariff structure statements comply with and give effect to the
distribution pricing principles and other applicable requirements of the NER.
Of the three proposals, Ausgrid's proposal demonstrates the greatest degree of
movement towards more cost reflective pricing and in our view is the closest to
complying with the distribution pricing principles. Ausgrid has achieved this principally
through changes to its tariff assignment policy. We find most, but not all, elements of
Ausgrid's tariff assignment policy contribute towards the achievement of compliance
with the distribution pricing principles. On the other hand, Endeavour Energy's and
Essential Energy's proposals contain limited changes to their current tariff
arrangements. We consider the proposals from these two distributors display limited
movement towards more cost reflective pricing. Further, we find each of the three
distributors have submitted insufficient evidence to demonstrate that their declining
block tariff structure contributes to the achievement of compliance with the distribution
pricing principles.
We briefly explain our reasons for our assessment below. Further details are provided
in chapter 4 (tariff structures), chapter 5 (tariff levels) and chapter 6 (tariff assignment
policies), respectively.
Application of time-of-use tariffs to residential and small business
customers
The NSW distributors proposed time-of-use tariffs as their cost reflective tariffs for
residential and small business customers. The NSW distributors did not propose any
form of demand tariffs for these customers.
We are satisfied time-of-use tariffs for residential and small business customers
contribute to the achievement of compliance with the distribution pricing principles. At
this stage of tariff reform in NSW, we consider time-of-use tariffs are sufficiently cost
reflective for residential and small business customers. While demand tariffs may be
8 Ausgrid, Submission: Issues paper on tariff structure statement proposals for NSW DNSPs: Attachment 2:
Response to AER information request, 6 May 2016.
16 New South Wales —Tariff structure statement— Draft decision
more appropriate for future tariff statement proposals, as a further tariff reform step
towards cost reflective pricing.
AGL suggested the NSW distributors adopt demand tariffs (as opt-in tariffs) for
residential and small business customers.9 On the other hand, EWON did not support
demand tariffs as they can be difficult to understand.10
We consider demand based tariffs are more cost reflective than time-of-use tariffs
because peak demand is a principal driver of network investment. However, time-of-
use tariffs are an appropriate transition to more cost reflective tariffs. Time-of-use tariffs
signal times when the network is likely to experience congestion and enable customers
shift their usage outside of peak times.11
Accordingly, we are satisfied that the NSW distributors' proposals to continue to use
time-of-use tariffs (and not introduce demand tariffs) as their more cost reflective tariff
for residential and small business customers is appropriate for this first round of tariff
reform. However, we have concerns that the NSW distributors' proposals would not
result in sufficient numbers of customers being assigned to time-of-use tariffs, and
would instead mean most customers would remain assigned to less cost reflective
declining (or inclining) block tariffs. This concern arises particularly with respect to
Endeavour Energy's and Essential Energy's opt-in only assignment policy, which is
discussed in the next section.
Section 4.1 contains our assessment of the application of demand tariffs to residential
and small business customers.
Tariff assignment policy for residential and small business customers
Ausgrid
Ausgrid has proposed to close its existing tariffs (e.g. declining block tariffs) to new
customers and adopt a new tariff assignment policy from 1 July 2018. This policy
involves assigning new customers by default to the time-of-use tariff, with the ability to
opt-in to a transitional flat rate tariff.
We are satisfied that assigning new customers by default to a time-of-use tariff
contributes to the achievement of compliance with the distribution pricing principles.
This is because:
it provides customers making new investments with more cost reflective price
signals—we are satisfied these types of customers are in a better position to
respond to the introduction of more cost reflective tariffs through their choice of
9 AGL, Re: Tariff Structure Statement proposals of the NSW electricity distribution network service providers, 10 May
2016, p. 2. 10
EWON, Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 3 May 2016,
p. 5. 11
NER, cll 6.18.5(a) and 6.18.5(h)(3).
17 New South Wales —Tariff structure statement— Draft decision
appliances, technology and other measures such as building design to increase
energy efficiency.
the inclusion of the opt-out provision to a flat rate tariff moderates the impact on
customers by providing further choice in tariff design
However, Ausgrid proposed to only apply this tariff assignment policy to new
customers with solar PV. New customers without solar PV would by default be
assigned to the transitional flat rate tariff, with the ability to opt-in to the time-of-use
tariff.
We are not satisfied that Ausgrid's proposal to distinguish between new customers with
and without solar PV in relation to tariff assignments contributes to the achievement of
compliance with the distribution pricing principles.
Ausgrid stated customers with embedded generation have different load profiles to
those without embedded generation, but did not provide sufficient evidence in
support.12 We consider a more cost reflective and technology neutral approach is to
assign all new customers with interval metering to a time-of-use tariff by default, with
the choice to opt out, and transfer to the transitional flat tariff.
Section 6.2 contains our detailed assessment of Ausgrid's tariff assignment policy for
residential and small business customers.
Endeavour Energy and Essential Energy
We are not satisfied that Endeavour Energy's and Essential Energy’s proposals
sufficiently progress towards the achievement of compliance with the distribution
pricing principles.
They proposed to offer, on an opt-in basis, time of use tariffs to residential and small
business customers whose meter is able to support time-of-use charging. Despite
being in place for a number of years, there has been low uptake of time-of-use tariffs
under these opt in approaches. Given this lack of progress, we consider Endeavour
Energy's and Essential Energy's proposals display insufficient tariff reform to comply
with the cost reflectivity requirements of the Rules.
We require Endeavour Energy and Essential Energy to take greater steps towards
transitioning to cost reflective tariffs in its revised proposal. They can demonstrate
progress towards cost reflectivity in a number of ways. For example, other distributors'
tariff statement proposals have done this using a number of reforms, including:
introducing demand-based tariffs on an opt in basis for customers with appropriate
metering
12
In response to an information request, Ausgrid provided load profiles for residential and small business customers
with and without embedded generation (Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and
ToU charging windows, 9 June 2016). These did not appear to indicate significant differences in the load profiles of
customers with and without embedded generation.
18 New South Wales —Tariff structure statement— Draft decision
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
maintaining their time-of-use tariffs (instead of demand tariffs), but making these
time-of-use 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 third option is consistent with Ausgrid's approach. Accordingly, it would promote
simplicity and consistency for Endeavour Energy and Essential Energy to model their
approaches to tariff reform on Ausgrid's tariff assignment policy centred approach.13
However, there a number of ways a distributor can demonstrate compliance with the
distribution pricing principles. Accordingly, it is a matter for Endeavour Energy and
Essential Energy to decide how they will respond to the AER's direction that it needs to
demonstrate progress on tariff reform.
Section 6.2 contains our detailed assessment of Endeavour Energy's and Essential
Energy's tariff assignment policy for residential and small business customers.
Tariff structures—Medium low voltage customers
The NSW distributors proposed to offer time-of-use demand tariffs to medium sized
businesses with a low voltage connection.14 These tariffs include the following features:
network access charge ($/day or c/day)
consumption charge (c/kWh) for peak, shoulder and off-peak hours
demand charge during peak hours ($/kVA/month, c/kW/day or c/kVA/day)
We consider this structure, particularly the inclusion of demand charges, provide
appropriate movement towards efficient pricing signals. We are, therefore, satisfied
that the NSW distributors' tariff structures for LV demand customers contribute to the
achievement of compliance with the distribution pricing principles.15
Tariff assignment policy for medium low voltage customers
Ausgrid currently assigns medium sized business customers with a low voltage
connection to tariffs using energy consumption as a criterion. Ausgrid proposed to
change the eligibility criteria for such customers with a criteria based on the size of the
current transformer connection. We are not satisfied this change to the eligibility
13
This is subject to the AER's limited changes to Ausgrid's approach. 14
Endeavour Energy and Essential Energy offer these tariffs to businesses consuming more than 160 MWh per
annum. Ausgrid offers these tariffs to business consumers depending on the amperage of their current transformer
connection. 15
These are larger commercial and light industrial customers consuming more than 160 MWh annually.
19 New South Wales —Tariff structure statement— Draft decision
criteria contributes to the achievement of compliance with the distribution pricing
principles.16
We are open to the use of criteria other than consumption levels in tariff assignment
polices. However, we do not consider Ausgrid provided sufficient evidence justifying
the use of transformer size as a criterion to assign customers to tariffs.
Section 6.2 contains our detailed assessment of Ausgrid's proposal to assign medium
sized business customers based on the size of their current transformer connection.
Tariff structures—Large business customers
The NSW distributors proposed to offer time-of-use demand tariffs to customers with
HV, sub-transmission or transmission (Ausgrid only) connections. These tariffs include
the following features:
network access charge ($/day or c/day)
consumption charge (c/kWh) for peak, shoulder and off-peak periods
demand charge during peak hours ($/kVA/month or $/kVA/day)17
We consider that this structure, particularly the inclusion of demand charges, provide
appropriate and efficient pricing signals. We are, therefore, satisfied that the NSW
distributors' tariff structures for customers with HV, sub-transmission or transmission
connections contribute to the achievement of the distribution pricing principles.
Ausgrid proposed to introduce a transmission-use-of-system only tariff for customers
connected to its transmission network (such customers were previously assigned to
the sub-transmission capacity tariff). We agree with Ausgrid that this will result in
greater efficiency as these customers will not incur a distribution-use-of-system charge
when they do not contribute to the costs of that segment of the network.
Endeavour Energy's indicative tariffs suggest there is only a small difference between
its demand charges for the high and low seasons.18 On the other hand, there is
evidence that demand in the low season is significantly lower than in the high
season.19 We encourage Endeavour Energy to investigate the relative levels of the
demand charges for the high and low seasons, including whether a low season
demand charge is required at all.
Similarly, Essential Energy's indicative tariffs suggest there is only a small difference
between its demand charges for peak and shoulder hours.20 On the other hand, there
is evidence demand during shoulder hours is significantly lower than during peak
16
NER, 6.18.5(a) and (g). 17
Essential Energy also includes demand charges for shoulder and off-peak periods. 18
Endeavour Energy, Tariff structure statement, 27 November 2015, pp. 81–83. 19
See Figure 4-8 and Figure 4-9 in section 4.2 of this draft decision. 20
Essential Energy, Tariff structure statement: Attachment 2: Indicative NUOS pricing schedule, 27 November 2015.
20 New South Wales —Tariff structure statement— Draft decision
hours.21 We encourage Essential Energy to investigate the relative levels of the
demand charges for peak and shoulder hours—including whether both shoulder and
off-peak demand charges are needed.
Subject to their respective investigations, we encourage Endeavour Energy and
Essential Energy to consider amending the demand charges in their revised proposal,
or in future tariff structure statements, depending on feasibility and timing
considerations.
Re-balancing towards fixed charges
We are satisfied that the NSW distributors' proposed re-balancing of costs to fixed
charges contributes to the achievement of compliance with the distribution pricing
principles. This applies to tariffs for all general customer types that we outline below
(residential and small business, medium sized business and large business).
The Rules require that electricity distribution tariffs recover long run marginal costs
(LRMC).22 However, a tariff based only on LRMC would not enable the distributor to
fully recover its allowed revenue.
There is a trade-off in setting tariffs which reflect LRMC and the recovery of residual
costs. It would be efficient to recover residual costs via fixed charges because these
charges are independent of customer usage. However, this may result in sudden bill
increases, which may not satisfy the pricing principle that the distributor must consider
the impact on customers.23
From our analysis, we are satisfied that the NSW distributors' re-balancing towards
fixed charges contributes to the achievement of compliance with the distribution pricing
principles by:
recovering residual costs in a manner which minimises distortions to efficient price
signals.24
taking into account the impact on customers of tariff changes from year to year
including the desirability for a reasonable transition period towards more cost
reflective tariffs.25
Section 5.2 contains our detailed assessment of the NSW distributors' re-balancing
towards fixed charges.
Declining block tariffs
21
See Figure 4-7 in section 4.2 of this draft decision. 22
NER, cl 6.18.5(f). 23
NER, cl 6.18.5(h). 24
NER, cl. 6.18.5 (g). 25
NER, cl. 6.18.5(h)(1).
21 New South Wales —Tariff structure statement— Draft decision
We are not satisfied the declining block tariff structure proposed by each of the NSW
distributors contributes to the achievement of compliance with the distribution pricing
principles.26
The NSW distributors proposed declining block tariffs for residential customers.
Ausgrid and Essential Energy also proposed declining block tariffs for small business
customers.27 Among other things, the NSW distributors considered declining block
tariffs would:
efficiently encourage consumers to use up the spare capacity in the NSW
distributors' networks.
spread the recovery of residual costs between the fixed charge and the low
consumption block usage charge. This is intended to minimise distortions in
consumption because usage in the low consumption block is less price sensitive
than in the high consumption block.
Several stakeholders opposed declining block tariffs. The Energy and Water
Ombudsman NSW (EWON), Public Interest Advocacy Centre (PIAC) and NSW
Council of Social Services (NCOSS) submitted that declining block tariffs disadvantage
low consumption households (who they consider are typically low income).28 Cotton
Australia and the NSW Irrigators Council (NSWIC) submitted declining block tariffs will
encourage consumption, resulting in the need for investment and in turn higher costs
to the consumer.29
We consider the NSW distributors did not sufficiently demonstrate that the first
consumption block is the least price sensitive block. Without such evidence, we
consider a flat rate tariff is likely to be the least distortive structure for recovering
residual costs.
While we consider it would be efficient to shift electricity consumption to times of low
congestion in order to make use of spare capacity within the NSW networks, declining
block tariffs do not do this effectively. Time-of-use tariffs are better able to achieve this
outcome. We consider the NSW distributors should focus on moving more customers
off block tariffs and onto time-of-use tariffs if they seek to encourage the efficient use of
spare capacity on their networks.
Section 4.1 contains our detailed assessment of the NSW distributors' declining block
tariffs.
Charging windows
26
NER, cl 6.18.5(a) and (f). 27
Ausgrid has closed its declining block tariffs to new customers. 28
EWON, Submission: AER issues paper, 3 May 2016; NCOSS, Submission: AER issues paper on the NSW tariff
structure statements, May 2016; PIAC, Submission: Response to the AER’s issues paper: NSW TSS, 6 May 2016. 29
Cotton Australia and NSWIC, Response to AER issues paper: Tariff structure statement proposals NSW electricity
distributors, 6 May 2016.
22 New South Wales —Tariff structure statement— Draft decision
We are not satisfied that the NSW distributors' proposed charging windows contribute
to the achievement of compliance with the distribution pricing principles. This applies to
time of use and demand tariffs. We consider the NSW distributors did not provide
sufficient evidence to justify the proposed charging windows regarding:
times of the charging windows for business days (section 4.2.1 contains our
detailed assessment)
seasonality (Endeavour Energy and Essential Energy) (section 4.2.2 contains our
detailed assessment)
charging windows for non-business days (Ausgrid and Endeavour Energy) (section
4.2.3 contains our detailed assessment)
Several stakeholders expressed concern regarding the different charging windows
between the NSW distributors. They suggested aligning time and season definitions for
all NSW distribution areas to reduce complexity and implementation costs to retailers
and other stakeholders.30
While we acknowledge that harmonising charging windows may reduce complexity and
implementation costs for retailers, we consider that charging windows should primarily
be based on sending an appropriate price signal of when the network is more
congested than other times. We consider that issues of complexity can be addressed
by providing consumers with accurate and timely information. We did not receive any
information to support the suggestion that implementation costs would be higher if
charging windows were not harmonised across NSW.
We consider the NSW distributors should amend their charging windows so they better
reflect the level of congestion in their respective networks.31 We consider this would
contribute to the achievement of compliance with the distribution pricing principles. If
the load profile is different on each network, it follows that cost reflective charging
windows would also differ. However, where the load profiles are similar than it would
be cost reflective to move towards alignment of charging windows. That is, we consider
some harmonisation of the charging windows between the NSW distributors would
promote the distribution pricing principles. However, this harmonisation should be
pursued to promote cost reflective objectives, rather than reduce implementation costs.
Section 4.2.4 contains our discussion on harmonisation.
Future direction
This is the first tariff structure statement submitted by the NSW distributors. The move
to cost reflective pricing will take time to implement. The distribution pricing principles
30
EnergyAustralia, Submission: Issues paper: Tariff structure statement proposals: NSW, 6 May 2016, pp. 2–9;
EWON, Submission: AER issues paper, 3 May 2016, p. 4; NCOSS, Submission: AER issues paper on the NSW
tariff structure statements, May 2016, pp. 8–9; PIAC, Submission: Response to the AER’s issues paper: NSW
TSS, 6 May 2016, p. 3. 31
Otherwise, the NSW distributors should provide detailed explanations for departing from cost reflectivity.
23 New South Wales —Tariff structure statement— Draft decision
require movement towards more cost reflective tariffs with every tariff statement
proposal over upcoming regulatory control periods.
In the discussion above, we identified elements of the NSW distributors' tariff structure
statements which we are not satisfied contribute to the achievement of compliance with
the distribution pricing principles.
We have also identified certain elements of the NSW distributors' proposals which
while not requiring changes in the NSW distributors' revised tariff structure statements,
we consider are less reflective of the distribution pricing principles and should be
addressed over time. We identify these matters to provide guidance to the NSW
distributors, and the industry more generally, on our views on the direction the industry
should be heading in in order to maintain compliance with the distribution pricing
principles in the future. Accordingly, in each further round of tariff structure statements,
we expect distributors to propose additional reforms in order to be compliant with the
rules.
In future rounds of tariff structure statements, we encourage the NSW distributors to
make further improvements in the following areas:
Greater integration between the NSW distributors' network pricing, network
planning and demand management strategies (see discussion in chapter 1)
Progression towards location based pricing (see discussion in section 4.1)
Refinements to the calculation of long run marginal cost (see discussion in section
5.1)
Refinements to the relative levels of Endeavour Energy's and Essential Energy's
demand charges for large business customers (see discussion in the 'Tariff
structures—Large business customers' subsection above).
Our process
The following table sets out how this tariff statement process flows on from the Power
of Choice reform program and will flow into the first annual pricing approval process.
In appendix A, we list the stakeholders who have made written submissions on our
issues paper from March and attended our public forum in April. We outline and
consider the stakeholder views we've received throughout this decision under each
topic the particular stakeholder views relate.
We request written submissions on our draft decision by 4 October 2016.
Tariff reform—Key timeframes
Reform milestones Date
Rule change process
AEMC recommends reforms to distribution pricing
through Power of Choice review November 2012
24 New South Wales —Tariff structure statement— Draft decision
COAG Energy Council proposes distribution pricing
rule change to AEMC September 2013
AEMC makes final rule determination on distribution
pricing rule change November 2014
Tariff statement process
NSW distributors submit tariff statement proposal to
AER 27 November 2015
AER publishes issues paper 22 March 2016
AER hosts public forum on NSW distributors'
proposals 6 April 2016
Stakeholders' submissions on NSW distributors'
proposals and AER's issues paper closed 6 May 2016
AER publishes draft decision 2 August 2016
NSW distributors' revised proposals and stakeholders'
submissions on AER's draft decision due 4 October 2016
Stakeholders' submissions on NSW distributors'
revised proposals and other stakeholders' submissions
due
25 October 2016
AER publishes final decision 27 February 2017
First annual pricing proposal process to apply
tariff structure statement
NSW distributors submits annual pricing proposal 31 March 2017
AER publishes decision 17 May 2017
New tariffs take effect 1 July 2017
Source: AEMC, National Electricity Rules, AER analysis.
25 New South Wales —Tariff structure statement— Draft decision
1 Background
The requirement on distributors to prepare a tariff structure statement arises from a
long process of reform to the National Electricity Rules (the Rules) governing
distribution network pricing. The purpose of the reforms is to empower consumers to
make informed choices by:
Providing better price signals—tariffs that reflect what it costs to use electricity at
different times so customers can make informed decisions and better manage their
bills.
Transitioning to greater cost reflectivity—requiring distributors to explicitly consider
the impact of tariff changes on customers and to engage with customers (and their
representatives) and retailers in developing tariff proposals.
Managing future expectations—providing guidance for retailers, customers and
suppliers of services such as local generation, batteries and demand management
by setting out the distributor's tariff approaches for a set period of time.
Why is network tariff reform important?
Distribution tariffs historically have not varied according to the time when electricity is
used. But distribution costs reflect the maximum demand the network must cater for at
key points in time. This means existing network tariffs don't reflect network costs. Most
existing tariffs send price signals that don't inform customers about the costs imposed
on distribution networks in peak demand periods.
Lifestyle changes, including increased use of air conditioners, means consumers now
use relatively more of their electricity at peak times, even if overall energy consumption
has declined. Network costs have increased in recent years as distributors invest in
additional infrastructure upgrades to meet the higher peak demand. This increased
investment has been a factor driving electricity price rises in recent years.
Moving to tariffs that reflect electricity use during peak demand periods will make
pricing for electricity more transparent. Those who use electricity at peak times will pay
rates better reflecting the costs created by their use. Those who use less power in
peak demand periods and more at other times will benefit from lower network prices
during non–peak times. And, if consumers take heed of these price signals, network
investment requirements will likely be lower than they otherwise would be, reducing
upwards pressure on electricity prices for everyone.
What are the key concepts to understand?
This draft decision incorporates concepts which may be unfamiliar to some readers. In
this section we provide descriptions of the more commonly used concepts. Readers
familiar with electricity network regulation and terminology may choose to skip to the
next section.
Difference between consumption and demand
26 New South Wales —Tariff structure statement— Draft decision
Electricity consumption is the total amount of electricity consumed (used) over a
period of time. For example, a typical Australian household might use around 7,000
kWh of electricity over 12 months.32 Demand means the amount of electricity used at a
single point in time. Peak demand is the maximum amount of electricity used at a
single point in time over a defined time period, often a day or a year. A typical
Australian household might have its yearly peak demand of around 5 kW, either on a
hot summer afternoon when air conditioning is used, or on a winter evening when
electric heating is used.33 That is, the household's annual peak demand is 5 kW.
A good analogy for electricity consumption compared to electricity demand is a river
flowing under a bridge. Annual electricity consumption is equivalent to the total water
volume flowing under the bridge during a year. Electricity demand is equivalent to the
volume of water under the bridge at a single point in time. Peak electricity demand is
equivalent to the time when the largest volume of water is flowing under the bridge.
Long run marginal cost and residual costs
An important feature of this draft decision is the concept of long run marginal cost.
Long run marginal cost is equivalent to the forward looking cost of a distributor
providing one more unit of service, measured over a period of time sufficient for all
factors of production to be varied. Long run marginal cost could also be described as a
distributor's forward looking costs that are responsive to changes in electricity
consumption.
The Rules require network tariffs to be based on long run marginal cost.34 However,
not all of a distributor's costs are forward looking and responsive to changes in
electricity consumption. Hence, if network tariffs only reflected long run marginal cost,
distributors would not recover all their costs. Costs not covered by a distributor's long
run marginal cost are called 'residual costs'. The Rules require network tariffs to
recover residual costs in a way that minimises distortions to the price signals for
efficient usage that would result from tariffs reflecting only long run marginal costs.35
Types of network tariffs
A network ’tariff’ is the combination of charges paid by a network customer in return for
network services. Historically, most small customers in Australia have been on either a
flat usage tariff or a block tariff (tiered pricing):
Flat tariff—usually consists of a fixed charge and flat usage charge. That is, usage
is charged the same price no matter how much electricity the customer uses.
Inclining block tariff—usually consists of a fixed charge and a series of block
charges where the price changes depending on the size of the customer's total
32
For a 3 person household in NSW without gas nor swimming pool, via: Acil Allen Consulting, Electricity bill
benchmarks for residential customers (report to the Australian Energy Regulator), March 2015, p. 29. 33
EMET Consultants Pty Ltd as referenced by solarchoice.net.au. 34
NER, cl. 6.18.5(f). 35
NER, cl. 6.18.5(g)(3).
27 New South Wales —Tariff structure statement— Draft decision
consumption. The first consumption block is charged the lowest price, and each
successive block of consumption is charged at a higher rate.
Declining block tariff—usually consists of a fixed charge and a series of block
charges where the price changes depending on the size of the customer's total
consumption. The first consumption block is charged the highest price, and each
successive block of consumption is charged at a lower rate. A declining block tariff
is the reverse of an inclining block tariff.
Flat tariffs or inclining block tariffs are relatively common. Declining block tariffs are
relatively uncommon.
A different type of tariff is a time-of-use (TOU) tariff. Time-of-use tariffs usually also
have a fixed charge component. Time-of-use tariffs apply a different price depending
on when the customer consumes electricity. A time-of-use tariff will have defined
charging windows when different rates apply. These charging windows might be
labelled the 'peak' window, 'shoulder' window, and 'off-peak' window. The highest
usage rate applies to consumption during the peak window, and the lowest usage rate
applies to consumption during the off-peak window.
A demand tariff includes a charge based on the customer's highest measured
demand at a single point in time during the billing period. Often, demand charges will
be limited to the highest demand measured during charging windows. Typically,
charging windows will coincide with the peak demand times for the whole network or
for specific customer types (e.g. residential or small business customers). Demand
tariffs usually also include fixed charges and usage charges.
Critical peak pricing is another tariff variant. Under this approach a distributor can
specify periods of critical network peak demand, and will set prices particularly high for
any demand or consumption that occurs during the specified critical peak event. This
approach is generally in use currently only for larger businesses which can moderate
consumption (e.g. by shutting down part of a production line) or use their own
generation assets as a substitute for network electricity.
Distributors sometimes offer combinations of a primary tariff, such as those listed
above, with secondary tariffs, such as load control tariffs. These tariffs typically
apply a lower rate to electricity used for certain appliances in return for using those
appliances during off peak times. For example, off peak hot water. In other cases a
lower rate may apply to customers who allow a distributor to remotely cycle appliances
on and off during peak demand periods. For example, air conditioning during high
demand hot summer afternoons. Distributors will often limit secondary tariffs to
customers on specified primary tariffs such as flat usage tariffs or block tariffs.
In addition to tariffs, distributors sometimes seek to influence network demand by
offering rebates (partial refunds) to customers in return for demand reductions made
by the customer during specific time periods. Rebates may be linked to critical peak
demand times or to specific geographic areas or both.
Metering and tariffs
28 New South Wales —Tariff structure statement— Draft decision
Flat tariffs or block tariffs can be applied to customers with basic accumulation
meters (type 6 meters). This is because to calculate the tariff, it is only necessary to
know the customer's total consumption, not when that consumption has occurred.
Whereas interval (type 5) or smart meters (type 4) can facilitate time-of-use or
demand tariffs. This is because interval and smart meters measure both when and how
much electricity a customer has consumed, which is necessary to calculate a time-of-
use tariff or demand tariff.
A manually read meter (generally an accumulation or interval meter) must be read in
person at the customer's premises. A remotely read meter requires the meter to have
communications functionality, radio or digital communications, generally associated
with smart meters.
Degree of choice in network tariff assignment
An element of a tariff statement is the policies and procedures a distributor will apply to
assign customers to tariffs.36 These policies and procedures should include certainty
around whether a tariff is a 'mandatory' tariff, 'opt-out' tariff or 'opt-in' tariff for particular
customer types:
A mandatory tariff—the only tariff available for customers of a particular type. For
example, industrial customers connected to the high voltage network and whose
annual consumption falls within a particular range may be required to be assigned
a demand tariff and there may be no other tariff options they can choose from.
An opt-out tariff—the customer is assigned to this tariff by default, but may
voluntarily choose to be re-assigned to a different tariff. For example, a residential
customer may by default be assigned to a block tariff, but could choose to switch to
a time-of-use tariff.
An opt-in tariff—the customer can choose to be re-assigned to this tariff, but is by
default assigned to some other tariff. This is the opposite of an opt-out tariff. In the
previous example, the time-of-use tariff would be described as an opt-in tariff.
It is important that tariff statements are clear about which of their proposed tariffs are
mandatory, opt-out and opt-in, and for which customer types.
To assign customers to one of the various tariffs offered by a distributor requires also
that the distributor group customers into types, or classes. Customer classes might be
based on a customer's connection type or metering arrangements, their annual usage,
or whether the customer is a new or existing customer.
Tariff structure and charging parameters
Tariff structure incorporates the charges that make up a tariff. For example, a
demand tariff typically comprises a fixed charge, a usage charge and a demand
36
NER, cl.6.18.1A(a)(2).
29 New South Wales —Tariff structure statement— Draft decision
charge. How those charges are applied to a customer reflect the tariff's charging
parameters. Examples of charging parameters include:
how frequently a charge is applied to a customer
the times during which usage or demand is measured to calculate a charge
variations in charges and how those variations are triggered.
Charging parameters may be varied to match the purpose of the distributor when
designing the tariff. For example, the demand charge within a demand tariff may target
the time of a distributor's broad network peak, a local regional peak, or a customer
class peak (e.g. residential customers).
To illustrate charging parameters linked to charges, Table 3 sets out the three usual
charges for a demand tariff. Alongside those usual charges are typical parameters for
each charge.
Table 1 Example demand tariff and charging parameters
Charge Charging parameters
Fixed charge Applied once per customer per billing period. Does not vary with customer usage or demand.
Usage charge Calculated using the total electricity consumed by the customer over the billing period.
Demand charge Calculated based on the customer's highest demand recorded during the demand charging
window 3pm to 8pm on weekdays.
Any of the charges described in Table 1 may vary according to the time of day, day of
the week or time of the year. For example, any of the fixed charge, usage charge or
demand charge could be higher in summer months and lower in non–summer months.
How does the tariff structure statement fit into the regulatory
process?
Tariff statements are a new element of the Rules. Generally, tariff statements will be
submitted to us by distributors with their distribution or revenue proposals every five
(usually) years.37 These revenue proposals set out the total amount of revenue
required from their customers to run their networks over a regulatory period (typically 5
years). As part of our distribution determination process we will publish, assess and
invite feedback on a tariff statement along with a revenue proposal. An approved tariff
statement will then apply to the distributors' tariffs for the coming five year regulatory
control period.
In this case, for the first tariff statements for each distributor, the Rules require tariff
statements be submitted outside the distribution determination process (excluding
37
NER, cl. 6.8.2.
30 New South Wales —Tariff structure statement— Draft decision
TasNetworks).38 This is simply because of the timing of the introduction of tariff
statements to the regulatory framework compared to the timing of most distribution
determinations.
The timing of TasNetworks' distribution determination means that TasNetworks' tariff
statement is able to be submitted with its distribution determination. Other distributors,
in South Australia, Victoria, New South Wales, the Australian Capital Territory and
Queensland, are required to submit tariff statements in advance of their next
distribution determination. Initial tariff statements for these distributors will apply for
abbreviated periods, reflecting the time remaining until their next distribution
determination.
Once approved, a tariff statement will guide a distributor in shaping its annual pricing
proposals, submitted to us prior to each regulatory year. The annual pricing proposal is
where a distributor reflects our distribution determination into tariffs. We check that
total expected revenue to be earned in the coming regulatory year is consistent with
the annual revenue we have determined for that year.
We will now also check that an annual pricing proposal is consistent with a distributor's
approved tariff statement. A distributor may not propose a tariff which was not included
in its approved tariff statement. Nor may a distributor materially vary the parameters of
a tariff from that described in its approved tariff statement. This provides retailers,
customers and other stakeholders with certainty about the structure of tariffs to be
charged in each year of the regulatory control period.
Approved tariff statements address tariffs for both standard control services and
alternative control services. However, in practice the tariffs for alternative control
services are almost entirely dealt with by our distribution determinations and the annual
tariff approval process. There is relatively little regulatory role left for tariff statements in
the context of alternative control services. Tariffs for fee based and quoted services are
set on an individual customer specific basis, so typically reflect the costs that each user
imposes on the distributor to provide the service. For this reason distributors deal with
alternative control services in their tariff statements relatively briefly and for
completeness. For the same reason our tariff structure decisions will focus on standard
control services and make little comment on a distributor's alternative control services.
How does network tariff reform interact with other reforms?
Network tariff reform is commencing at the same time as reforms to provision of
metering services and access to customer information. These related reforms have
implications for network tariffs, including the pace at which tariffs can evolve to become
more cost reflective.
For metering, changes to the Rules will remove the existing barrier to third parties
supplying accumulation and interval meters to customers. The same wave of changes
38
NER, cl. 11.73.2.
31 New South Wales —Tariff structure statement— Draft decision
to metering arrangements will establish new minimum specifications to improve
performance for all new meters compared to most meters currently in use. In effect, all
new meters will incorporate functionality equivalent to smart meters. This will see
better meter functionality progressively taken up across distribution networks and
facilitate broader use of more cost reflective pricing over time.
Consumers may engage an energy services provider or retailer to use their
consumption information to recommend bundled energy plans. In recognition of how
customer energy usage information might be used, reforms have been introduced to
make it easier to obtain access to this information.39 Customers may now access their
consumption data from their distributor and retailer. They may also authorise other
parties, such as retailers, to do so on their behalf. These reforms will not only help
customers but also assist energy service providers in developing tailored and
innovative energy products and services.
How does network pricing interact with network planning and
demand management?
Demand pressures can be addressed by sending price signals to encourage
customers (and retailers) to reduce demand, consistent with the aims of tariff reform.
Alternatively, demand pressures can be addressed by network expenditure, as has
been the case in the recent past. Another option, which distributors are required by the
Rules to consider, is the use of demand management initiatives. These can include
rebates for customers who reduce their consumption. Or distributors can install or
utilise generation assets in areas where the associated cost is less than the cost of
network investment to meet local area demand.
While not explicitly required of distributors by the Rules, we consider it useful for tariff
statements to describe the distributor's approach to integrating tariff reform, network
investment and demand management. Such discussion will position tariff statements
within the broader context of how distributors intend to respond to demand and service
challenges. Also, while the Rules require distributors to consider the time and location
varying nature of network cost drivers, difficulties with locational pricing suggest a
larger role for demand management or non-price initiatives to address local network
demand pressures.
An example of this is United Energy proposing to apply rebates for customers in
selected locations within its network, to encourage demand reductions that will limit
peak demand.40 This will alleviate, or postpone, the need for more costly network
upgrades to those areas where network constraints may be likely in the near term, and
still ensure continuing electricity supply and reliability.
39
Australian Energy Markets Commission, National Electricity Amendment (Customer access to information about
their energy consumption) Rule 2014, Final Determination, 6 November 2014. 40
United Energy, Revised Tariff Structure Statement 2017–20, 29 April 2016, pp. 34-35.
32 New South Wales —Tariff structure statement— Draft decision
Ausgrid acknowledged the important inter-relationship between demand management
and pricing in managing areas facing congestion, particularly in networks that
predominantly have accumulation meters. In such networks, Ausgrid described how
non-time-of-use tariffs could result in over-use of the network. An effective demand
management strategy, which may include air condition cycling and peak rebates,
should reduce demand pressures.41
Ausgrid's tariff statement proposal discussed the interaction between demand
management and pricing at a theoretical level. Ausgrid controls supply to approved
appliances during network congestion under its controlled load tariffs.42 Besides this, it
is unclear whether Ausgrid has other demand management programs that would
interact with its pricing strategy. In its revised proposal, it would be useful for Ausgrid to
describe in more practical terms how its tariff strategy interacts with demand
management initiatives (and network planning). This could refer to demand
management initiatives Ausgrid has implemented, or plans to implement, in the current
regulatory control period.
Endeavour Energy referred to demand-based pricing trials it conducted with limited
groups of its customers. This included a peak time rebate it trialled over the 2012–13
and 2013–14 summers to determine the efficacy of a broad-based approach to
demand management.43 From the trial, Endeavour Energy considered the rebate
provided an effective signal for reducing demand during peak periods. However,
Endeavour Energy's ability to introduce such rebates is limited because of the low
take-up of interval and smart meters in its network.44
Referring to a study by the CSIRO, Essential Energy noted the potential to use tariff
strategies such as critical peak pricing and peak time rebates as a demand
management tool. However, Essential Energy did not propose such tariffs in its tariff
statement proposal due to the low numbers of interval and/or smart meters in its
network.45
Similar to Ausgrid, it would be useful for Endeavour Energy and Essential Energy to
describe the inter-relationship between its tariff strategy and its demand management
initiatives for the current regulatory control period. For example, Essential Energy
considered its tariffs form a key component of its overall demand management
strategy, and considered its declining block tariffs as a logical transition towards
efficient prices.46 Essential Energy could describe how it will use its current demand
41
Ausgrid, Tariff structure statement, 27 November 2015, pp. 55, 72–73. 42
Ausgrid, Tariff structure statement, 27 November 2015, p. 166. 43
Endeavour Energy described the peak time rebate as typically a flat price for electricity consumed, with a rebate
when the customer uses less electricity than normal during a designated critical event day. Endeavour Energy,
Tariff structure statement, 27 November 2015, p. 47. 44
Endeavour Energy, Tariff structure statement, 27 November 2015, pp. 48–49. 45
Essential Energy, Tariff structure statement, 27 November 2015, pp. 40–41. 46
Essential Energy, Tariff structure statement, 27 November 2015, p. 8.
33 New South Wales —Tariff structure statement— Draft decision
management program (including its controlled load tariffs) to encourage more efficient
usage of the network during this transition.
34 New South Wales —Tariff structure statement— Draft decision
2 Rule requirements
The Rules' amended pricing provisions have three aims, to provide:
better signals of the cost drivers of distribution networks
explicit consideration of tariff change impacts on retail customers
transparency and greater certainty on tariff strategies for a regulatory period.
A new network pricing objective is the focus for distributors when developing their
network prices. This objective is that:47
the tariffs that a distributor charges for provision of direct control services to a
retail customer should reflect the distributors' efficient costs of providing those
services to the retail customer
A tariff structure statement is part of the new tariff arrangements. It should show how a
distributor applied the distribution pricing principles48 to develop its price structures and
indicative price levels for the coming five year regulatory period. A distributor must
submit its proposed tariff structure statement to us for assessment.
Generally, a distributor will be required to submit its proposed tariff structure statement
when submitting its regulatory proposal.49 The Rules required submission of a tariff
structure statement outside the regulatory proposal process this time because of the
timing of the rule changes.50
Tariff Structure Statement requirements
There are two separate sets of requirements for tariff structure statements. First, the
Rules set out a number of elements that an approved tariff structure statement must
contain. Second, a tariff structure statement must also reflect the distribution pricing
principles.
What must a tariff structure statement contain?
The Rules require a tariff structure statement to include:51
the tariff classes into which retail customers for direct control services will be
divided
47
NER, cl. 6.18.5(a). 48
This is a reference to the Rules' pricing principles for direct control services, alternatively described in this paper as
the "distribution pricing principles"; NER, cl. 6.18.5(e)–(j). 49
NER, cl. 6.8.2(a). 50
NER, cl. 11.76.2(a). 51
NER, cl. 6.18.1A(a).
35 New South Wales —Tariff structure statement— Draft decision
the policies and procedures the distributor will apply for assigning retail customers
to tariffs or reassigning retail customers from one tariff to another
structures for each proposed tariff
charging parameters for each proposed tariff
a description of the approach that the distributor will take in setting each tariff in
each pricing proposal.
A tariff structure statement must be accompanied by an indicative pricing schedule.52
What must a tariff structure statement comply with?
A tariff structure statement must comply with the distribution pricing principles, which
may be summarised as:
for each tariff class, expected revenue to be recovered from customers must be
between the stand alone cost of serving those customers and the avoidable cost of
not serving those customers53
each tariff must be based on the long run marginal cost of serving those customers,
with the method of calculation and its application determined with regard to the
costs and benefits and customer location54
expected revenue from each tariff must reflect the distributor's efficient costs,
permit the distributor to recover revenue consistent with the applicable distribution
determination and minimise distortions to efficient price signals55
distributors must consider the impact on retail customers of tariff changes and may
vary from efficient tariffs, having regard to:56
o the desirability for efficient tariffs and the need for a reasonable transition
period (that may extend over one or more regulatory periods)
o the extent of customer choice of tariffs
o the extent to which customers can mitigate tariff impacts by their
consumption
tariff structures must be understandable by retail customers57
tariffs must otherwise comply with the Rules and all applicable regulatory
instruments.58
52
NER, cl. 6.8.2(d1). 53
NER, cl. 6.18.5(e). 54
NER, cl. 6.18.5(f). 55
NER, cl. 6.18.5(g). 56
NER, cl.6.18.5(h). 57
NER, cl. 6.18.5(i). 58
NER, cl. 6.18.5(j); this requirement includes jurisdictional requirements.
36 New South Wales —Tariff structure statement— Draft decision
The distribution pricing principles are not prescriptive. They do not specify particular
tariff structures or transitional arrangements. In practice, this means a range of
approaches are likely to be consistent with the distribution pricing principles. In
making our assessment, in general terms, we consider the distribution pricing
principles require tariff structure statements to demonstrate movement towards
more cost reflective tariffs, taking into account customer impacts.59
Our role in approving a distributor's tariff statement
We must approve a distributor's tariff structure statement unless we are satisfied that
the proposed tariff structure statement does not comply with the distribution pricing
principles or other applicable requirements of the Rules.60 In Queensland, the
distributors' tariff structure statements must also comply with the uniform tariff policy.
We make one holistic determination to approve or refuse to approve the distributor's
tariff statement. Our analysis on each element of the distributor's tariff structure
statement contributes to our overall determination.
What happens when a distributor submits a proposed tariff statement?
The Rules require us to publish a proposed tariff structure statement and invite
submissions.61 We then assess a proposed tariff structure statement for its compliance
with the distribution pricing principles. Taking into account submissions and any
supporting information submitted by the distributor, we will publish a draft
determination on the proposed tariff structure statement.62 This will set out our reasons
for making the draft determination.63 We will call for submissions on our draft
determination.64
Our role is largely one of assessing for compliance. We must approve a proposed tariff
structure statement unless we are satisfied that it will not comply with the distribution
pricing principles or other applicable requirements of the Rules.65
What happens if a proposed tariff statement is not approved?
A distributor may submit a revised tariff structure statement no later than 45 business
days after we publish our draft determination.66 Under the Rules, a distributor may only
make revisions to its tariff structure statement to address matters raised by our draft
determination.67 We will publish the revised tariff structure statement and again call for
59
NER, cl 6.18.5(b) - (d). 60
NER, cl 6.12.3(k) 61
NER, cl. 6.9.3(a). 62
NER, cl. 6.10.2; cl. 11.76.2(a). 63
NER, cl. 6.10.2(a)(3); cl. 11.76.2. 64
NER, cl. 6.10.2(a)(5). 65
NER, cl. 6.12.3(k). 66
NER, cl. 6.10.3(a). 67
NER, cl. 6.10.3(b).
37 New South Wales —Tariff structure statement— Draft decision
submissions.68 We will make a final determination on the proposed tariff structure
statement in February 2017
What happens after a tariff statement is approved
Once approved, a tariff structure statement will remain in effect for the relevant
regulatory period.69 The distributor must comply with the approved tariff structure
statement when setting prices annually for direct control services.70
We will separately assess the distributor's annual tariff proposals for the coming 12
months. Our assessment of annual tariff proposals will be consistent with the
requirements of the relevant approved tariff structure statement.
An approved tariff structure statement may only be amended within a regulatory period
with our approval.71 We will approve an amendment if the distributor demonstrates that
an event has occurred that was beyond its control and which it could not have foreseen
so that the amended tariff structure statement materially better complies with the
distribution pricing principles.72
68
NER, cl. 6.10.3(d)(e). 69
Tariff Structure Statements may only be amended during a regulatory period, with our approval, if an event occurs
that is beyond the distributors' reasonable control and could not reasonably have been foreseeable requires a
change. 70
NER, cl. 6.18.1A(c). 71
NER, cl. 6.18.1B. 72
NER, cl. 6.18.1B(d).
38 New South Wales —Tariff structure statement— Draft decision
3 Summary of NSW distributors' proposals
Table 3-1 to Table 3-3 summarise the tariffs the three NSW distributors proposed respectively.
These tariffs comprise the following main elements:
The structure of the tariffs, for example whether there is a fixed charge, and whether charges vary according to the level of usage
(irrespective of time), the time at which usage occurs, or maximum demand over a certain period (charging windows).
The rules that determine which tariffs customers are assigned to. These may vary according to the meter type (whether accumulation
meters, interval meters or smart meters) and type of connection. In addition to the tariff that customers are assigned to by default, they
may choose to be assigned to other tariffs in certain circumstances.
3.1 Ausgrid
Table 3-1 summarises the tariff structures that will apply to different types of customers as Ausgrid proposed in its tariff statement proposal.
Appendix B sets out Ausgrid's proposed tariffs in detail.
Most of Ausgrid's residential and small business customers are currently assigned to a usage based tariff with a declining block structure. This
is because the majority of these customers currently have accumulation meters, as opposed to smart meters.
Ausgrid proposed to assign residential and small business customers with an interval meter to a transitional flat usage tariff, with the option to
opt in to a time-of-use tariff. These transitional flat usage tariffs have a time-of-use structure, but the same charge for the peak, shoulder and
off peak periods. Ausgrid proposed these new tariffs to facilitate the transition of customers towards more cost reflective tariffs, especially
residential and small business customers.
Ausgrid proposed to assign larger customers with interval meters to more complex tariffs that include fixed, demand and time-of-use
components.
39 New South Wales —Tariff structure statement— Draft decision
Table 3-1 Summary of Ausgrid's proposed tariffs
Customer type Meter type Connection type
Default tariff structure
Optional tariffs
Existing customer Type 6 Single phase or three phase Declining block + fixed charge
These customers will be re-assigned to a
transitional flat tariff if their meter is upgraded from 1
July 2018. They can then also opt in to a TOU tariff.
New customer without embedded
generation
Existing customer on a declining block
tariff
Interval meter Single phase or three phase Transitional flat usage + fixed
charge These customers can opt in to a TOU tariff.
New customer with embedded generation Interval meter Single phase or three phase TOU usage + fixed charge These customers can opt in to a transitional flat
tariff.
Low voltage CT 100–1,600 Amps
High voltage
Subtransmission
Interval meter Various Demand + TOU usage + fixed
charge
These customers can opt in to an individually
calculated tariff (which are more cost reflective) or a
substation connected tariff in some situations.
Source: Ausgrid, Response to AER issues paper on NSW DNSP’s draft tariff structure statements, May 2016, p. 4.
3.2 Endeavour Energy
Table 3-2 summarises the tariffs Endeavour Energy proposed in its tariff statement proposal. These tariffs are similar to Endeavour Energy’s
current tariffs.
Endeavour Energy proposed to assign residential customers with accumulation meters to declining block tariffs. Endeavour Energy proposed
to assign small business customers with accumulation meters to inclining block tariffs.
40 New South Wales —Tariff structure statement— Draft decision
Residential and small business customers with interval or smart meters can opt in to tariffs that include fixed and time-of-use components,
under Endeavour Energy's proposal.
Endeavour Energy proposed to assign larger commercial and smaller industrial customers to tariffs that include demand, time of use and fixed
components. Endeavour Energy proposed to assign such customers without the necessary metering for time-of-use and demand tariffs to a
transitional tariff with usage and fixed components only.
Endeavour Energy proposed to assign industrial customers to more sophisticated tariffs that include fixed, demand and time-of-use
components.
Table 3-2 Endeavour Energy's proposed tariffs
Tariff
class Proposed tariffs Customer type Assignment
Meter type
Tariff structure Notes
LV
energ
y
Residential block Residential consuming < 160 MWh annually Default Type 6 Declining block +
fixed
Residential TOU Residential consuming < 160 MWh annually Opt in Type 4
1, 5 or
6 Usage + fixed
Small business2 block tariff
Small to medium business connection consuming
< 160 MWh annually Default Type 6
Inclining block +
fixed
Consumption block increased from
10MWh to 120 MWh (making this
effectively a “flat” tariff).
Small business2 TOU
Small to medium business consuming < 160 MWh
annually Opt in
Type 41, 5 or
6 Usage + fixed
Controlled load 1 Available to customers with a residential or small
business tariff Opt in
Separately
metered Usage + fixed
Controlled load so that supply may not
be available between 07:00 and 22:00.
41 New South Wales —Tariff structure statement— Draft decision
Controlled load 2 Available to customers with a residential or small
business tariff Opt in
Separately
metered Usage + fixed
Controlled load so that supply does not
exceed a total of 17 hours in any 24 hour
period.
LV
dem
and
LV TOU demand Larger commercial and light industrial consuming
> 160 MWh annually Default Type 4
Demand + usage
+fixed
LV TOU demand transition Larger commercial and light industrial consuming
> 160 MWh annually
Mandated (see
notes)
Interval
meter Usage + fixed
For customers without necessary
metering for LV TOU demand tariff, or
where this tariff has excessive bill impact.
HV
dem
and
HV TOU demand Industrial Default Interval
meter
Demand + usage +
fixed
Individually calculated HV
TOU demand Industrial
Mandated (see
notes)
Interval
meter Various
For HV customers above certain
consumption or demand thresholds
Subtr
ansm
issio
n
dem
and
ST TOU demand Industrial Default Interval
meter
Demand + usage +
fixed
Individually calculated ST TOU
demand Industrial
Mandated (see
notes)
Interval
meter Various
For subtransmission customers above
certain consumption or demand
thresholds
Inte
r-dis
trib
uto
r
transfe
r
Inter-distributor TOU demand Distributors Mandated (see
notes)
Interval
meter
Demand + usage +
fixed (individually
calculated)
For electricity transferred through the
Endeavour Energy network on behalf of
Ausgrid and Essential Energy.
Source: Endeavour Energy, Tariff structure statement, 27 November 2015.
Notes: 1. Endeavour Energy currently has type 6 and type 5 metered versions of this tariff. Endeavour Energy proposed to add a type 4 metered version of this tariff effective 1 July 2016.
Endeavour Energy. Tariff structure statement, 27 November 2015, p. 37.
2. Endeavour Energy refers to these tariffs as 'general supply'. We have used the term 'small business' for ease of understanding.
42 New South Wales —Tariff structure statement— Draft decision
3.3 Essential Energy
Table 3-3 summarises the tariffs Essential Energy proposed in its tariff statement proposal. These tariffs are similar to Essential Energy’s
current tariffs.
Essential Energy proposed to assign residential and small business customers with accumulation meters to declining block tariffs.
Residential and small business customers with interval or smart meters can opt in to tariffs that include fixed and time-of-use components,
under Essential Energy's proposal.
Essential Energy proposed to assign larger businesses that take power at low voltage to a tariff that includes demand, usage and fixed
components.
Essential Energy proposed to assign larger businesses that take power at high voltages to tariffs that also include demand, usage and fixed
components.
Table 3-3 Essential Energy's proposed tariffs
Tariff
class Proposed tariffs Customer type Assignment
Meter type
Tariff structure Notes
Low
voltage –
energ
y
Residential block Residential consuming < 160 MWh annually Default Type 6 Declining block +
fixed
Residential TOU Residential consuming < 160 MWh annually Opt in Type 5 Usage + fixed
Controlled load 1 Residential and business consuming < 160
MWh annually Opt in
Separately
metered
Usage (flat rate) +
fixed
For usage between 5–9 hours overnight
on weekdays and extra hours on
weekends except where time clock
controls load.
43 New South Wales —Tariff structure statement— Draft decision
Controlled load 2 Residential and business consuming < 160
MWh annually Opt in
Separately
metered
Usage (flat rate) +
fixed
For usage between for 10–18 hours per
day on weekdays, and all day weekends
except where time clock controls load.
Business block Business consuming < 100 MWh annually Default Type 6 Declining block +
fixed
Business TOU < 100 MWh Business consuming < 100 MWh annually Opt in Type 5 Usage + fixed
Business TOU < 160 MWh Business consuming < 160 MWh annually Opt in Type 5 Usage + fixed
Low
voltage –
dem
and
LV – TOU three rate demand Business consuming > 160 MWh annually Default Type 4 Demand + usage +
fixed
LV – TOU average daily
demand Business consuming > 160 MWh annually Opt in (see notes) Type 4
Demand + usage +
fixed
For customers whose monthly load factor
exceeds a threshold. Intended for
customers with seasonal demand.
LV – TOU alternative demand Business consuming > 160 MWh annually Opt in Type 4 Demand + usage +
fixed
Hig
h v
oltage –
dem
and
HV – TOU monthly demand Large business consuming > 160 MWh annually Default Interval
meter
Demand + usage +
fixed
HV – average daily demand Large business consuming > 160 MWh annually Opt in (see notes) Interval
meter
Demand + usage +
fixed
For customers whose monthly load factor
exceeds a threshold. Intended for
customers with seasonal demand.
Subtr
ansm
issio
n Subtransmission – three rate
demand Large business consuming > 160 MWh annually Default
Interval
meter
Demand + usage +
fixed
Not applicable for connection to dual
purpose subtransmission/ distribution
circuits.
Site specific Large business customers Opt in Interval
meter Various
44 New South Wales —Tariff structure statement— Draft decision
Inter-distributor transfers Customer with demand > 10MW or a load > 40
GWh annually Type 3
Negotiated with
customer Formerly in its own tariff class.
Source: Essential Energy, Tariff structure statement, 27 November 2015; Essential Energy, Tariff structure statement: Attachment 6: Policy for network tariff assignment and reassignment, 27
November 2015.
45 New South Wales —Tariff structure statement— Draft decision
4 Tariff structures
This chapter considers each tariff structures proposed by the NSW distributors for
residential and small business customers and for large business customers.
4.1 Tariff design
We approve the NSW distributors' proposed design of tariff structures for medium and
large customers. We are satisfied that tariffs which are designed to include time-of-use
and demand components contribute to the achievement of compliance with the
distribution pricing principles. This is because time-of-use 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. However, we do not approve the timing
of the charging windows for the time-of-use tariffs. This is discussed in section 4.2
below.
We do not approve the NSW distributor's proposed declining block tariff structure for
residential and small business customers. We are not satisfied that a declining block
tariff structure contributes towards the achievement of compliance with the distribution
pricing principles. This is because we find that a declining block structure does not:
efficiently recovers costs from customers
send signals regarding the efficient use of spare capacity in the network.
These reasons are discussed in more detail below.
We consider there is scope for tariff reform at the residential and small business
customer level, as the current tariff structures and tariff assignment policies have
resulted in few customers moving towards more cost-reflective tariff structures.
Each of the NSW distributors proposed declining block tariffs and time-of-use tariffs for
their small customers, with some variations. Endeavour Energy proposed an inclining
block tariff for its small business customers and Ausgrid proposed transitional flat tariffs
for some residential and small business customers. The major difference between the
proposals was in relation to tariff assignment, rather than tariff structures, however
these issues are related. Endeavour Energy and Essential Energy proposed to
continue their block tariffs as the default tariff for residential and small business
customers, and to have time-of-use tariffs as opt-in only. Ausgrid proposed time-of-use
tariffs as the default tariff for certain new customers. We consider Ausgrid's proposal
better progresses tariff reform at the small customer level. Tariff assignment is
discussed in chapter 6.
Table 4-1 shows the tariff structures proposed by each of the NSW distributors.
Table 4-1 NSW distributors' proposed tariffs
Customer type Ausgrid Endeavour Energy Essential Energy
Residential Declining block Declining block Declining block
46 New South Wales —Tariff structure statement— Draft decision
Time-of-use
Transitional flat time-of-use
Time-of-use Time-of-use
Small business
Declining block
Time-of-use
Transitional flat time-of-use
Inclining block
Time-of-use
Declining block
Time-of-use
Medium business
Time-of-use demand
Time-of-use
Time-of-use demand
Time-of-use
Time-of-use demand
Large business
High voltage time-of-use
demand system
High voltage time-of-use
demand substation
High voltage time-of-use
capacity
High voltage time-of-use
monthly demand
High voltage time-of-use
average daily demand
Sub-transmission
Sub transmission system
Sub transmission
substation
New transmission
connected time-of-use
capacity
Sub transmission time-of-
use demand
Sub transmission 3 rate
demand
Medium and large business customers
We are satisfied that the proposed tariff structures for medium and large business
customers contribute to the pricing principles, except for the time frames proposed for
the time-of-use charging windows. Our decision on charging windows is discussed in
section 4.2.
We are satisfied that time-of-use tariff structures, which contain peak, shoulder and off-
peak periods, and tariff structures with a demand charge contribute to the achievement
of compliance with the distribution pricing principles. These structures send signals
regarding the timing of consumption as to when peak periods occur and of the size of
the assets required to provide the electricity. We consider this contributes to the
signalling of efficient electricity use and efficient costs.
The demand charge sends signals regarding the size of the assets required to provide
the electricity and hence sends signals to customers to better manage their peak
demand and or invest in efficiency measures. This is a more efficient recovery of costs
from those large customers placing a burden on the grid, than through higher fixed
charges and usage charges. We consider this contributes to the pricing principle that
the tariff has regard to the additional costs likely to be associated with meeting demand
from customers that are assigned to that tariff at times of greatest utilisation.73 A
demand charge for large customers can incentivise them to shift their consumption.
73
NER, cl.6.18.5(f)(2)
47 New South Wales —Tariff structure statement— Draft decision
Large customers are in a better positon to invest in battery storage and appliances to
reduce their peak load, than smaller customers. By encouraging larger customers to
reduce their load factors and shift their peak consumption the improved utilisation and
load factors at peak times will reduce overall future infrastructure costs. We consider
this contributes to the efficient use and costs of the network.
Residential and small business customers
Declining block structure
We are not satisfied that the declining block structure is an efficient tariff structure as it
provides no signals regarding the timing of consumption. We recognise that the lack of
interval metering at the residential and small business level limits the options of
different tariff structures to flat, declining block or inclining block structures. Taking this
into consideration we have assessed the NSW distributors proposed declining block
tariff structure against their reasons for proposing it and whether, of the options
available, it better promotes the pricing principles. We are not satisfied that the
declining block tariff structure contributes towards the achievement of compliance with
the distribution pricing principles because:
we are not satisfied that a declining block structure provides efficient price signals
to consumers to make use of spare capacity within the NSW networks,74 and
we do not consider it efficiently recovers costs from customers.
The NSW distributors proposed declining block tariffs for the following reasons:
It is one of the few tariff options (being declining block, inclining block and flat)
available given the lack of interval metering at the residential level.
The NSW distributors consider that a declining block tariff structure spreads the
recovery of residual costs between the fixed charge and the low consumption block
usage charge. They consider this is an efficient way to recover residual costs as it
will minimise distortions in consumption because usage in the low consumption
block is less price sensitive to usage in the high consumption block (Endeavour
Energy, Essential Energy).
Of the available tariff options a declining block tariff structure is efficient to
encourage consumers to use up the spare capacity within the NSW networks. The
NSW distributors submitted that a declining block structure is the more cost
reflective of the options available given the high sunk costs in NSW and the spare
capacity. The NSW distributors make this argument based on their view that a
declining block tariff allows residual costs to be recovered through the fixed charge
74
The national electricity objective includes the efficient use of electricity services for the long term interests of
consumers (NEL, s.7). Similarly, one of the revenue and pricing principles includes that a regulated network
service provider should be provided with effective incentives in order to promote economic efficiency with respect
to direct control network services. The economic efficiency that should be promoted includes the efficient use of
the distribution system with which the operator provides direct control network services (NEL, s.7A(3)(c)).
48 New South Wales —Tariff structure statement— Draft decision
and the first block. The second and third blocks can then be set close to long run
marginal costs This provides the correct price signal for use within these blocks.
A declining block structure will provide efficient price signals to high consumption
consumers because the high consumption block usage rate will more closely reflect
long run marginal cost.
A declining block structure provides greater revenue stability for the distributor and
greater price stability for the consumer, as a greater portion of residual costs is
recovered from fixed charges gradually over time (Essential Energy).
Stakeholders have strongly opposed the declining block tariff. The main concerns
submitted by most stakeholders are that a declining block structure:
will encourage consumption therefore resulting in the need for further network
expansion and therefore higher costs to the consumer.75
will disadvantage low consumption users (which stakeholders consider to typically
be low income households).76
Stakeholders also considered that a declining block tariff structure would:
reduce the incentive / ability of customers to change their energy use behaviour77
discourage investment in energy efficiency measures by consumers78, and
disadvantage food and fibre groups.79
We are not satisfied that the allocation of more residual costs to the first block is
efficient because we have not been provided with sufficient evidence to persuade us
that consumption in this block is the least price sensitive. We are also not satisfied that
a declining block tariff provides efficient price signals to use spare capacity on the
NSW networks. Our analysis of the declining block tariff against the reasons proposed
for it is summarised in Table 4-2 and further discussed below.
Table 4-2 Summary of declining block analysis
Reason / argument AER Response
NSW distributors' reasons for declining block tariffs
Minimises distortions in the recovery of residual costs
Only true if supported by evidence that the first
consumption block is the least price elastic. We are not
convinced the first consumption block is least price
elastic. Many low consumption households may be
holiday homes or homes with solar PV installed. The
75
Energy and Water Ombudsman NSW (EWON), Public Interest Advocacy Centre (PIAC), NSW Council of Social
Services (NCOSS). 76
Cotton Australia, NSW Irrigators' Council (NSWIC), Solar Citizens 77
NSW Irrigators' Council (NSWIC), Cotton Australia, NSW Council of Social Services (NCOSS) 78
NSW Irrigators' Council (NSWIC), Cotton Australia 79
NSW Irrigators' Council (NSWIC), Cotton Australia
49 New South Wales —Tariff structure statement— Draft decision
increase in battery storage is likely to change the elasticity
of these customers.
Efficiently encourages use of spare capacity within the
NSW networks
Only true if there is widespread capacity at all times. We
are not convinced there is spare capacity at all times. As a
block tariff sends no signals regarding the timing of
consumption we are concerned that this may over
incentivise consumption during peak times. Time-of-use
tariffs better signal times of spare capacity and hence are
more efficient. Or in the absence of interval metering a flat
tariff will have a more neutral effect on consumption.
Provides efficient price signals for network congestion
Declining block tariffs provide no price signals around
peak times or locations and may over incentivise
consumption at these times. Time-of-use tariffs provide
more direct signals, or in the absence of interval meters a
flat tariff would neutralise the effect.
Greater revenue stability for the distributor and price
stability for the consumer
We do not consider this is a concern as the NSW
distributors are each subject to a revenue cap. By its
nature, a revenue cap provides greater revenue stability
for the distributor. Similarly overall revenues are set
separately as part of 5 yearly reviews.
Stakeholders main reasons against the declining
block tariff
Encourages consumption (relative to other tariff options)
The lack of price signals as to the timing of consumption
is a concern.
Subsidises high consumption users High consumption users will pay a lower average price
per kilowatt hour than low consumption users.
Reduces the incentive / ability of customers to change
their energy use behaviour
Declining block tariffs reduce the incentive to manage
electricity use.
Discourages investment in energy efficiency
measures
Declining block tariffs do not send signals regarding peak
times and hence reduce the incentive for energy efficiency
Disadvantages food and fibre groups Declining block tariffs reduce the ability of food and fibre
groups to mitigate bill impacts through their usage.
Time-of-use tariffs would better signal spare capacity within the NSW network
compared to a declining block tariff. Block tariffs provide no signals as to when
capacity is available making it less certain that the capacity will be efficiently utilised. A
declining block tariff designed to encourage consumption may encourage it at the
wrong times. We are concerned that a declining block tariff will not effectively
encourage consumption in times of capacity and could over incentivise consumption at
peak times. Time-of-use tariffs can be structured to encourage consumption of
electricity at the times when capacity is available. The lack of widespread interval
metering at the residential and small business level, however, means that the option
for time-of-use tariffs for the majority of customers is limited. We consider a more
neutral tariff such as a flat tariff, whilst still not sending signals regarding the timing of
consumption, would reduce the risk of encouraging too much consumption (over-
incentivising) compared to a declining block tariff when there are constraints on the
network.
50 New South Wales —Tariff structure statement— Draft decision
Efficient recovery of residual costs
A cost reflective tariff is one where the usage components recover the long-run
marginal costs and the fixed charge recovers the sunk (residual) costs. Where the
residual costs are significant it may be necessary to recover some residual costs
through the usage charge, so as not to set the fixed charge too high and increase the
possibility of disconnection and price shock to customers. In the first stages of tariff
reform the recovery of some residual costs through usage charges may be necessary
to mitigate the impact of changes in tariffs on consumers.80 The declining block tariffs
proposed by the distributors spread the recovery of residual costs between the fixed
charge and the low consumption block usage charge. These tariffs will be efficient
only if consumption in the first block has a lower price elasticity than consumption in
the second and third blocks.
We are not satisfied that the NSW distributors have provided sufficient evidence to
show that customers consuming in the first consumption block are less price sensitive
than those that reach the second or third blocks.
As discussed in section 5.2, the majority of customers consume only in the first block.
There is some reason to suggest that the consumption of at least some of these
customers is sensitive to price. There is some evidence to suggest that price elasticity
is proportional to income, and it might be assumed that income is lower for low use
customers and higher for high use customers. However there is no conclusive
evidence that price elasticity varies predictably with income.81 We also note that for any
link to price elasticity in the first block which is related to income, relies on an
underlying assumption that low use customers are also low income customers. While
there is some evidence to suggest this is the case it is also true that many low
consumption households are those with solar, holiday homes and those where the
occupants are at work for significant parts of the day.
We consider the introduction of roof top solar has implications for price elasticity
particularly for low consumption households and therefore the assumption that low
consumption households are less elastic. With the development of improved battery
storage and better solar PV those low consumption solar customers are likely to have
a higher elasticity. Overall we find that the distributors have not provided sufficient
information to support the link between low consumption customers having low
elasticity. Accordingly, we are not satisfied that the recovery of residual costs through
the first block of consumption contributes to the achievement of compliance with the
distribution pricing principles.
In the absence of supporting evidence on price elasticity, we consider the least
distortive method to recover the residual costs would be through a consistent mark-up
80
NER, cl.6.18.5(h)(3) 81
The Brattle Group, Structure of Electricity Distribution Network Tariffs: Recovery of Residual Costs, August
2014,p.42
51 New South Wales —Tariff structure statement— Draft decision
to the usage rates (i.e. through a flat rate tariff). A flat rate tariff is consistent with the
pricing principles in the following respects:
for tariffs to comply with the pricing principles, albeit after a reasonable period of
transition82 and
the ability of customers to mitigate the impact of changes through their usage
decisions.83
We are not satisfied that customers are able to mitigate the impact of changes in tariffs
through their usage decisions84 under a declining block tariff where more costs are
recovered through the fixed charge and first consumption block .
We consider that in principle a declining block tariff would only contribute to
compliance with the distribution pricing principles if the NSW distributors can
demonstrate that consumption in the first block is less price sensitive than consumption
in the second and third blocks. This would be consistent with the Rules which require
total costs be recovered in a way which minimises distortions to price signals for
efficient usage resulting from tariffs reflecting long run marginal cost.85
Efficient use of spare capacity
The NSW distributors proposed declining block tariff relies on there being spare
capacity in the NSW network. In the presence of spare capacity and high sunk costs,
the average cost to provide electricity decreases with the volume of electricity sold.
This is because in the case of distributors which are natural monopolies the largest
costs are incurred to build the infrastructure in the first place, but once built, the cost of
transporting an additional unit of electricity is very low—up until the point where
congestion sets in, and further capacity is required to be built.
Spare capacity where it exists should be signalled to customers to enable them to use
it. This is consistent with the national electricity objective which includes the promotion
of efficient use of the network in the long term interests of consumers.
While spare capacity may exist in the NSW network, it may not exist at all times. The
NSW distributors' tariff statements suggest that network constraint is an issue at least
at certain times of the day.86 If this is the case declining block tariffs will also not
reflect the efficient costs of providing network services87 and will also not accurately
82
NER, cl.6.18.5 (h)(1) 83
NER, cl.6.18.5 (h)(3) 84
NER, cl.6.18.5(h)(3). 85
NER, cl. 6.18.5(g)(3). 86
The peak usage charges proposed by Ausgrid for its time-of-use tariff are double the usage charge for any of its
declining block usage charges. Ausgrid is introducing seasonal components to time-of-use tariffs with differing
peak charging windows applied during summer and winter months. The peak and shoulder periods proposed by
Ausgrid and Endeavour time-of use tariffs are wide covering 62 per cent of the time 87
NER, cl.6.18.5(a)
52 New South Wales —Tariff structure statement— Draft decision
reflect long run marginal costs of providing the service.88 Further, a declining block
structure will reflect efficient costs of providing network services only until
augmentation is required. The distributors have not provided sufficient evidence to
show that further augmentation is not required.
Block tariffs send the same price signals regardless of when consumption occurs. They
do not provide any incentives for shifting consumption from peak to off-peak periods as
customers receive no signals regarding the timing of their consumption. A declining
block tariff, where the price decreases for higher blocks of consumption may over-
incentivise consumption at peak times.
As block tariffs do not send any price signals or incentives to customers to shift their
consumption from peak periods to off-peak periods, the incentive to change energy
behaviour or invest in energy efficiency is reduced. Any increase in consumption
during peak times will contribute to the need for further network investment and hence
increases in prices.
Stakeholders did not support the NSW distributors declining block tariffs.
Jemena submitted:
Having declining block structures supported by a non-robust long-run marginal
cost estimate may result in forgoing the opportunity to efficiently downsize or
delay some of the capex program. This is because of the weaker signals to
reduce demand levels.89
Cotton Australia and NSW Irrigators' Council (NSWIC) submitted:
Declining block tariff will incentivise higher electricity consumption. This will
further expand the regulatory asset base and generate a requirement for higher
network operating and capital expenditure – an investment spiral.90
Solar Citizens submitted that higher users will be encouraged to use more energy and
pay on average less per unit price for energy consumption. They submitted that:
It is intuitively obvious that the declining block pricing scheme is designed to
and will encourage more consumption, which could be used by the distributors
to justify existing excessive investment in infrastructure, and potentially even to
attempt to make a case for future investment by promoting increasing electricity
consumption.91
88
NER, cl.6.18.5(f) 89
Jemena, Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6 May
2016, p.3 90
NSW Irrigators Council (NSWIC) and Cotton Australia Submission, AER Issues paper on the NSW Tariff Structure
Statements 6 May 2016, p.3. 91
Solar Citizens Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 5 April
2016, p.1.
53 New South Wales —Tariff structure statement— Draft decision
New South Wales Council of Social Service (NCOSS) considered declining block
structures would increase the incentive not to conserve energy, and noted two possible
perverse outcomes from this:
Firstly, ongoing or increased consumption of energy at peak times could give
rise to the re-emergence or continuation of the peak demand problem, leading
to the necessity for further costly augmentation of the network.
The other likely consequence is that consumers who are able, will seek to
reduce their reliance on the network by investing in solar and batteries, while
those who are not able will bear the price impact of reduced overall demand.
This scenario is already familiar, and is not consistent with the outcomes being
sought by the new pricing rules.92
A time-of-use structure would better promote the pricing principles through the
signalling of when capacity is available; however given the lack of interval metering at
the small customer level in NSW, we consider a more neutral tariff, such as a flat tariff,
is a preferred option to a declining block. A flat tariff, whilst not sending signals
regarding the timing of consumption would reduce any risk of over incentivising
consumption during peak periods.
A flat tariff will ensure that high and low usage customers will pay for residual costs in
proportion to their use of electricity.
Table 4-3 shows analysis of how much 100kWh would cost for each subsequent block
in 2018-19 prices. From this we can see that for customers in Ausgrid’s area once they
reach the second block they will pay $2.63 less for each 100kWh consumed compared
to the first block and 62 cents less for each 100kWh consumed in the third block
compared to what they paid in the second block. For Endeavour Energy this difference
is $1.03 and $1.33. For Essential Energy the difference is only 50 cents and 49 cents
between the blocks. At current proposed levels the declining block price signals are
fairly flat and the change to a more neutral flat tariff is unlikely to have a significant
impact on the NSW distributors recovery of costs.
Table 4-3 Comparison of revenue recovered in each block
Ausgrid Endeavour Essential
Amount
paid for
100kWH
($)
Difference
b/w blocks
($)
Amount paid
for 100kWH
($)
Difference b/w
blocks ($)
Amount paid
for 100kWH
($)
Difference
b/w blocks
($)
Block 1 (first 1000kWh in 91
day period)
11.60
9.74
11.05
Block 2 (next 750kWh per 91 8.97 -2.63 8.71 -1.03 10.55 -0.50
92
NSW Council of Social Service (NCOSS) Submission: AER issues paper: Tariff structure statement proposals:
NSW electricity DNSPs May 2016, p.8.
54 New South Wales —Tariff structure statement— Draft decision
day period)
Block 3 (all kWh over 1750 per
91 day period) 8.35 -0.62 7.38 -1.33 10.06 -0.49
Effect on revenue stability
The NSW distributors submitted that a declining block structure provides greater
revenue stability for the distributor and greater price stability for the consumer.
We do not agree that revenue stability is an issue that needs to be addressed through
a declining block tariff structure at the expense of efficient price signals.
Further, we are not persuaded that the NSW distributors would face significant revenue
instability if the declining block structure was removed. The NSW distributors are each
subject to a revenue cap. By its nature, a revenue cap provides a significant degree of
revenue stability for the distributor, and more revenue stability than a price cap (where
the distributor’s revenue is affected by volume risk). Under a revenue cap, the only
revenue volatility faced by the distributor is in relation to the unders-and-overs
mechanism where a distributor recovers more or less revenue than the revenue cap in
a particular year. Similarly, under a revenue cap there is no significant effect on price
stability for customers over the regulatory period. Therefore, we are not satisfied that
revenue or price instability concerns are justified or require a response as proposed.
Disadvantaged consumers
Affordability is an important issue for vulnerable customers. Our role is to encourage
efficient pricing so consumers understand the cost of their decisions. This will also
provide policy makers with accurate information in deciding to target certain groups of
customers, such as vulnerable customers, with additional assistance.
The distribution pricing principles, which we assess distributor's proposals against,
require distributors to balance cost reflectivity and customer impact considerations.
The customer impact considerations relate to gradually transitioning to cost reflective
prices. Accordingly, we consider any movement to a pricing structure where more
costs are recovered through fixed charges should be gradual. Such an approach will
contribute to the pricing principle that customers can mitigate the impact of tariffs
through their usage decision.93
Stakeholders submitted that the recovery of more residual costs through the first block
of the declining block tariff disadvantages low consumption households and subsidises
high consumption households. Under the NSW distributors proposed declining block
tariffs, more of the residual costs are recovered through the first block usage charge,
rather than being spread over all usage, as would be the case with a flat tariff. This
means the average rate paid by low consumption households on tariffs with more costs
allocated to the first block charge will be higher compared to high consumption
93
NER, cl.6.18.5(h)(3)
55 New South Wales —Tariff structure statement— Draft decision
households. Although the rules do not take into consideration whether one customer
group is 'disadvantaged' compared to another, the pricing principles take into account
a customer's ability to mitigate bill impacts.94 An increased recovery of residual costs
through the fixed charge and first consumption block will make it more difficult for low
consumption households to mitigate the changes in tariffs through their usage
decisions.95
The extent to which low income households are disadvantaged by a declining block
tariff will depend on the extent that low consumption is correlated with low income.
New South Wales Council of Social Services (NCOSS) submitted:
Evidence that low income households are generally low consumers of energy is
demonstrated in NSW by an IPART survey of households in 2010. For the
Sydney households in the IPART survey, 39 per cent of the lowest income
group were also in the very lowest consumption group. This low income-low
consumption group were consuming less than 4MWh per annum when the
average household was consuming 7.2 MWh.96
NCOSS also submitted that:
Low income households already spend a higher proportion of household
income on residential electricity. A 2012 estimate for Australia is that lower
income households spend over 4 per cent of household income on household
energy compared to 2 per cent for all households combined.97
For low income households, a tariff structure in which most of the costs are recovered
through the fixed charge and the first block reduces the ability of these customers to
manage these costs through changes in their usage, and is inconsistent with pricing
principles.98 To the extent that low consumption households are also low income
households this impact is exacerbated.
Food and Fibre customers
Food and fibre groups submitted that a declining block tariff would disadvantage them,
as their energy use can be very high at certain times of the year and significantly lower
during others. In NSW, irrigators have water entitlements which mean they are only
allowed to pump water for very short periods (sometimes just a 48 hour period). The
water has to be pumped at a certain time or they lose their entitlement. For customers
with low usage most of the year, a tariff structure where most of the costs are
recovered through the fixed charge and the first block usage charge would make it
94
NER, cl.6.18.5(h)(3) 95
NER, cl. 6.18.5(h)(3). 96
NSW Council of Social Services (NCOSS) Submission: AER issues paper: Tariff structure statement proposals:
NSW electricity DNSPs, May 2016, p.10. 97
NSW Council of Social Services (NCOSS) Submission: AER issues paper: Tariff structure statement proposals:
NSW electricity DNSPs, May 2016, p.10. 98
NER, cl. 6.18.5()(3).
56 New South Wales —Tariff structure statement— Draft decision
more difficult for these customers to mitigate the impact of the tariff through their usage
decisions compared to a time of use tariff, or if interval meters are not available
through a more neutral tariff such as a flat tariff.
We are not satisfied that a declining block tariff structure contributes to the
achievement of compliance with pricing principles for food and fibre customers. We
consider a declining block tariff reduces the ability of food and fibre customers to
mitigate bill impacts through their usage and is inconsistent with the distribution pricing
principles.99
Inclining block tariff
We are satisfied Endeavour Energy's proposed inclining block tariff for small business
customers contributes to the achievement of compliance with the distribution pricing
principles. Specifically, we consider Endeavour Energy's proposed inclining block tariff
for small business customers is consistent with the distribution pricing principles of
minimising customer impact and promoting customers moving to more efficient tariffs.
Endeavour Energy proposed to maintain its current inclining block structure for small to
medium commercial customers. Endeavour Energy submitted that the benefits of this
tariff structure in the context of commercial customers, where the penetration of more
advanced interval meters is greater, is that it:
Incentivises customers with higher consumption (consuming close to the 160MWh
per annum consumption border of our LV energy and LV demand tariff classes) to
move to more efficient demand based tariff structures.
Ensures that this signal to large customers does not create distortions to smaller
customers on the tariff.
We received no submissions from stakeholders regarding Endeavour Energy's
proposed inclining block tariff structure.
An inclining block tariff like the declining block tariff does not send any price signals
regarding the timing or location of consumption. Under an inclining block tariff structure
larger customers on average will pay more per kilowatt hour than small customers.
Endeavour Energy's rationale for its proposed inclining block tariff structure for small to
medium commercial customers is to encourage those higher consumption customers
(consuming close to 160 MWh per annum) to move to the more efficient demand
based tariff structures.
Endeavour Energy proposed to increase the energy consumption point at which the
second block starts from the current threshold of 10 MWh to 120 MWh per annum.
This will mean that the vast majority of customers will pay only the fixed annual charge
and the first block energy charge, making this effectively a ‘flat’ tariff structure for the
vast majority of customers (97.8 per cent).
99
NER, cl. 6.18.5(h)(3).
57 New South Wales —Tariff structure statement— Draft decision
Increasing the consumption threshold at which the second block commences provides
a long term signal for larger customers on the tariff to switch to a more efficient tariff,
whilst minimising distortions to the vast majority of customers on this tariff. We
consider this contributes to the achievement of compliance with the distribution pricing
principles
that the tariff should reflect the distributors efficient costs100, and
that the additional costs likely to be associated with meeting demand are assigned
at times of greatest utilisation.101
Time-of-use tariffs
We are satisfied that the proposed time-of-use tariff structure design better contributes
to cost reflectivity and the achievement of compliance with the pricing principles than a
flat structure, or a block structure. Time-of-use tariffs send signals regarding the timing
of consumption and provide incentive for customers to shift their energy usage from
times of network constraint. We consider this contributes to achievement of compliance
with the pricing principles
that prices should reflect the efficient costs102 and
reflects the additional costs likely to be associated with meeting demand at times of
greatest utilisation.103
However, we are not approving the proposed timing of the charging windows for time-
of-use tariffs. This is discussed further in section 4.2.
Endeavour Energy and Essential Energy proposed opt-in time-of-use tariffs for their
residential and small business customers. This means that any customer with an
interval meter can opt-in to a time-of-use tariff. As discussed in chapter 6 Ausgrid has
proposed that new customers with embedded generation will be assigned by default to
a time-of-use tariff from 1 July 2018. Ausgrid also proposed that customers with
interval meters will be assigned to time-of-use tariffs.
Other tariffs—proposed by distributors
Ausgrid proposed transitional tariffs for existing customers with interval meters and
time-of-use tariffs for new customers. Endeavour Energy and Essential Energy
proposed to maintain their current opt-in time-of-use tariffs.
Ausgrid's transitional tariffs
100
NER, cl.6.18.5(a) 101
NER, cl.6.18.5(f)(2) 102
NER, cl.6.18.5(a) 103
NER, cl.6.18.5(f)(2)
58 New South Wales —Tariff structure statement— Draft decision
As discussed in chapter 6 Tariff Assignment Policies, we consider Ausgrid's proposed
transitional tariff which has a time-of-use tariff structure (i.e. peak, shoulder and off-
peak windows) but where the usage rate is consistent across all charging windows is a
move towards more cost reflective pricing for existing customers. By being on a
transitional tariff with a time-of-use structure but with flat rates the customer is
protected from any bill shock due to re-assignment. By having a time-of-use structure
the transitional flat tariff will better enable customers to see their consumption
behaviour in each charging window, whilst providing protection from bill shock in the
initial transition period until they can better manage their usage decisions.
We consider this to contribute to the pricing principle that customers are able to
mitigate the impact of changes in tariff through their usage decisions.104
We also consider the proposed transitional tariff will promote the pricing principle
that the tariff must be reasonably capable of being understood by customers
assigned to it.105
Ausgrid's proposed tariff for new transmission connected customers
Ausgrid proposed to introduce a transmission-use-of-system only tariff for customers
connected to its transmission network (such customers were previously assigned to
the sub-transmission capacity tariff). Ausgrid proposed that this should be the default
tariff for all new transmission customers connected to its network.106 This tariff has the
following structure:107
network access charge (c/day)
consumption charge (c/kWh) for peak, shoulder and off-peak periods
demand charge during peak hours (c/kVA/day).
We are satisfied the introduction of this tariff contributes to the achievement of
compliance with the distribution pricing principles.108 We agree with Ausgrid that this
will result in greater efficiency as these customers will not incur a distribution-use-of-
system charge when they do not contribute to the costs of that segment of the network.
We also consider the tariff structure, particularly the inclusion of a demand charge,
provides appropriate and efficient price signals.
Endeavour Energy's new low voltage transitional demand tariff
We are satisfied that Endeavour Energy's proposed time-of-use transitional demand
tariff contributes to the achievement of compliance with the distribution pricing
principles. Endeavour Energy proposed that this tariff should be mandatory for certain
104
NER, cl.6.18.5(h) 105
NER, cl.6.18.5(i) 106
Ausgrid, Tariff structure statement: Appendix 2: General description of Ausgrid’s default network use of system
tariffs, 27 November 2016, p. 17. 107
Ausgrid, Tariff structure statement, 27 November 2016, pp. 11 and 126. 108
NER, cl 6.18.5(a)
59 New South Wales —Tariff structure statement— Draft decision
customers. These are customers whose annual consumption requires a demand tariff
but who cannot be transferred to it either because their meter will not support this tariff
or because the impact of transferring them to this tariff is excessive. At a minimum,
customers that are allocated to this tariff must have an interval meter. The low voltage
time-of-use demand transition tariff is not available on customer or retailer request.
We consider this contributes to the distribution pricing principles
that the tariff should reflect the distributors efficient costs109
that the additional costs likely to be associated with meeting demand are assigned
at times of greatest utilisation110
that customers are able to mitigate the impact of changes in tariff through their
usage decisions,111 and
that the tariff must be reasonably capable of being understood by customers
assigned to it.112
Other tariff options—requested by stakeholders
We consider at this stage of tariff development in NSW, time-of-use tariffs and policies
to assign customers to time-of-use tariffs or transitional tariffs will progress to more
efficient use of the network and contribute to the distribution pricing principles. Rather
than expecting a large number of possible tariff forms to be introduced at once, our
main concern in this initial period is moving customers from non-cost reflective tariffs to
more cost reflective tariffs.
Stakeholders had mixed views on whether the NSW distributors should introduce a
wider range of tariff options than currently proposed. The Energy Network Association
(ENA) and EnergyAustralia did not support a wider range of tariff options, because
they considered simplicity in the options for customers was important at this stage of
the reform process.113 In contrast, some other stakeholders considered there should be
more tariff options, however their views differed with respect to what additional tariff
options should be introduced. AGL considered the distributors should introduce a
demand tariff for residential and small business customers114, whereas the Energy and
Water Ombudsman (EWON) disagreed with this.115 EWON and the NSW Council of
Social Services (NCOSS) considered the distributors should introduce a ‘social
109
NER, cl.6.18.5(a) 110
NER, cl.6.18.5(f)(2) 111
NER, cl.6.18.5(h) 112
NER, cl.6.18.5(i) 113
Energy Network's Association (ENA) Submission: AER issues paper: Tariff structure statement proposals: NSW
electricity DNSPs, 6 May 2016, p.3; Energy Australia Submission: AER issues paper: Tariff structure statement
proposals: NSW electricity DNSPs, 6 May 2016, p.4-5. 114
AGL Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 10 May 2106,
p.2 115
Energy and Water Ombudsman NSW (EWON Submission: AER issues paper: Tariff structure statement
proposals: NSW electricity DNSPs, 3 May 2016, p.5
60 New South Wales —Tariff structure statement— Draft decision
tariff’116, and Cotton Australia and the NSW Irrigator's Council (NSWIC) considered the
distributors should introduce ‘food and fibre’ tariffs.117
Social tariffs
EWON and NCOSS supported a social tariff. EWON believed that discussion around a
social tariff is important and that the AER and the networks should engage in
discussion with stakeholders about a Social Tariff in preparation for the next round of
tariff design as part of a multifaceted approach to developing affordability solutions. In
summary, they argued the concept of a network social tariff should be explored with
particular focus on four aspects:
design flexibility to suit variable consumption needs
retailer tariff supported
have broad eligibility criteria, and
accessibility
The AER has no particular views on the intrinsic merits of a social tariff or the need for
such a tariff to be explored as suggested above, the requirements of the rules are
focused on moving customers towards more cost reflective prices, while managing the
impact on customers through the transition. There are no particular requirements for
tariffs to deal directly with affordability concerns, beyond transitional considerations. It
is also usually more efficient to provide assistance to vulnerable customers through
more targeted measures.
Food and Fibre tariffs
Cotton Australia and NSWIC supported a food and fibre tariff. Cotton Australia and
NSWIC submitted they were misrepresented by Networks NSW who submitted that the
feedback from commercial stakeholders was that ‘it is the responsibility of
Government, not networks, with policy changes and the provision of industry
assistance providing better solutions’. Cotton Australia and NSWIC submitted that this
is certainly not the case, and is why Cotton Australia and NSWIC have made
submissions, participated in Tribunal hearings associated with the network
determination and tariff structure statement process as they believe that the networks
can undertake significant and meaningful actions in tariff reform and cost reductions in
order to provide electricity price relief for food and fibre producers.118
116
The NSW Council of Social Services (NCOSS Submission: AER issues paper: Tariff structure statement
proposals: NSW electricity DNSPs, May 2016, p.12 117
Cotton Australia and NSW Irrigator's Council (NSWIC Submission: AER issues paper: Tariff structure statement
proposals: NSW electricity DNSPs, 6 May 2106, p.5 118
Cotton Australia and NSW Irrigator's Council (NSWIC) Submission: AER issues paper: Tariff structure statement
proposals: NSW electricity DNSPs, 6 May 2016, p.5
61 New South Wales —Tariff structure statement— Draft decision
Cotton Australia and NSWIC submitted that the majority of their members are large
energy users and are therefore assigned to either demand or time-of-use tariffs. They
also raised concerns with the specific design of the charging windows associated with
these tariffs. In particular, they noted that Essential Energy charges the same rate
across its peak and shoulder periods, and that its off-peak window is narrow. They
submitted that these aspects combined means there is little incentive for customers to
shift to a time-of-use tariff.
We are satisfied that, in principle, the use of demand and time-of-use tariffs contribute
to the achievement of compliance with the distribution pricing principles because both
tariffs send signals to customers on times of high and low network congestion.
However, we share some of Cotton Australia and NSWIC's concerns over the design
of the charging windows associated with these tariffs. Our discussion on charging
windows is set out in section 4.2.
Demand tariffs
AGL submitted that the NSW networks have all justified their decisions to ignore
energy demand as a cost driver on their individual networks because of the excess
capacity that exists. AGL queried the networks’ general positions that network capacity
is unconstrained and submitted that the distributors should be considering a more
significant step towards tariff reform as part of their proposals. AGL suggested that
demand-based network pricing is an achievable goal in the immediate term,
particularly as an opt-in network tariff for residential and small business customers.
AGL proposed that the distributors can create demand-based network tariffs that are
cost reflective for consumers with good load factors and/or low peak demand which
would incentivise the take-up of the tariffs accordingly. AGL considered it is highly
unlikely that any customers will access the proposed time-of-use tariffs in the tariff
statement period given their structure, so replacing these with demand-based tariffs
can only be a positive step.119
Although supportive of more tariff options EWON did not support a demand tariff –
demand tariffs are complex and can be difficult to understand.120
Endeavour Energy submitted that it is not proposing to introduce demand tariffs.
Endeavour Energy submitted that this is a prudent approach in light of the fact that:
demand for our network has been reducing over time, with peak demand currently
lower than forecast, and
new metering technology will be required.121
119
AGL Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 10 May 2016,
p.4 120
Energy and Water Ombudsman NSW (EWON) Submission: AER issues paper: Tariff structure statement
proposals: NSW electricity DNSPs, 3 May 2016, p.5 121
Endeavour Energy Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6
May 2016, p.4
62 New South Wales —Tariff structure statement— Draft decision
Our role is to assess a distributor's proposal for compliance against the distribution
pricing principles. While we consider demand tariffs are the next step along the cost
reflectivity spectrum after time-of-use tariffs, we are not satisfied that the introduction of
demand tariffs for small customers in NSW at this point in time is required for
compliance against the distribution pricing principles.
We consider at this stage of tariff development in NSW, time-of-use tariffs and policies
to assign customers to time-of-use tariffs or transitional tariffs will progress to more
efficient use of the network and contribute to the distribution pricing principles. Our
main concern in this initial period is getting customers off non-cost reflective tariffs
(declining block, inclining block and flat tariffs) and onto more cost reflective tariffs
(either demand or time-of-use tariffs).
Locational tariffs
Endeavour Energy submitted that it is unclear at this time if the potential benefits of
location specific tariffs outweigh the equity concerns of customers and the added
complexity and administrative cost imposed on networks and retailers.122
We consider that as tariff reform progresses and costs are allocated more efficiently
locational based pricing may become more appropriate. At this time locational tariffs
may be limited because of technical barriers and there will be a need for distributors to
consult with stakeholders on their impact. We consider this issue should be revisited in
future tariff statements.
Tariff simplicity
ENA and Energy Australia were supportive of tariff simplicity. ENA submitted that at
this stage of tariff reform there are strong arguments to support simplicity to minimise
customer confusion and to assist retail marketing, rather than a broad suite of network
tariff options. This approach appears consistent with behavioural economic research
which finds that customers:
will weigh financial losses more heavily and discount future (uncertain) financial
benefits;
are risk averse and have a preference for certainty;
tend to stick to defaults as information increases; and
find decision-making more difficult as information or options increase.123
122
Endeavour Energy Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6
May 2016, p.4 123
Energy Networks Association (ENA) Submission: AER issues paper: Tariff structure statement proposals: NSW
electricity DNSPs, 6 May 2016, p.3
63 New South Wales —Tariff structure statement— Draft decision
The ENA submitted that it would caution the AER against imposing additional
obligations on the DNSP which mandate a wider menu of tariff options for customers
for the following reasons:
such requirements may have potential implications for complexity and transaction
costs in the absence of strong evidence that they are likely to be taken up by
customers or retailers. Distributors would need to re-evaluate take up rates and
parameter relativities across a wider array of tariffs and to ensure effective
communication of a wider variety of tariff options. The net benefit of providing a
wider range of tariff options is likely to be better evaluated by distributors directly in
consultation with their customers, and
it does not appear that a compulsory requirement to offer a menu of more cost-
reflective options is necessary. A number of tariff structure statement proposals by
Australian distributors have proactively offered options for customers to opt in to a
more cost reflective pricing option. Equally, the locational targeting of network
constrained areas can also be addressed through non-tariff agreements between
distributors and their customers, such as other Australian distributors have
proposed. The National Electricity Rules provides a framework in which
distributors, in consultation with their customers, can consider the prospective need
or net benefits of such options.124
ENA submitted that location based cost-reflectivity for all customers would be likely to
lead to very significant price increases for regional customers, particularly in areas of
relatively low customer density. Further, some jurisdictional policy settings will prevent
the network tariff locational signal being sent to customers through their retail bills, in
which case the cost of creating the signal will definitely outweigh any benefit to be
obtained.125
Energy Australia submitted that examples of the type of issue that complicate timely
implementation of revised tariffs or that undermines reform objectives include:
significant differences in tariffs between networks, including their definition of peak
periods (in terms of time of day or season, for example)
different treatment of customers where there is no obvious difference in the cost of
supply, such as mandatory assignment to a particular tariff class depending on
whether the customer is new or existing, and
uncertainty about the application of tariffs and whether customers have a choice
between different tariff options.126
124
Energy Networks Association (ENA) Submission: AER issues paper: Tariff structure statement proposals: NSW
electricity DNSPs, 6 May 2016, p.3 125
Energy Networks Association (ENA) Submission: AER issues paper: Tariff structure statement proposals: NSW
electricity DNSPs, 6 May 2016, p.3 126
Energy Australia Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6
May 201, p.7-8
64 New South Wales —Tariff structure statement— Draft decision
We consider the first step to more cost reflective pricing in NSW is a move towards
time-of-use tariffs and an increase in the assignment of customers to time-of-use
tariffs. As customers understanding of time-of-use tariffs increases there may be more
opportunities for more complex structures including locational and demand tariffs.
The ENA and Energy Australia's raised views associated with the design of charging
windows and tariff assignment policies. We discuss these issues in section 4.2 and
chapter 6, respectively.
4.2 Charging windows
One aim of the pricing rules is to encourage more cost reflective pricing.127 If prices
were fully cost reflective, tariffs would reflect demand conditions through time and at a
local level. Periods of high demand risk assets becoming congested, which may trigger
expenditure. One aim of cost reflective pricing is to incentivise customers to shift their
use of network services to less congested periods, which would mitigate the need for
expenditure. However, there are currently impediments to the full application of cost
reflective pricing. In NSW, for example, the low penetration of interval meters limits the
number of customers to whom cost reflective pricing can apply. There are also
implementation and equity issues in transitioning to location-based pricing.128 In the
absence of perfectly cost reflective pricing, distributors commonly utilise charging
windows that signals times when the whole network is likely to experience high levels
of demand.
The objective of the pricing rules is to better reflect the distributor's costs of providing
network services,129 and we consider this should be the primary consideration in
setting charging windows. However, distributors also need to manage the impacts of
tariff changes and customer ability to respond.130 Customers can reduce their peak
usage through moving some appliance use outside the peak charging window. For
example, they can use other large appliances at other times while the air conditioner is
on.
We are not satisfied that all aspects of the NSW distributors' proposed charging
windows for time of use and demand tariffs contribute towards the achievement of
compliance with the distribution pricing principles. We consider the NSW distributors
did not provide sufficient evidence to justify the proposed charging windows regarding:
what time of day the charging windows apply (business days)
whether the charging windows differ based on seasonality, or time of year
(Endeavour Energy and Essential Energy), and
127
NER, cl 6.18.5(a). 128
Location-based pricing may increase implementation costs due to increased complexity in tariff structures, for
example. 129
NER cl 6.18.5(a) 130
NER, cl 6.18.5(h)
65 New South Wales —Tariff structure statement— Draft decision
charging windows for weekends/non-business days (Ausgrid and Endeavour
Energy).
We discuss our consideration of these issues in sections 4.2.1, 4.2.2 and 4.2.3,
respectively. These sections also contain the changes we require in the NSW
distributors' revised proposals to demonstrate compliance with the distribution pricing
principles. We also discuss stakeholder submissions calling for the NSW distributors to
harmonise their charging windows in section 4.2.4.
4.2.1 Time of day (business days)
We consider the NSW distributors did not provide sufficient evidence demonstrating
how charging windows reflect the level of congestion in their respective networks.131 In
particular, we consider the NSW distributors' peak and shoulder hours are too long.
This potentially distorts the price signals for efficient usage of the distribution networks
and reduces customers' ability to mitigate the impact of changes in tariffs through their
usage decisions.132 We therefore, require the NSW distributors to amend the times of
their charging windows to be more cost reflective (that is, they better reflect congestion
in their respective networks).
We understand the NSW distributors may have considered other factors besides cost
reflectivity when designing the times of their charging windows. Ausgrid, for example,
stated the recovery of residual costs influenced how it derived its charging windows,
(the 'Ausgrid' subsection discusses this issue further). The Rules allow departure from
cost reflectivity in certain cases, for example, to mitigate the impact on customers of
transitioning to cost reflective tariffs.133 If this is the case, we require the NSW
distributors to explain these factors in their revised proposal and demonstrate how they
influence the times of their charging windows.
Stakeholders also submitted their concerns that there is limited opportunity for
customers to access off-peak pricing.134 Available evidence indicates it may be
appropriate for the NSW distributors to adjust their charging windows—namely, by
reducing the number of hours allocated to peak and shoulder periods. This would
provide customers greater opportunities to access off-peak pricing.135
Ausgrid
We are not satisfied that Ausgrid's proposed times for its charging windows on
weekdays contribute to the achievement of compliance with the distribution pricing
131
NER, cl 6.18.5(f). 132
NER, cll 6.18.5(g) and (h)(3). 133
NER, cll 6.18.5(c) and 6.18.5(h)(1). 134
NCOSS, Submission: AER issues paper on the NSW tariff structure statements, May 2016, p. 8; Cotton Australia
and NSWIC, Submission: Issues paper: Tariff structure statement proposals NSW, 6 May 2016, pp. 4–5. 135
NER, cl 6.18.5(h)(3).
66 New South Wales —Tariff structure statement— Draft decision
principles. We do not consider that Ausgrid achieved the appropriate balance between
greater cost reflectivity and customer ability to respond, for the following reasons:
we consider that Ausgrid's proposed times for the peak period are too long and do
not reflect the level of congestion in its network
we consider that Ausgrid's tariff statement proposal did not provide sufficient
evidence and explanation on how it determined its shoulder and off peak hours
during working weekdays
we consider that the times of peak hours on weekdays should be different between
summer and winter (we also discuss this in section 4.2.2).
In its revised proposal, we require Ausgrid to:
Amend its charging windows to better reflect network congestion (which Ausgrid
indicated in its tariff statement proposal is the primary driver of its charging
windows). We consider the peak period should be shorter than Ausgrid's proposal,
and peak times should differ between summer and winter. Based on evidence in
Ausgrid's tariff statement proposal, we consider that Ausgrid's peak hours occur
approximately 2:00PM to 4:00PM in summer and 5:00PM to 7:00PM in winter. In its
revised proposal, Ausgrid may initiate the transition to more cost reflective charging
windows with longer peak hours, with the view of achieving greater cost reflectivity
in subsequent regulatory control periods.
Provide further evidence to justify the times of its charging windows during working
weekdays. In response to an information request, Ausgrid clarified the recovery of
residual costs, in addition to network congestion, influenced the time of its charging
windows. For transparency, we require Ausgrid to include this, and any other
considerations that affect the times of its charging windows, in its revised proposal.
Explain how it determined the thresholds between peak, shoulder and off peak
hours. Following from the point above, we require Ausgrid to clearly demonstrate
the link between the times of its charging windows and the recovery of residual
costs.
The rest of this section sets out our reasons for our draft decision and directions to
Ausgrid.
Figure 4-1 summarises Ausgrid's proposed charging windows. The hours for the peak,
shoulder and charging windows are largely consistent with Ausgrid's current charging
windows. A significant reform is Ausgrid's proposal to include a seasonal component in
its charging windows.136
136
Ausgrid, Tariff structure statement, 27 November 2015, p. 15.
67 New South Wales —Tariff structure statement— Draft decision
Figure 4-1 Ausgrid's proposed charging windows
Source: Ausgrid, Tariff structure statement, 27 November 2015, p. 15; Ausgrid, Tariff structure statement: Appendix
2: General description of Ausgrid’s default network use of system tariffs, 27 November 2015.
In its tariff statement proposal, Ausgrid appears to justify its peak period on the basis
that it reflects network congestion. Ausgrid considered the most economically efficient
peak period definition should only apply to usage on hot summer days in summer
peaking parts of the network (and the converse for winter).137 Ausgrid included in its
tariff statement proposal the top peak demand intervals from recent years for summer
(Figure 4-2) and winter (Figure 4-3).
137
The peak period should only apply to usage on cold winter days in winter peaking parts of the network. However,
Ausgrid did not propose to introduce dynamic peak pricing given the limited penetration of interval metering in its
network. See Ausgrid, Tariff structure statement, 27 November 2015, p. 47.
Tariff Type of day Season 12
AM
6 7 8 9 10 11 12
PM
1 2 3 4 5 6 7 8 9 10 11
Working
weekday
Summer,
Winter,
Weekend,
Public
All
Working
weekday
Summer,
Winter
Working
weekday
Other
Weekend,
Public
All
Peak
Shoulder
Off peak
Residential
time of use
All other
tariffs
68 New South Wales —Tariff structure statement— Draft decision
Figure 4-2 Ausgrid historical system-wide peak demand (MW) – Half Hour
Intervals - Summer
Source: Ausgrid, Tariff structure statement, 27 November 2015, p. 48.
69 New South Wales —Tariff structure statement— Draft decision
Figure 4-3 Ausgrid historical system-wide peak demand (MW) – Half
Hour Intervals – Winter
Source: Ausgrid, Tariff structure statement, 27 November 2015, p. 48.
Figure 4-2 does not support Ausgrid's statement that network peak demand occurs
between 2:00PM and 8:00PM in summer.138 Rather, it suggests the summer peak
period should end at approximately 4:00PM.139
Figure 4-3 suggests the winter peak period is between approximately 5:00PM and
7:00PM. Further, the level of peak demand, and hence congestion, in winter appears
to be equivalent to summer demand levels in the shoulder charging window.140 This
suggests Ausgrid should charge shoulder rates during winter.
Ausgrid acknowledged that its proposed charging windows are inefficient. Specifically,
it submitted:141
The inefficiencies associated with the current period definition for time of use
(peak, shoulder and off peak) arise because it is designed to cover both the
evening winter and summer peak across the whole network. Ausgrid believes
138
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 23. 139
There are significantly fewer peak demand data points after 4:00PM and these are mostly below the levels of data
points found between 9:00AM and 2:00PM, which is within Ausgrid's shoulder period. 140
The winter peak demand points in Figure 4-3 fall below 5,500MW and most are below 5,000MW. This is
comparable to demand points that are within Ausgrid’s shoulder period in summer (see the demand points
between 9:00AM and 2:00PM in Figure 4-2). 141
Ausgrid, Tariff structure statement, 27 November 2015, p. 46.
70 New South Wales —Tariff structure statement— Draft decision
that the broad definition of the peak period that covers all business days
throughout the year has the potential to undermine economic efficiency even if
peak energy charges are set reflective of LRMC because the network is not
congested on all business days.
Ausgrid further stated ‘there appears to be economic advantages from adopting a
narrower peak period definition in winter’.142 However, Ausgrid proposed to delay
changing peak time periods pending further research on: 143
customer response to “sharper” peak price signals
the impact on future peak demand patterns of emerging technologies, such as solar
and electric vehicles.
We do not consider Ausgrid's proposal to delay changing peak time periods
contributes to the achievement of compliance with the distribution pricing principles.
We are not convinced by Ausgrid's reasoning for this delay.
Ausgrid did not explain what information it required from research on customer
response to sharper peak price signals. For example, does Ausgrid require information
regarding all customers or a just a particular customer class, such as residential
customers? Evidence suggests residential and small business customers are the main
contributors to the sharp evening peaks in winter.144 Ausgrid also did not discuss where
it was going to obtain such information. For example, does Ausgrid intend to conduct
trials with its own customers, or will it rely on external research? If the former, it is
unclear why Ausgrid cannot use its first tariff statement to transition to narrower peak
times. Given the low penetration of time-of-use enabled meters in its network,
introducing such a transition, even on a trial basis, would not impact revenue recovery.
Rather, Ausgrid would likely gain valuable information from such a transition for
designing charging window times for future tariff statements.
Regarding the impact of emerging technologies on peak demand patterns, the time
horizon is unclear. It is not clear whether such technologies will significantly impact
peak demand patterns in five, ten or more years. On the other hand, we consider each
tariff statement should begin the transition towards cost reflectivity to the greatest
extent practicable for the regulatory control period in which it applies. Ausgrid can
consider the peak demand impact of emerging technologies and their implication for
charging windows in future tariff statement proposals.
Ausgrid provided analysis showing that narrowing the winter peak period to between
5:00PM and 7:00PM (as suggested by Figure 4-3) would result in unacceptable bill
impact for its time-of-use customers. This is because a narrower peak period would
necessitate a rise in tariffs in order to recover residual costs (we discuss this further
142
Ausgrid, Tariff structure statement, 27 November 2015, p. 48. 143
Ausgrid, Tariff structure statement, 27 November 2015, p. 48. 144
Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and ToU charging windows, 9 June 2016.
71 New South Wales —Tariff structure statement— Draft decision
below).145 However, this first tariff statement provides Ausgrid the opportunity to
transition to the efficient peak window. We require Ausgrid to investigate the bill impact
of transitioning towards the 5:00PM to 7:00PM window with slightly wider intervals.146
Ausgrid can further mitigate the bill impact by making use of its tariff assignment policy
and developing opt in tariffs with narrower peak windows.
As noted above, Ausgrid's tariff statement proposal appeared to justify its peak period
on the basis that it reflects network congestion. We therefore assessed the tariff
statement proposal on this basis. In response to an information request, however,
Ausgrid explained that the recovery of residual costs influenced how it derived its
charging windows.147
Ausgrid stated, in theory, the peak period should coincide with the moment system
peak demand occurs. Prices in the peak period should equal LRMC, and prices
outside the peak period should equal zero (from a price signalling perspective).148 Strict
application of this efficient 'reference' tariff means recovering all residual costs through
the fixed charge. To mitigate the bill impact of the efficient tariff, Ausgrid proposed to
largely maintain the times of its charging windows as a transition. Wider peak charging
windows (compared to the reference tariff) as well as shoulder and off-peak windows
would enable Ausgrid to allocate some residual costs away from the fixed charge.149
We agree, in principle, with using charging windows to recover residual costs, and
hence mitigate the customer impact of transitioning to cost reflective tariffs.150
However, we do not consider Ausgrid provided sufficient evidence to show the
relationship between charging windows and residual costs. Ausgrid largely used
qualitative evidence to justify its proposal to use charging windows as a mechanism to
recover residual costs. In some cases, the evidence Ausgrid provided contradicted
information in its tariff statement proposal. For example, Ausgrid's proposed peak
tariffs exhibit much greater mark-ups over its shoulder and off peak rates compared to
Endeavour Energy and Essential Energy.151 On the other hand, Ausgrid expects to
recover a much smaller portion of residual costs through peak charges compared to
shoulder and off peak charges.152 It is, therefore, difficult to see the interactions
145
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, pp. 23–
25. 146
For example, Ausgrid can investigate the bill impact of the following winter peak windows: 5:00PM–8:00PM or
4:00PM–7:00PM, and 4:00PM–8:00PM. Ausgrid can similarly investigate the impact of transitioning to shorter peak
periods in summer. 147
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, pp. 22–
23. 148
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 20. 149
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, pp. 25–
26. 150
NER, cl 6.18.5(g) and (h). 151
For example, see AER, Issues paper: Tariff structure statement proposals: NSW electricity distribution network
service providers, March 2016, pp. 35–36. 152
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 27.
72 New South Wales —Tariff structure statement— Draft decision
between Ausgrid's proposed tariffs, including the residual costs they are supposed to
recover, and the length of the charging windows.
In its revised proposal, we require Ausgrid to provide quantitative evidence to more
clearly demonstrate the interaction between its recovery of residual costs and its peak,
shoulder and off peak times. In particular, we require Ausgrid to demonstrate how
amendments to the charging windows redistribute the recovery of residual costs and
how this, in turn, affects tariff levels.
Endeavour Energy
We are not satisfied Endeavour Energy's proposed times for its charging windows on
business days contribute to the achievement of compliance with the distribution pricing
principles. We do not consider Endeavour Energy achieved the appropriate balance
between greater cost reflectivity and customer ability to respond, for the following
reasons:
we consider 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
we consider the times of peak hours on weekdays should be different between
summer and winter (we discuss this further in section 4.2.2)
we consider Endeavour Energy did not provide sufficient evidence and reasoning to
justify its method for determining the threshold between peak, shoulder and off
peak hours.
In its revised proposal, we require Endeavour Energy to:
amend its charging windows to better reflect network congestion (which Endeavour
Energy indicated in its tariff statement proposal is the primary driver of its charging
windows). We consider the peak period should be shorter than Endeavour
Energy's proposal, and peak times should differ between summer and winter.
Based on available evidence, we consider Endeavour Energy's peak hours occurs
approximately 3:00PM to 5:00PM in summer and 6:00PM to 8:00PM in winter.153 In
its revised proposal, Endeavour Energy may initiate the transition to more cost
reflective charging windows with longer peak hours, with the view of achieving
greater cost reflectivity in subsequent regulatory control periods.
provide evidence and reasoning to justify its method for determining the threshold
between peak, shoulder and off peak hours. In doing so, Endeavour Energy should
note our concerns with the 10 and 20 per cent thresholds, as well as seasonality
(we discuss both issues below and in section 4.2.2).
The rest of this section sets out our reasons for our draft decision and directions to
Endeavour Energy.
153
Endeavour Energy, RE: Endeavour - TSS info request no.1 - Load profiles and ToU charging windows, 10 June
2016.
73 New South Wales —Tariff structure statement— Draft decision
Figure 4-4 summarises Endeavour Energy's proposed charging windows. The hours
for the peak, shoulder and charging windows are largely consistent with Endeavour
Energy's current charging windows.
Figure 4-4 Endeavour Energy's proposed charging windows
Source: Endeavour Energy, Tariff structure statement, 27 November 2015.
Note: Endeavour Energy’s ‘high’ and ‘low’ seasons apply only to the demand component of certain TOU tariffs.
The demand charges apply during peak hours.
Endeavour Energy stated it based the timing of peak, shoulder and off-peak periods
and its high and low seasons on historical peak demand at the total network level.
Endeavour Energy stated it is important that its time of use and seasonal definitions
are monitored to ensure that they continue to accurately reflect times of peak network
congestion.154
Endeavour Energy justified its peak and shoulder hours using the highest demand
intervals in recent years. Endeavour Energy normalised each point against the peak
demand interval for its year to account for year-on-year variations. Endeavour Energy
stated its peak period contains data points within 10 per cent of the peak demand for
each year. The shoulder period contains the data points between 10 per cent and 20
per cent of the peak demand interval for that year.155 Endeavour Energy presented its
analysis in Figure 4-5, which includes summer and winter data points.
154
Endeavour Energy, Tariff structure statement, 27 November 2015, p. 72. 155
Endeavour Energy, Tariff structure statement, 27 November 2015, p. 72.
Tariff Type of day Season 12
AM
6 7 8 9 10 11 12
PM
1 2 3 4 5 6 7 8 9 10 11
Business
day
High, Low
Non-
business
High, Low
Business
day
High, Low
Non-
business
High, Low
Peak
Shoulder
Off peak
All other
tariffs
Residential
time of use
74 New South Wales —Tariff structure statement— Draft decision
Figure 4-5 Endeavour Energy's peak period definition
Source: Endeavour Energy, Tariff structure statement, 27 November 2015, p. 73.
From the evidence in Figure 4-5, we consider Endeavour Energy should reduce the
number of hours in its peak period. It shows data points after approximately 6:00PM
appear noticeably lower than data points around 1:00PM, which is the threshold
between peak and shoulder periods. Figure 4-5 also suggests Endeavour Energy
should reduce the number of hours in its shoulder period.156
Further, Endeavour Energy's method of defining the peak period as those data points
within 10 per cent of the year's peak demand includes both summer and winter data in
the same analysis. We consider Endeavour Energy should assess summer and winter
demand data separately. As we discuss in more detail in section 4.2.2 below, there is a
clear difference in the levels and timing of peak demand during summer and winter
months. We therefore require Endeavour Energy to introduce different times in its
charging windows for different seasons.
Lastly, we require Endeavour Energy to provide more robust explanation as to why
they used the 10 per cent and 20 per cent thresholds to define peak and shoulder (and
by extension, off peak) hours. In particular, we require Endeavour Energy to clearly
demonstrate the link between its 10 per cent and 20 per cent thresholds and network
congestion.
We do not consider Endeavour Energy provided sufficient explanation as to why data
points within 10 per cent of a particular year's peak demand should define the peak
period. For example, why is 10 per cent a more appropriate threshold for the peak
156
Figure 4-5 suggests the shoulder period should begin at 10:00AM, rather than 7:00AM. There is a single data
point within the 10 and 20 per cent band at 8:00AM, which appears to be an outlier compared to all the other data
points.
75 New South Wales —Tariff structure statement— Draft decision
period than, say, five percent or one per cent? Similarly, Endeavour Energy did not
appear to explain why the 10 to 20 per cent range is an appropriate threshold to define
the shoulder period.
Endeavour Energy's tariff statement proposal stated that its peak period 'accurately'
targets the top 10 per cent of demand periods. Similarly, its shoulder period 'accurately'
targets demand periods within the 10 and 20 per cent band.157 However, the tariff
statement proposal does not appear to provide sufficient explanation on these
thresholds' link with network congestion. We understand it is absolute demand levels
that cause network congestion and, in turn, informs distributors' investment decisions.
We are not convinced that normalised demand data signals network congestion.
Essential Energy
We are not satisfied Essential Energy's proposed times for its charging windows on
business days contribute to the achievement of compliance with the distribution pricing
principles. We are not satisfied that Essential Energy has achieved the appropriate
balance between greater cost reflectivity and customer ability to respond, for the
following reasons:
Essential Energy’s network does not appear to peak on summer mornings (see
Figure 4-7)
it is unclear whether the magnitude of Essential Energy’s winter morning peak
warrants an additional peak charging window (see Figure 4-7)
we consider a single evening peak window will make it easier for customers to
move their consumption to shoulder/off-peak periods
there appears to be a seasonal component to the demand profiles in Essential
Energy's network (we discuss this further in section 4.2.2).
In its revised proposal, we require Essential Energy to:
amend its charging windows to better reflect network congestion (which Essential
Energy indicated in its tariff statement proposal is the primary driver of its charging
windows). Specifically, we require Essential Energy to implement a single evening
peak window. We also require Essential Energy to extend its off peak hours during
weekdays.
o Based on available evidence, we consider Essential Energy's off peak hours
can extend to 9:00AM on weekdays. In its revised proposal, Essential
Energy may initiate the transition to more cost reflective charging windows,
with the view of achieving greater cost reflectivity in subsequent regulatory
control periods.
explain how it determined the thresholds between its peak, shoulder and off peak
hours.
157
Endeavour Energy, Tariff structure statement, 27 November 2015, p. 72.
76 New South Wales —Tariff structure statement— Draft decision
The rest of this section sets out our reasons for our draft decision and directions to
Essential Energy.
Figure 4-6 summarises Essential Energy's proposed charging windows. The hours for
the peak, shoulder and charging windows are largely consistent with Essential
Energy's current charging windows.
Figure 4-6 Essential Energy's proposed charging windows
Source: Essential Energy, Tariff structure statement, 27 November 2015.
Essential Energy proposed morning and evening peaks (7:00AM–9:00AM, and
5:00PM–8:00PM) during weekdays. In its tariff statement proposal, Essential Energy
appeared to justify its peak period on the basis that it reflects network congestion (see
Figure 4-7).158 Essential Energy's tariff statement proposal did not appear to explain
how it determined the thresholds between peak, shoulder and off peak hours.
Figure 4-7 Essential Energy average daily summer and winter system
demand 2014–15 (MW)
Source: Essential Energy, Tariff structure statement, 27 November 2015, p. 27.
We consider the evening window to be more cost reflective, as Essential Energy's
network peaks in the evening at both a residential and total system level, and in both
summer and winter.
158
Essential Energy, Tariff structure statement, 27 November 2015, pp. 26–27.
Tariff Type of day Season 12
AM
6 7 8 9 10 11 12
PM
1 2 3 4 5 6 7 8 9 10 11
Weekday NA
Weekend NA
Peak
Shoulder
Off peak
All tariffs
77 New South Wales —Tariff structure statement— Draft decision
However, we are not satisfied a morning peak window is cost reflective. Firstly, there
does not appear to be a morning peak in summer. Demand in summer rises steadily
from a low at about 3:30AM until the system peak demand at around 5:30PM.
While there is an increase in demand between 7:00AM–9:00AM in winter, it is
questionable whether the magnitude of that demand warrants an additional morning
peak period. Networks set capacity levels to meet the peak demand. Figure 4-7 shows
the higher evening peak demand is more likely to be contributing to network
congestion in Essential Energy's network, and thus network expenditure.
Further, Figure 4-7 shows that the 7:00AM–9:00AM period during weekdays has lower
demand on average than the ‘evening peak’ on weekends (around 5:00PM–
7:00PM).159 Since Essential Energy defines weekends as off-peak all day, this implies
the off-peak period can extend to 9:00AM (at least) on weekdays.
Overall, we are not satisfied that two peak charging windows (morning and evening)
applicable year round is cost reflective. As discussed above, there is evidence
Essential Energy can extend its off-peak hours for weekdays (and hence shorten its
shoulder and/or peak hours). In addition, two peak charging windows (morning and
evening) provide:
an increased level of complexity with limited efficiency gains (see cost reflective
discussion above), and
reduced opportunity for customers to respond to changes to their tariff via their
usage decisions
While there may be some merit to maintaining consistency with current tariff structures
as Essential Energy has done, we are not satisfied this is sufficient. Firstly we consider
two demand charging windows increase complexity.160 Secondly, the two peak
charging windows provide customers with a reduced opportunity to move their usage
outside of peak and shoulder windows.161 In our view a single peak window will be
simpler for small customers to understand and manage their usage in response to
network peak demand.
Essential Energy indicated that amending its charging windows would be costly to
implement. Essential Energy stated that the meters in its network are of a nature that
any changes to the time of use profiles would require a manual update for each meter.
This would require a site visit to each installed meter to complete these program
updates. Essential Energy stated the 312,000 meters are widely distributed across its
159
In winter 2014–15, for example, the average weekend experienced its highest demand levels of 1,879 MW at
approximately 6:30PM. In comparison, the peak day of 2014–15 (as opposed to the average weekday of 2014–15)
experienced its highest morning demand level of 1,821MW at approximately 9:30AM. Essential Energy, RE:
Essential - TSS info request no.1 - Load profiles and ToU charging windows, 30 May 2016. 160
NER, cl.6.18,5(h)(3). 161
NER, cl.6.18,5(i).
78 New South Wales —Tariff structure statement— Draft decision
network and travel time will vary greatly between each site. This would be extremely
difficult to execute in a timely manner and would involve significant cost.162
Essential Energy did not provide an estimate of these costs. Hence, it is unclear
whether such costs would inhibit application of charging windows that are more cost
reflective.163 In its revised proposal, we expect Essential Energy to provide an estimate
of these costs, including inputs and assumptions used to derive the estimate. Essential
Energy should also consider whether it could reduce costs by incorporating the meter
updates with ongoing activities (such as regular meter reads), rather than proposing it
as a discrete one-off project.
4.2.2 Seasonality
As we noted earlier, the aim of the pricing rules is to encourage more cost reflective
pricing.164 If there is evidence that demand patterns differ between seasons, we
consider differentiating charging windows by season would contribute to the
achievement of compliance with the distribution pricing principles.
Ausgrid
We are satisfied Ausgrid's introduction of seasonality in its charging windows
contributes to the achievement of compliance with the distribution pricing principles. As
we discussed in section 4.2.1, there is evidence that the pattern and levels of network
congestion differs between summer and winter.165
However, we do not agree with the times Ausgrid allocated for peak, shoulder and off
peak periods, which is largely consistent with its current charging windows (see section
4.2.1). We consider the introduction of seasonality is 'in name only'. There is no real
movement towards greater cost reflectivity since the times of the charging windows are
still the same across summer and winter. Further, Ausgrid's indicative tariff levels for its
time of use and demand tariffs appear to be the same for winter and summer.166
Customers will still face limited opportunity to shift usage to off peak times, despite
Ausgrid providing evidence that narrower peak times may be justified, especially in
winter.
As we discussed in section 4.2.1, we require Ausgrid to amend the times of its peak,
shoulder and off peak hours to reflect different patterns of network congestion
according to the season.
162
Essential Energy, Response: TSS information request no. 1: Load profiles and charging windows for TOU tariffs, 9
June 2016, p. 3. 163
NER, cl 6.18.5(f)(1). 164
NER, cl 6.18.5(a). 165
Ausgrid, Tariff structure statement, 27 November 2015, pp. 47–48. 166
Ausgrid, Tariff structure statement: Appendix 10: Indicative annual distribution use of system pricing schedules, 27
November 2015.
79 New South Wales —Tariff structure statement— Draft decision
Origin expressed concern about Ausgrid's proposal to include seasonality in its
charging windows. Origin considered seasonality will hinder the ability of residential
customers to understand price signals. Origin stated it appreciated the intent of
seasonal demand signals, but considers multiple charges will not help customers.167
We agree seasonality adds some complexity to tariff structures. However, we have not
seen evidence that seasonality will hinder the ability of residential customers to
understand price signals.
We also note that these signals only apply to customers assigned to time-of-use tariffs
(not block or flat rate tariffs). This means the introduction of seasonality to customers
would be gradual over time.
Endeavour Energy
With respect to seasonality, we are not satisfied Endeavour Energy's proposed
charging windows contribute to the achievement of compliance with the distribution
pricing rules. Given evidence that seasonality affects demand profiles, we do not
consider the proposed charging windows reflect network congestion across different
seasons of the year.ge, We, therefore, require Endeavour Energy to amend the times
of its charging windows having regard to the different levels of congestion in different
seasons. In redefining the times of its charging windows by season, Endeavour Energy
should have regard how it determined the thresholds between peak, shoulder and off
peak hours (see section 4.2.1).
Figure 4-8 shows the highest demand intervals in Endeavour Energy's network from
the past few years in the months that they occurred. These are the same data points
as those in Figure 4-5. Using Endeavour Energy's own definition of the peak and
shoulder periods (see section 4.2.1), Figure 4-8 suggests Endeavour Energy should
not include a peak window during the winter months.168 Although, as we discussed in
section 4.2.1, we do not consider Endeavour Energy adequately explained how it
determined the thresholds between peak, shoulder and off peak periods.
167
Origin, Submission: Networks NSW tariff structure statements, 10 May 2016, p. 2. 168
That is, all of the demand intervals in the winter months are in the range of 10 to 20 per cent of the peak demand
for the year. We discussed this in section 4.2.1.
80 New South Wales —Tariff structure statement— Draft decision
Figure 4-8 Distribution of highest demand intervals by month
Source: Endeavour Energy, Tariff structure statement, 27 November 2015, p. 73; Endeavour Energy, RE: Endeavour
- TSS info request no.1 - Load profiles and ToU charging windows, 10 June 2016.
We consider Endeavour Energy's peak hours of 1:00PM to 8:00PM applicable all year
on business days do not reflect the level of congestion in the network. Figure 4-9
shows the average daily demand profile on Endeavour Energy's network for summer
and winter. It shows that network demand reaches its highest level at different times in
different seasons: approximately 3:00PM in summer and approximately 6:30PM in
winter.
It also shows Endeavour Energy's network experiences much narrower peaks in winter
evenings compared to summer evenings (similar to Figure 4-7 for Essential Energy).169
For example, demand levels in winter between 1:00PM and 5:00PM are below the
levels seen in the 7:00AM to 1:00PM shoulder period.170 This suggests the peak period
should not begin until 5:00PM in winter.171
169
Endeavour Energy, RE: Endeavour - TSS info request no.1 - Load profiles and ToU charging windows, 10 June
2016. 170
This applies when comparing the same data type: that is, when comparing weekday with weekday, or weekend
with weekend. 171
Similarly, demand after 5:00PM in summer are approximately the same levels seen in the 7:00AM to 1:00PM
shoulder period (in summer). This suggests the peak period should end at approximately 5:00PM in summer.
0.75
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Data: FY 12/13, 13/14 and 14/15
High(Winter)
Low HS
81 New South Wales —Tariff structure statement— Draft decision
Figure 4-9 Endeavour Energy average daily summer (2014–15) and
winter (2015) system demand (MW)
Source: Endeavour Energy, RE: Endeavour - TSS info request no.1 - Load profiles and ToU charging windows, 10
June 2016.
Essential Energy
With respect to seasonality, we are not satisfied Essential Energy's proposed charging
windows contribute to the achievement of compliance with the distribution pricing rules.
Given evidence that seasonality affects demand profiles, we do not consider the
proposed charging windows reflect network congestion across the different seasons of
the year. We, therefore, require Essential Energy to amend the times of its charging
windows having regard to different levels of congestion in different seasons. In
redefining the times of its charging windows by season, Essential Energy should have
regard to how it determined the thresholds between peak, shoulder and off peak hours
(see section 4.2.1).
Figure 4-7 shows that Essential Energy's network peaks at different times:
approximately 5:30PM in summer and approximately 6:30PM in winter. Further, Figure
4-7 shows the shape of the evening peak in winter is narrower compared to the
summer evening peak. This may suggest that the peak period for summer should be
slightly wider for summer than in winter.
4.2.3 Charging windows for weekends/non-business days
We do not consider Ausgrid's and Endeavour Energy's proposed application of
shoulder rates on weekends contributes to the distribution pricing principles. We have
not seen evidence that charging shoulder rates on weekends is cost reflective in
Ausgrid's and Endeavour Energy's network.
We discuss these considerations below.
Ausgrid
We are not satisfied Ausgrid's application of shoulder charging windows on non-
business days contributes to the achievement of compliance with the distribution
pricing principles. We require Ausgrid to apply off peak rates for all hours of weekends
1,000
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82 New South Wales —Tariff structure statement— Draft decision
(and public holidays). Otherwise, we require Ausgrid to explain in greater detail its
rationale for applying shoulder rates to customers on non-business days. In doing so,
Ausgrid should have regard to how it determined the thresholds between peak,
shoulder and off peak hours and the recovery of residual costs (see section 4.2.1).
Ausgrid designated the period between 7:00AM and 10:00PM of weekends and public
holidays to be shoulder period for all of its time of use tariffs (see Figure 4-1). Figure
4-10 shows it experiences significantly lower levels of demand on weekends.172 This
suggests off peak pricing should apply to all hours of weekends.
Figure 4-10 Ausgrid average daily summer (2015–16) and winter (2015)
system demand (MW)
Source: Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and ToU charging windows, 2 June
2016.
In response to an information request, Ausgrid clarified it included shoulder charging
windows on weekends to recover residual costs (see also section 4.2.1). Ausgrid
explained that including shoulder and off peak windows (rather than just one window
outside of peak times) is justifiable if energy consumption in the shoulder period is
more inelastic than consumption in the off peak period. In that case, the welfare gain
from the lower off peak price would be higher than the welfare loss from the higher
shoulder price.173 Ausgrid stated:174
The inclusion of weekends in the shoulder period definition may also be
justified on economic grounds given that it is likely that residential energy
consumption may be more inelastic at these times, particularly during the
summer and winter months of the year when households are likely to place a
high value on their electricity use for cooling and heating purposes.
It does not appear Ausgrid provided evidence regarding this assertion, particularly for
the time period it proposed (7:00AM to 10:00PM). Further, Ausgrid did not justify its
172
For example, the highest levels of demand on the average summer weekend is approximately 3,082 MW at around
5:00PM. By comparison, demand reaches approximately 3,300 MW at around 6:00AM on summer weekdays
(which Ausgrid designated as off peak). 173
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 28. 174
Ausgrid, Ausgrid's approach to defining time-of-use periods for its tariff structure statement, 28 June 2016, p. 29.
1,000
1,500
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2,500
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Eastern Standard Time of Day
Summer 2015/16
Peakday 1 Peakday 2 Weekday Weekend
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Peak Day Weekday Weekend
83 New South Wales —Tariff structure statement— Draft decision
proposal to include the same shoulder periods for non-residential customers. Load
profiles of such customers in Ausgrid's network are flat on weekends with much lower
demand levels compared to business days.175 Indeed, Ausgrid currently has off-peak
rates on weekends for its medium and large business customers (such customers
have annual consumption greater than 40MWh).176
Endeavour Energy
We are not satisfied Endeavour Energy's application of shoulder charging windows for
residential customers on non-business days contributes to the achievement of
compliance with the distribution pricing principles. We require Endeavour Energy to
apply off peak rates for all hours of weekends (and public holidays). Otherwise, we
require Endeavour Energy to explain in greater detail its rationale for applying shoulder
rates for residential customers on non-business days. In doing so, Endeavour Energy
should have regard to how it determined the thresholds between peak, shoulder and
off peak hours (see section 4.2.1).
Endeavour Energy proposed to apply off peak rates all day on non-business days for
its non-residential time of use and demand tariffs. Figure 4-9 shows average demand
levels on weekends are noticeably lower than weekdays. Hence, we consider applying
off peak rates for the entire weekend for its non-residential time of use and demand
tariffs is cost reflective.177
On the other hand, Endeavour Energy designated the period between 7:00AM and
10:00PM of non-business days to be shoulder period for its residential time of use tariff
(see Figure 4-4). We consider this is inconsistent with Endeavour Energy's
statement:178
… we do not believe that separating load profiles by customer type is relevant
to the calculation of charging windows that are designed to target demand at
the network level. To separate peak demand periods by customer type would
suggest that Endeavour Energy builds a separate network to supply the loads
of each different customer class. This is clearly not the case in a shared
network.
It is therefore unclear why Endeavour Energy does not apply off peak rates all
weekend to all of its customers, including residential customers.
Essential Energy
175
Ausgrid, Response to Ausgrid - TSS info request no.2 - Load profiles and ToU charging windows, 2, 8 and 9 June
2016. 176
Ausgrid, Initial pricing proposal, May 2015, p. 14. 177
NER, cl 6.18.5(a). 178
Endeavour Energy, Re: TSS info request no. 1: Load profiles and TOU charging windows: Response to Q1, 31
May 2015.
84 New South Wales —Tariff structure statement— Draft decision
Essential Energy defined all hours of weekends as off peak. We are satisfied this
contributes to the achievement of compliance with the distribution pricing principles.
Figure 4-7 shows the level of demand (and, therefore, congestion) in Essential
Energy's network is lower on weekends than it on weekdays. We consider applying off
peak tariffs on weekends is cost reflective and enables customers to mitigate the
impact of changes in tariffs through their usage decisions.179 For example, it would
enable households to transfer the use of some appliances from weekdays to
weekends.
4.2.4 Harmonisation of charging windows
We acknowledge submissions from some stakeholders advocating the benefits of
harmonising charging windows. However, we are not convinced the benefits are
greater than the costs of harmonising charging windows where the pattern of network
congestion may differ between distribution networks. We consider the NSW distributors
should amend their charging windows so they are more cost reflective (that is, they
better reflect the level of congestion in their respective networks).180 We consider this
would contribute to the achievement of compliance with the distribution pricing
principles. If the load profile is different on each network, it follows that cost reflective
charging windows would also differ. However, we have not received evidence that this
is the case, and the times for congestion appear similar across networks (see sections
4.2.1 to 4.2.3). This would mean the NSW distributors should more closely align their
charging windows.
EnergyAustralia, the Energy and Water Ombudsman NSW (EWON), the Council of
Social Service NSW (NCOSS) and the Public Interest Advocacy Centre (PIAC)
expressed concern regarding the different charging windows in the NSW distributors’
tariff structure statement proposals. They submitted consistency is desirable at this
stage to reduce complexity and implementation costs. 181
Stakeholder submissions did not quantify or discuss in great detail the savings
harmonisation would produce. It is also unclear to what extent retailers can pass such
savings on to consumers. Endeavour Energy also pointed out that retailers have
already invested in systems to manage multiple charging windows in different networks
in the National Electricity Market. It is not apparent that the stranding of this sunk
investment will result in savings to customers.182
179
NER, cll 6.18.5(f), (g) and (h)(3). 180
Otherwise, the NSW distributors should provide detailed explanations for departing from cost reflectivity. 181
EnergyAustralia, Submission: Issues paper: Tariff structure statement proposals: NSW, 6 May 2016, pp. 2–9;
EWON, Submission: AER issues paper, 3 May 2016, p. 4; NCOSS, Submission: AER issues paper on the NSW
tariff structure statements, May 2016, pp. 8–9; PIAC, Submission: Response to the AER’s issues paper: NSW
TSS, 6 May 2016, p. 3. 182
Endeavour Energy, RE: Endeavour - TSS info request no.1 - Load profiles and ToU charging windows, 2 June
2016.
85 New South Wales —Tariff structure statement— Draft decision
5 Tariff levels
The distribution pricing principles require each tariff to be based on the long run
marginal cost of providing the service to which it relates to the retail customers
assigned to that tariff.183 The Rules define long run marginal cost as the cost of an
incremental change in demand over a period of time in which all factors of production
can be varied.184 This is also known as the forward-looking cost. This chapter sets out
our considerations on the NSW distributors' approaches to calculating long run
marginal cost, passing those costs through to customers and dealing with residual
costs.
5.1 Calculation of long run marginal cost
When tariffs accurately reflect the marginal or forward-looking cost of increasing
demand, consumers may make informed choices about their electricity usage. Tariff
reform seeks to promote additional investment in the network by distributors only when
consumers value increased demand more than the cost of delivering the additional
network capacity necessary to meet that demand.
The estimation of long run marginal costs involves three key steps, which are to:
choose the overall approach (the two principal choices are the Turvey approach
and the average incremental cost approach)
define what costs are considered ‘marginal’ vs. what costs are considered
‘residual’, and
define what timeframe is considered the ‘long run’.
We consider elements of the NSW distributors' long run marginal cost methodology
contribute to compliance with the distribution pricing principles better than other
elements of their methodology. That said, taken as a whole, on balance, we are
satisfied that the distributors' proposed methodology sufficiently complies with the
distribution pricing principles for this initial round of tariff reform.
Accordingly, we do not require the NSW distributors to make changes to their
methodologies in their revised proposals. Nonetheless, we elaborate here on the
elements of their methodologies we consider are less reflective of the distribution
pricing principles. We do so to provide guidance to the NSW distributors, and the
industry more generally, on our views on the direction the industry should be heading
in in order to maintain compliance with the distribution pricing principles in the future.
Tariff reform is a long tern project. Accordingly, in each round of tariff structure
statements, we envisage distributors would likely need to propose additional reforms in
order to be compliant with the rules. In the second round of tariff structure statements,
183
NER, cl. 6.18.5(f). 184
NER, Chapter 10—Glossary.
86 New South Wales —Tariff structure statement— Draft decision
we encourage the NSW distributors to make further improvements and refinements to
their long run marginal cost methodologies.
We consider that the choice of overall approach or methodology proposed by each
NSW distributor—the average incremental cost approach—is in accordance with the
distribution pricing principles. On the other hand, the elements of their methodology
which we consider could be improved in the future to better promote the distribution
pricing principles are:
The NSW distributors' definition of 'marginal' costs does not capture all major types
of marginal costs as it excludes replacement capital expenditure and related costs
The NSW distributors' timeframe over which they forecast costs is too short to be
considered 'long term'
Definition of marginal costs
The definition of long run marginal costs in the Rules is the cost of an incremental
change in demand over a period of time in which all factors of production can be
varied.185
In the long run, the level of capacity in a distribution network is a factor of production
that can be varied. When assets come to the end of their useful life, distributors have a
choice of maintaining their current level of capacity, increasing capacity or decreasing
capacity, depending on demand and use of the network. Distributors should not adopt
a default position of maintaining existing capacity levels, especially where existing
networks have spare capacity and where there are changing patterns of use. To
promote network capacity in the long run being at a level consumers' value, we
consider replacement capital expenditure (and associated operating expenditure)
should be included within long run marginal cost estimates.
This differs from the approach that most distributors have reflected in their proposals
for this first round of tariff structure statements, which have typically excluded
replacement capex from long run marginal cost estimates. The NSW distributors'
proposals are no different.186 The only exception appears to be one of the Queensland
distributors who has included a small portion of replacement capex within the
estimation of long run marginal cost.187 Distributors generally base their LRMC
estimates on augmentation capex alone on the basis that this is the only ‘growth’
capex. However, this reasoning overlooks the point made above that the level of
network capacity (whether to increase, maintain or decrease) is not fixed in the long
run.
185
NER, Chapter 10—Glossary. 186
Ausgrid, Tariff structure statement, 27 November 2015, p. 40; Endeavour Energy, Tariff structure statement, 27
November 2015, p. 68; Essential Energy, Tariff structure statement, 27 November 2015, p.57; Houston Kemp,
Estimation of long run marginal cost and other concepts related to the distribution pricing principles - prepared for
Essential Energy, November 2015, pp.11-12. 187
Ergon Energy, Tariff structure Statement 2018–2020 appendices, 27 November 2015, p.25.
87 New South Wales —Tariff structure statement— Draft decision
We encourage the NSW distributors, along with other distributors, to review this
element of their long run marginal cost methodology in the lead-up to the next round of
tariff structure statements.
Definition of long run
As noted above, the definition of long run marginal costs in the Rules is the cost of an
incremental change in demand over a period of time in which all factors of production
can be varied.188 And in the long run, the level of capacity in a distribution network is
variable. Accordingly, theoretically the 'long run' would match the life of the assets.
Some distribution network assets have very long lives (e.g. in excess of 60 years).
However, it would likely be impractical to produce accurate forecasts over such a long
horizon.
Distributors have typically used timeframes of between 10 and 40 years to estimate
long run marginal costs.189 We consider there is no clear correct timeframe, and we are
satisfied that a range of timeframes would be compliant with the rules. However, the
timeframe must be long enough to allow a significant number of factors of production to
change—and a key factor of production is the level of capacity the network is built to
withstand. The timeframes proposed by distributors outside NSW is more in line with
the long lives of network assets. Endeavour and Essential appear to have proposed
timeframes of around or less than 5 years.190 This is out of step with the rest of the
industry and appears too short to allow a significant number of factors of production to
change (i.e. the capacity of the network). That is, the timeframes over which
Endeavour and Essential have forecast their costs do not reflect the 'long term' as well
as most other distributors' proposals.
As noted above, for this first round of tariff structure statements we do not require the
NSW distributors to change their long run marginal cost methodologies to comply with
the rules. However, we encourage the NSW distributors to review this element of their
long run marginal cost methodology in the lead-up to the next round of tariff structure
statements.
5.2 Recovery of residual costs
Not all of a distributor's costs are forward looking and variable. Costs not captured by
long run marginal cost estimates are called residual costs. Together, long run marginal
costs and residual costs form a distributor's total costs. The Rules require total costs
be recovered in a way which minimises distortions to price signals for efficient usage
188
NER, Chapter 10—Glossary. 189
Ausgrid, ActewAGL, SAPN, CitiPower, Powercor, AusNet Services and United Energy 190
HoustonKemp, Estimation of long run marginal cost and other concepts related to the distribution pricing principles
- prepared for Essential Energy, November 2015, pp.11-12; HoustonKemp, Estimation of long run marginal cost
and other concepts related to the distribution pricing principles - prepared for Endeavour Energy, November 2015,
pp.11-12.
88 New South Wales —Tariff structure statement— Draft decision
resulting from tariffs reflecting long run marginal cost.191 In this context, non–
distortionary tends to mean unresponsive to customer usage.
In this section, we assess the NSW distributors' proposals on recovery of residual
costs through:
Fixed charges—The NSW distributors' have proposed to moderately increase their
fixed charges in order to recover a greater portion of their residual costs through
fixed charges
Usage rates—The NSW distributors' proposals for declining block tariff structures
rests on their view on how to recover residual costs. The design of their time-of-use
usage rates also appears connected to their residual cost recovery methodology, at
least for Ausgrid.
Re-balancing towards fixed charges
We are satisfied that the moderate increases in fixed charges proposed by the NSW
distributors contributes to compliance with the distribution pricing principles. This is
because we consider this approach appropriately balances the distribution pricing
principles to:
Recover residual costs in a manner which minimises distortions to efficient price
signals.192
Take into account the impact on customers of tariff changes from year to year
including the desirability for a reasonable transition period towards more cost
reflective tariffs.193
A significant proportion of a distributor’s revenue requirement is made up of the fixed
capital costs of previous investments in network assets. These fixed costs are not
affected by current and future consumption decisions. Therefore, from an economic
perspective, fixed costs do not provide a basis for signalling the costs of network use.
The relevant costs to signal the costs of network use are marginal (forward looking)
costs. However, in the case of natural monopolies, pricing based on marginal cost
alone does not provide sufficient revenue to recover a distributor’s total efficient costs.
There are fixed (or “residual”) costs which must be recovered by other means, and the
key economic consideration in the rules is reflected in the distribution pricing principle
that these residual costs are recovered in a manner which minimises distortions to
efficient price signals.194 That is, minimises distortions compared with the situation
where network prices are based on marginal cost alone. Setting usage charges
significantly higher than marginal cost to recover all or most residual costs would be
expected to distort consumption decisions because consumers are facing usage
191
NER, cl. 6.18.5(g)(3). 192
NER, cl. 6.18.5 (g). 193
NER, cl. 6.18.5(h)(1). 194
NER, cl. 6.18.5 (g).
89 New South Wales —Tariff structure statement— Draft decision
charges which are too high. In contrast, recovering a greater proportion of residual
costs through fixed charges is expected to lead to smaller distortions, because by their
nature, the level of fixed charges has less impact on consumption decisions.
Accordingly, the NSW distributors’ modest re-balancing towards fixed charges is
consistent with the efficiency considerations in the rules. There is a balance here as
excessive fixed charges would likely not be consistent with the customer impact
distribution pricing principle, especially where increases in fixed charges were
significant and occurred over a short period of time.195 We are satisfied that the NSW
distributors' proposal reflects an appropriate balance between these principles.
We consider the level of revenue in the applicable distribution determination, and
changes in the level of total revenue between distribution determinations, are relevant
considerations for the AER to take into account in assessing whether a distributor's
tariff structure statement proposal contributes to compliance with the customer impact
distribution pricing principle. 196 This is because the customer impact principle refers to
the impact on customers from changes in tariffs from one regulatory year to the next—
and changes in tariffs between years are driven by both changes in total revenue and
changes in tariff structures.
The NSW distributors’ proposed tariff re-balancing is impacted by our recent
distribution determinations which significantly reduced the total revenue requirements,
compared with the previous regulatory period. While the tariff structure statement
determines the structure of tariffs, the revenue determination is also important as the
allowed revenue sets the level of prices. So any relative re-balancing between tariff
components due to changes in tariff structures, or re-balancing within the same tariff
structure will have either a bigger or smaller impact on customers depending on the
total revenue to be recovered from customers. The recent revenue determinations for
the NSW distributors significantly reduced the allowed revenue. This means that,
despite the re-balancing towards fixed charges, fixed charges will not be significantly
higher than they were in the previous regulatory control period. We consider this
means the re-balancing will have less of an impact on customers, than if the re-
balancing occurred at a time when revenue was not falling or was increasing. A time
series of the fixed charges for residential customer on the NSW distributors' declining
block tariffs is displayed in the table below.
Table 5-1 NSW residential declining block tariffs (nominal, $)—
Historical, current and forecast
2013-14 2014-15 2015-16 2016-
17197
2017-18 2018-19
195
NER, cl. 6.18.5(h)(1). 196
NER cl 6.18.5(h) 197
The recent undertaking for Ausgrid and Endeavour for 2016-17 prices held prices constant in real terms. The CPI
increase was 1.51% on the 2015-16 prices. Therefore the proposed prices for Ausgrid and Endeavour Energy in
this table will not apply.
90 New South Wales —Tariff structure statement— Draft decision
Ausgrid
Fixed charge ($/year) 142.17 145.71 119.54 122.53 125.60 128.74
Block 1 (c/kWh) 12.915 12.86 10.81 11.05 11.32 11.6
Block 2 (c/kWh) 15.375 13.96 10.52 8.72 8.89 8.97
Block 3 (c/kWh) 19.475 14.96 10.27 8.22 8.35 8.35
Simple average (c/kWh)
15.92
13.93
10.53
9.33
9.52
9.64
Endeavour Energy
Fixed charge ($/year) 127.75 130.85 119.32 124.10 124.10 127.75
Block 1 (c/kWh) 10.8934 10.8934 9.7212 9.96 9.91 9.74
Block 2 (c/kWh) 14.5818 12.4941 9.1315 9.35 9.12 8.71
Block 3 (c/kWh)
8.0407 8.23 7.90 7.38
Simple average (c/kWh)
12.74
11.69
8.96
9.18
8.98
8.61
Essential Energy
Fixed charge ($/year) 306.09 313.57 281.99 311.95 320.93 332.13
Block 1 (c/kWh) 16.8301 16.1353 9.4654 10.355 10.6637 11.0534
Block 2 (c/kWh) 16.8301 16.1353 9.1474 9.9595 10.1876 10.5506
Block 3 (c/kWh) 16.8301 16.1353 8.8295 9.5676 9.7493 10.0604
Simple average (c/kWh) 16.8301 16.1353 9.15 9.96 10.20 10.55
Source: Ausgrid tariff structure statement proposal; Endeavour Energy tariff structure statement proposal; Essential
Energy tariff structure statement proposal; AER analysis
After factoring in the re-balancing, the NSW distributors’ proposed fixed charges for
residential customers at the end of the tariff structure statement period (2018-19)
compared to current 2015-16 levels would see these increase by 8 per cent for
Ausgrid, 7 per cent for Endeavour Energy, and 18 per cent for Essential Energy.
However, compared to the previous regulatory period (2013-14 and 2014-15) the fixed
charge is lower for all households except for Essential Energy’s customers. In 2018-19
compared to 2013-14:
Ausgrid’s fixed charge is 8 per cent lower in nominal terms, and 19 per cent lower
in real terms,
Endeavour Energy’s fixed charge is constant in nominal terms, and 11 per cent
lower in real terms
Essential Energy’s fixed charge is 9 per cent higher in nominal terms, and 3 per
cent lower in real terms.
91 New South Wales —Tariff structure statement— Draft decision
The above calculations are based on the NSW distributors’ indicative tariff schedules
included within their tariff statement proposals. While these schedules are non-binding,
the distributors must justify any significant departures from these indicative schedules
in their annual pricing proposals.198 Further, the distributors’ also included a re-
balancing constraint formula within their tariff statement proposals which will be binding
on annual pricing proposals.
For example, Endeavour Energy’s tariff statement proposal contains a tariff re-
balancing constraint formula that limits increases in any tariff component (e.g. fixed
charges) to the greater of:
The average annual price movement plus 2.5 per cent
The rate of inflation199
Ausgrid’s and Essential Energy’s proposals contain similar tariff re-balancing
constraints.200
We note that the Rules set out the side constraints on tariffs classes for standard
control services.201 This constraint allows for an annual adjustment to the weighted
average tariff class within the regulatory period of CPI-X+2 per cent. This is a much
looser constraint than that proposed by the distributors as it applies to the whole tariff
class. This means that any component of any tariff within that class can be adjusted by
any amount as long as the weighted average of the whole tariff class only increases by
CPI-X+2 per cent. The constraint proposed by the NSW distributors is a much tighter
constraint as it applies to each tariff component of each tariff. The Rules require
distributors to consider the impact on customers of changes in tariffs from one
regulatory year to the next, and permits distributors to address this customer impact in
several ways including incorporating a reasonable transition path towards more cost
reflective tariffs. The NSW distributors’ proposed re-balancing constraint appears to be
part of the way the distributors are seeking to address the customer impact principle.
We consider this is a reasonable approach to address the customer impact principle,
subject to the comments below.
This limit is reflected in the moderate fixed charge increases in their indicative pricing
schedules. However, the NSW distributors sought review of our distribution
determinations to the Australian Competition Tribunal. On 26 February 2016, the
Tribunal decided to remit the decisions back to the AER to be re-made, particularly in
relation to the opex allowance, return on debt allowance, and tax allowance (gamma).
The AER has sought judicial review of the Tribunal’s decisions. As a result of the
appeals processes, there is uncertainty about the prices NSW consumers will pay in
198
NER, cl.6.18.2(b)(7A). 199
Endeavour Energy, Tariff structure statement, 27 November 2015, p.38 200
Essential Energy, Tariff structure statement, 27 November 2015, p.66; Ausgrid, Tariff structure statement, 27
November 2015, p.15 201
NER, cl.6.18.6.
92 New South Wales —Tariff structure statement— Draft decision
the future, meaning, electricity prices in NSW may be different to the tariffs in the
indicative tariff schedules.
If the AER is successful in the appeals process—that is, if allowed revenue remains at
the level from the AER’s distribution determinations—then we have no concerns with
the NSW distributors’ proposed re-balancing formula, and we would expect the re-
balancing of fixed charges in the annual pricing approval processes to be similar to that
contained in the NSW distributor's indicate tariff schedules.
If the AER is unsuccessful in the appeals process and all foregone revenue is
recovered in the final year of the current regulatory period—the above re-balancing
constraint may be ineffective in moderating increases in fixed charges. This is because
the “average annual price movement plus 2.5 per cent” may need to be quite high in
order to recover all foregone revenue in one year. In this situation, it is likely however
that there will be smoothing of the recovery of revenue into the next regulatory period.
We understand the NSW distributors have submitted a rule change proposal to the
AEMC to enable this result.
At this stage, we do not require the NSW distributors to amend their proposed re-
balancing constraint formula. However, we will continue to monitor the upcoming rule
change process concerning the smoothing of revenue, and will take into account any
relevant developments in making our final tariff structure statement decision.
Residual cost recovery and declining block tariffs structures
As discussed in chapter 4 Tariff Structures we are not satisfied that the distributors'
proposal that the recovery of residual costs through the first block of the declining block
tariff contributes to the achievement of compliance with the pricing principles. This
section discusses this in more detail.
We are not satisfied that the recovery of residual costs through the first block of
consumption contributes to the achievement of compliance with the distribution pricing
principles, in particular the NPO, that this is an efficient recovery of costs. This is
because we are not convinced that applying the first block to low consumption
household, along with higher consumption customers, reflects the distributors' costs of
providing direct control services to these retail customers. We are not convinced that
consumption in the first block is less price sensitive than consumption in the second
and third blocks. We also consider the recovery of more residual costs through the
fixed charge and the first block does not contribute to achievement of compliance with
the distribution pricing principle regarding a customer's ability to mitigate tariff impacts
through changing their usage.202
All of the NSW distributors proposed a declining block tariff for their residential
customers. Endeavour Energy and Essential Energy proposed that a declining block
tariff structure spreads the recovery of residual costs between the fixed charge and the
202
NER, cl.6.18.5(h)
93 New South Wales —Tariff structure statement— Draft decision
low consumption block usage charge (i.e. the first consumption block). They proposed
this is an efficient way to recover residual costs as they considered it will minimise
distortions in consumption because usage in the low consumption block is less price
sensitive to usage in the high consumption block.
Essential Energy proposed that their declining block tariff will be transitioned over time
such that the residual costs will eventually be recovered from the fixed charge and first
block, while the second and third blocks will be set to long-run marginal cost.203
Ausgrid proposed that its declining block tariff becomes a closed tariff to new
customers.
HoustonKemp provided analysis to Endeavour Energy. In its analysis HoustonKemp
noted that all three blocks of Endeavour Energy's declining block tariffs are currently
set at a level exceeding the long-run marginal cost. That is, residual costs are currently
recovered in part from all three blocks.204
HoustonKemp acknowledged that Endeavour Energy’s current declining block tariff
does not provide the lowest possible distortions to price signals. HoustonKemp stated
a ‘more efficient’ tariff (hereafter ‘long-run marginal cost only’) structure is one that
more closely aligns the charging metric with the network costs caused by an
incremental change in network use – the structure that would result in no distortions to
price signals would be where the levels of the tariff components were set equal to the
long-run marginal cost, assuming that customers are somewhat responsive to changes
in price.205 HoustonKemp stated:
In the absence of any direct information on price responsiveness of customers
with different levels of consumption, implicit within a declining block tariff
structure is an assumption that low consuming customers are less price
responsive than high consuming customers, all other things equal. Endeavour
shows that year-on-year variations in first and second block volumes are lower
than for the third block, which provides some evidence that the price elasticity
may differ according to volume, albeit this evidence is not conclusive.206
HoustonKemp also noted that the declining block tariff provides flexibility to manage
customer impact.
HoustonKemp concluded that the blocks allow Endeavour to reduce the usage charge
for the third block towards its estimate of the long-run marginal cost, and in so doing
provide an improved price signal for a segment of customers on the tariff, without
203
Essential Energy, Tariff Structure Statement, 27 November 2015, p.40 204
HoustonKemp, Tariff Structure Statement, Supporting documentation Review of Consistency with the pricing
principles, p.13 205
HoustonKemp, Tariff Structure Statement, Supporting documentation Review of Consistency with the pricing
principles, p.13 206
HoustonKemp, Tariff Structure Statement, Supporting documentation Review of Consistency with the pricing
principles, p.13
94 New South Wales —Tariff structure statement— Draft decision
necessarily impacting on the bills for all customers. HoustonKemp considered that
Endeavour’s assumptions about elasticity of different charging components are correct.
In their opinion the declining block tariff satisfies the requirement of minimising
distortions to price signals, subject to the limiting customer impact. However,
HoustonKemp reiterated that Endeavour should investigate its price elasticity
assumptions, and strengthen its understanding thereof in the future.207
We consider that minimising distortions in the recovery of residual costs aligns with the
pricing principles. A declining block tariff is potentially an effective way to reduce
distortions to efficient consumption decisions. A declining block tariff structure will only
be efficient if consumption in the first block is less price sensitive than consumption in
the higher blocks. This assumption is based on Endeavour Energy's submission that
the year-on-year variations in first and second block volumes which are lower than for
the third block is a proxy for price elasticity. However, we do not consider this is
sufficient.
The majority of customers consume only in the first block. There is some reason to
suggest that the consumption of at least some of these customers is sensitive to price.
There is some evidence to suggest that price elasticity is proportional to income, and it
might be assumed that income is lower for low use customers and higher for high use
customers. However there is no conclusive evidence that price elasticity varies
predictably with income.208 We also note that for any link to price elasticity in the first
block which is related to income, relies on an underlying assumption that low use
customers are also low income customers. While there is some evidence to suggest
this is the case it is also true that many low consumption households are those with
solar, holiday homes and those where the occupants are at work for significant parts of
the day.
We consider the introduction of roof top solar has implications for price elasticity
particularly for low consumption households and therefore the assumption that low
consumption households are less elastic. With the development of improved battery
storage and better solar PV those low consumption solar customers are likely to have
a higher elasticity. Overall we find that the distributors have not provided sufficient
information to support the link between low consumption customers having low
elasticity. Accordingly, we are not satisfied that the recovery of residual costs through
the first block of consumption contributes to the achievement of compliance with the
distribution pricing principles.
We further note, that Ausgrid's appendix 5 provides information from various studies
regarding elasticities of consumption. This provided the following:
207
HoustonKemp, Tariff Structure Statement, Supporting documentation Review of Consistency with the pricing
principles, p.14 208
The Brattle Group, Structure of Electricity Distribution Network Tariffs: Recovery of Residual Costs, August
2014,p.42
95 New South Wales —Tariff structure statement— Draft decision
Reiss and White (2002) also generate estimates of price elasticities for
households of different characteristics. The key results are:
Households with electric space heating or air conditioning exhibit higher price elasticities than households without such systems (close to zero for households without either of these systems)
Lower income households tend to be more sensitive to energy prices than households with medium to high income; and
Elasticities are lower for households that use high amounts of electricity (the authors recognise that this is a slightly unusual result in light of the two previous conclusions and suggest that it reflects both a weak correlation between household income and ownership of space heating / air conditioning and the fact that households tend to substitute toward more price inelastic electricity use as income rises).
209
Instead of the first block of the declining block tariff being less elastic, it could be that
the second and third blocks are less elastic.
Residual cost recovery and time-of-use tariff rates
We consider it appears that changes in the NSW distributors' time-of-use tariffs
contribute to compliance with the distribution pricing principles. Specifically, it appears
the NSW distributors are progressing tariff reform at the residential level through:
reductions in usage charges of their time-of-use tariffs towards long run marginal
cost, and
through an allocation of more costs to the declining block tariff and less to the more
efficient time-of-use tariff structure.
However, we request further information from the distributors as to how they have
allocated residual costs at the residential level before we are able to ascertain with
certainty whether the allocation of costs is efficient. This includes:
how much of the residual costs have been allocated to the declining block and
time-of-use tariff,
the allocation of residual costs between the usage rate components of the time-of-
use tariff.
Residual cost recovery between declining block tariff and time-of-use
tariffs
In the initial stages of tariff reform where more than one tariff can apply to a group of
customers an efficient allocation of residual costs would be to allocate more residual
costs to the less efficient tariff and less residual costs to the more efficient tariff. This
209
Ausgrid, Appendix 5: Price Elasticity of Demand, p.16
96 New South Wales —Tariff structure statement— Draft decision
will encourage customer take up of the more efficient tariff during the transition to more
cost reflective prices.
This is supported by Houston Kemp's analysis that:
For tariffs where a customer can switch to a tariff with a different strength price
signal, residual costs should be assigned so as to encourage customers to shift to
tariffs that have the most efficient price signal. That is residual costs should be
allocated to tariffs so that customers on more efficient tariffs pay a smaller quantum
of residual costs.
Over time charging parameters will need to be re-balanced to ensure that the
shifting of customers between tariffs:
Does not lead to under or over recovery of revenue; and
Does not violate the customer impact principle.210
In comparing the less efficient declining block tariff to the more efficient time-of-use
tariff we can observe the fixed charges proposed for the time-of-use tariffs are higher
than that of the declining block tariffs. This may suggest more residual costs have been
allocated to the time-of-use tariffs. However, the proposed shoulder and off-peak rates
for the time-of-use tariffs are lower than the block usage rates.
AGL submitted that the NSW networks have largely designed their time-of-use tariffs
with higher fixed charges than for standard block tariffs. AGL submitted it is unknown
why the fixed charges should vary between these tariffs and AGL believes it will
prevent the take-up of time-of-use tariffs. AGL submitted a similar situation has
occurred in Queensland and almost no customers moved to time-of-use tariffs as a
result over the last three-year period.211
Our analysis of an average customer on the declining block tariff compared to the time-
of-use tariff for each distributor suggests that more costs have been allocated to the
declining block tariff compared to the time-of-use tariff. This is supported by Ausgrid's
comment at our public forum in April, that the levels for its residential time-of-use tariff
had been set initially to be attractive to customers and that over time would increase.
However, without further information from the NSW distributors as to how residual
costs have been allocated between tariffs at the residential level we are unable to say
with certainty that this is the case.
The following three tables show the annual bill for an average customer on the
declining block tariff compared to the time-of-use tariff for each of the NSW distributors.
These tables show that for all NSW distributors a typical customer consuming 5 MWh
210
HoustonKemp, Estimation of Long Run Marginal Cost and Other Concepts Related to the Distribution Pricing
Principles, prepared for Essential Energy, Final Report November 2015. P.24-25. 211
AGL, Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 10 May 2016,
p.3
97 New South Wales —Tariff structure statement— Draft decision
per annum would be better off on a time-of-use tariff, albeit marginally for Endeavour
Energy.
Table 5-2 Ausgrid declining block tariff compared to time-of-use and
transitional tariff (2018-19) for residential customer consuming 5MWh/p.a
Note: Average customer usage is peak (21 per cent), shoulder (51 per cent) and off-peak (28
per cent), based on 2015-16 annual tariff submission.212
Table 5-3 Endeavour Energy declining block tariff compared to time-of-
use tariff (2018-19) for residential customer consuming 5MWh/p.a
212
Source: 2015-16 Annual tariff submission
0
100
200
300
400
500
600
700
800
Declining block Residential time-of-use Transitional
$ p
er
ann
um
Fixed charge Usage
0
100
200
300
400
500
600
700
Declining block Residential time-of-use
$ p
er
ann
um
Fixed charge Usage
98 New South Wales —Tariff structure statement— Draft decision
Note: Average customer usage is peak (26 per cent), shoulder (31 per cent) and off-peak (43
per cent), based on 2015-16 annual tariff submission.213
Table 5-4 Essential Energy declining block tariff compared to time-of-use
tariff (2018-19) for residential customer consuming 5MWh/p.a
Note: Average customer usage is peak (18 per cent), shoulder (29 per cent) and off-peak (53
per cent), based on 2015-16 annual tariff submission.214
However, the above results could be driven by factors other than the residual cost
recovery methodology. Our analysis is based on the average load profile of customers
currently on time-of-use tariffs. The average load profile of this group of customers
could differ from the overall population of residential customers, and this may explain
the above results. Accordingly, given the uncertainty in the distributors' residual cost
recovery methodologies, we require further information to better understand their
allocation of residual costs between declining block and time-of-use tariffs.
Residual cost recovery through time-of-use usage charges
As discussed above an efficient allocation of costs would be that usage charges are
set equal to long run marginal cost, which promotes efficiency.
Table 5-5 shows the proposed change in tariff components for the residential time-of-
use tariff between 2016-17 and 2018-19. This indicates that the NSW distributors are
allocating fewer costs to their usage charges. However, without more information from
the distributors regarding the actual level of long-run marginal cost for each tariff
213
Source: 2015-16 Annual tariff submission 214
Source: 2015-16 Annual tariff submission
0
100
200
300
400
500
600
700
800
900
Declining block Residential time-of-use
$ p
er
ann
um
Fixed charge Usage
99 New South Wales —Tariff structure statement— Draft decision
component we are unable to determine how much each tariff component cost are
related to residual cost recovery or long run marginal cost.
Table 5-5 Changes in residential time-of-use tariff components between
2016-17 and 2018-19
Tariff Fixed charge Peak Shoulder Off peak
Ausgrid 6% -5% 1% -14%
Endeavour 7% -6% -5% -3%
Essential 18% 5% -1% 3%
We further note that there is variation between the usage charges proposed by each of
the NSW distributors. The table below shows that Ausgrid has a high peak charge
compared to the Endeavour Energy and Essential Energy. However, Ausgrid's
shoulder and off-peak rates are lower than that of Endeavour and Essential Energy.
Table 5-6 Proposed residential time-of-use tariffs (2018–19)
Proposed Tariff Fixed charge
($/p.a) Peak (c/kWh)
Shoulder
(c/kWh)
Off peak
(c/kWh)
Ausgrid 160.24 25.06 5.55 2.41
Endeavour 197.10 12.99 8.67 4.54
Essential 322.29 13.53 12.76 5.40
Note: Some tariffs have been rounded to two decimal places
These differences in the level of each of the tariff components between the NSW
distributors likely reflects both the different underlying costs of the distributors and their
methodologies for calculating long run marginal cost and allocating residual costs.
Without this additional information we cannot say at this stage whether the level of the
tariff components for the time-of-use tariffs proposed by the NSW distributors reflect
efficient costs.
100 New South Wales —Tariff structure statement— Draft decision
6 Tariff assignment policies
This chapter sets out our assessment of the NSW distributors' policies and procedures
for grouping and assigning customers to tariffs.
6.1 Tariff classes
We are satisfied that the tariff classes proposed by each of the NSW distributors
contribute towards the achievement of compliance with the distribution pricing rules.215
The tariff classes proposed by each of the NSW distributors are mostly consistent.
Both Endeavour Energy and Essential Energy have proposed the same six tariff
classes. Ausgrid has proposed five tariff classes. These are summarised in Table 6-1.
Table 6-1 NSW distributors tariff classes
Customer type Tariff class Definition
Residential and small to
medium businesses
Low voltage energy LV Connection 230/400 V
Larger commercial and
light industrial
Low voltage demand216
LV Connection (230/400 V)
Industrial High voltage demand HV Connection (12.7 kV SWER, 11
or 22 kV)
Industrial Sub transmission Demand ST Connection (33, 66 or 132 kV)
Distributors Inter-Distributor Transfer217
Distributor Transfer
Unmetered Unmetered supply e.g.
public lighting
Unmetered
Industrial Transmission218
Any site connected to the
transmission network.
6.2 Residential and small business tariff assignment policies
215
NER, cl.6.18.3. 216
Applies to Endeavour Energy and Essential Energy only 217
Applies to Endeavour Energy and Essential Energy only 218
Applies to Ausgrid only.
101 New South Wales —Tariff structure statement— Draft decision
We do not approve Endeavour Energy's and Essential Energy's assignment policies
for small customers. We are not satisfied that Endeavour Energy's and Essential
Energy's proposed tariff assignment criteria promotes efficient use of electricity
services as required by the Rules. Endeavour Energy's and Essential Energy's
proposed tariff statement demonstrates little change to existing tariff approaches. Both
businesses have proposed to continue their current 'opt-in' centred approach to tariff
reform, which despite being in place for a number of years has resulted in few
customers opting-in to time-of-use tariffs. For example, Endeavour Energy submitted
that:
Although we have offered our residential and general supply (small business)
customers optional time-of-use tariffs for over 10 years, we have seen little take
up of these alternatives with only 2,340 residential and general supply
customers opting for this voluntary tariff type.219
Given the lack of success in of the opt-in policy, we consider Endeavour Energy's and
Essential Energy's tariff statement proposals display insufficient progress towards the
use of more cost reflective tariffsto comply with the requirements of the rules.
Accordingly we consider Endeavour Energy's and Essential Energy's tariff assignment
policies do not contribute to the achievement of compliance with pricing principles.
We approve Ausgrid's proposed tariff assignment policies for small customers except
for its proposed assignment of new residential and new small business customers,
which distinguishes between those new customers with embedded generation and
those without embedded generation.
This means:
We are approving Ausgrid's proposal that existing customers with interval meters
(currently on a declining block tariff) are re-assigned to transitional tariffs. These
transitional tariffs have the same fixed charge as the declining block tariff, but the
usage rate is flat, set at a rate lower than the first block rate and higher than the
third block rate. We consider this approach will effectively transition customers to
time-of-use tariffs and avoid price shock.
We are not approving Ausgrid's proposal for new residential and small business
customers with interval meters which distinguished between those who do not have
embedded generation and those with embedded generation. Ausgrid proposed
that,
o Those without embedded generation will be assigned to a transitional flat
tariff with the choice to opt-in to a time-of-use tariff.
o Those with embedded generation will be assigned to a time-of-use tariff with
the choice to opt-in to a transitional flat tariff.
219
Endeavour Energy, Tariff Structure Statement, p.14
102 New South Wales —Tariff structure statement— Draft decision
We are not convinced as to why customers without embedded generation should also
not be assigned by default to a time-of-use tariff. Customers with electric vehicles or air
conditioning could also benefit from a time-of-use tariff on which they are better able to
time their consumption and hence manage their bill impact. Taking into consideration
Ausgrid's current tariff structures and assignment polices, we consider that not
assigning customers without embedded generation by default to time-of-use tariffs,
does not reflect movement towards greater cost reflectivity, and therefore is not
compliant with the distribution pricing principles.
Our consideration of each of the distributors proposed tariff assignment policies are set
out below.
Ausgrid
Ausgrid proposed that its residential and small business declining block tariffs become
closed tariffs from 1 July 2018. Accordingly, Ausgrid has proposed changes to its tariff
assignment criteria for its residential and small business customers to take effect from
1 July 2018. These proposed changes are summarised below and in the figure below.
103 New South Wales —Tariff structure statement— Draft decision
Figure 6-1 Overview of Ausgrid's proposed tariff assignments from 2018-19
Source: Ausgrid submission on issues paper
104 New South Wales —Tariff structure statement— Draft decision
New residential and small business customers
Ausgrid proposed that new residential and small business customers who do not have
embedded generation will be assigned in the first instance by default to a transitional
flat time of use tariff (transitional flat tariff). Transitional flat tariffs have the structure of
a time-of-use tariff, with peak, shoulder and off-peak charging windows, but the cent
per kilowatt hour rate applied to each window is the same. Ausgrid proposed that these
new customers can also choose to opt-in to a time-of-use tariff. The time-of-use tariff
has different rates for the peak, shoulder and off-peak windows.
However, for new residential and small business customers with embedded generation
Ausgrid proposed that these customers will be assigned in the first instance by default
to a time-of-use tariff. These customers can choose to opt-in to a transitional flat tariff.
Existing residential and small business customers who currently have
interval meters
Ausgrid proposed that its existing residential and small business customers who
currently have an interval meter but are on declining block tariffs will be re-assigned to
a transitional flat tariff. These customers can also opt-in to a time-of-use tariff.
Existing residential and small business customers who currently have
basic meters
Existing residential and small business customers with a basic meter will continue to
be assigned to a declining block tariff.
If these customers change to an interval meter they will be re-assigned to a transitional
flat tariff. They can also opt-in to a time-of-use tariff.
Medium low voltage customers
For medium low voltage customers Ausgrid proposed to change the eligibility criteria to
replace the energy consumption criteria currently applying to medium and large sized
business customers with a criteria based on the size of the current transformer
connection.
For existing customers Ausgrid proposed to introduce transitional tariffs for medium
sized business customers who have a current transformer. Ausgrid will only assign
customers to this tariff if they choose to go on to it.
For existing customers Ausgrid proposed to introduce transitional tariffs within the low
voltage tariff class who have a current transformer. Ausgrid proposed to only assign
existing customers to this tariff if the voluntarily elect it. The proposed transitional tariff
for existing customers has the same rates as the current small business time-of-use
tariff. This will protect existing customers against bill shock as a result of re-
assignment. We are satisfied this approach contributes to the achievement of
compliance with the distribution pricing, subject to Ausgrid addressing our concerns on
the new eligibility criteria above.
105 New South Wales —Tariff structure statement— Draft decision
below shows Ausgrid's proposed tariffs for current transformer connected customers.
Table 6-2 Ausgrid's proposed LV time-of-use tariffs for 2018-19
Network Tariff Fixed
c/day
Peak
c/kWh
Shoulder
c/kWh
Off-peak
c/kWh
Capacity
charge
c/kW/d
Transitional LV time-of-use
Capacity (CT Connection <
400Amps)*
125.22 21.95 5.71 1.98
CT<400 AMPS 614.77 3.69 1.59 1.36 35.84
CT400-1600 AMPS 1852.19 3.29 1.51 1.26 35.84
CT>1600 AMPS 2314.24 2.84 1.46 1.14 35.84
* Note: this transitional tariff has the same rates as the small business time-of-use tariff.
AER consideration
Ausgrid's proposed tariff assignment policy takes effect from 1 July 2018. This is
shortly after the commencement for the new framework for metering, which will require
that any new or replacement meter will need to be an advanced meter and be provided
on an unregulated basis from December 2017. The tariff class assignment rules
specifically allow metering to be considered in this circumstance.
New customers
We do not consider Ausgrid's proposed tariff assignment criteria for new residential
and small business customers contribute to the achievement of compliance with the
distribution pricing principles.
Ausgrid's proposal for new residential and small business customers with interval
meters distinguished between those who do not have embedded generation and those
with embedded generation. Those without embedded generation will be assigned to a
transitional flat tariff with the choice to opt-in to a time-of-use tariff. Those with
embedded generation will be assigned to time-of-use tariff with the choice to opt-in to a
transitional flat tariff.
Time-of use tariffs are more cost reflective than flat tariffs and better promote the
network pricing objective.220 Time-of-use tariffs also provide better signals to customers
regarding the timing of their consumption than flat tariffs. This better enables
customers to manage their bills through changing their consumption behaviour.221 New
customers are at the point where they can make efficient future decisions on the
appliances they install in their premises by having visibility on potential costs. This is
supported by the Energy Network Association (ENA).
220
6.18.5(a) 221
6.18.5(h)(3)
106 New South Wales —Tariff structure statement— Draft decision
The ENA has supported the use of appropriate triggers and thresholds as an important mechanism to achieve the timely implementation of tariff reform to the benefit of Australian energy consumers.
Australian energy consumers face significant risks in a stalled implementation of cost-reflective pricing reform, through the potential for entrenched, unfair cross-subsidies between electricity customers and distorted incentives for investment. There are strong arguments for assigning customers to a cost-reflective tariff structure at the time of investment. It allows the customer considering the investment to appraise the costs and benefits of their decision at the relevant time. It avoids entrenching an implicit cross-subsidy to those customers taking up Distributed Energy Resources which was never intended by public policy or sought by the customer themselves but which results only from current volumetric tariff structures.
222
We consider the assignment of new customers to time-of-use tariffs, as proposed by
Ausgrid for customers with embedded generation is consistent with the pricing
principles. AGL223 and Red Energy224 submitted that they did not support mandatory
assignment. However, we note that Ausgrid has provided the option to opt-out of the
time-of-use tariff to the transitional flat tariff for a given period, should these customers
prefer a flat tariff structure. We consider this supports the customer impact principle.225
We are not convinced as to why customers without embedded generation should not
be assigned by default to a time-of-use tariff. Customers with electric vehicles or air
conditioning could also benefit from a time-of-use tariff on which they are better able to
time their consumption and hence manage their bill impact.
Ausgrid submits that customers with embedded generation have a different load profile
to customers without embedded generation, but have not provided evidence in
support. In the absence of evidence to support assigning customers with and without
embedded generation to different tariffs, we consider a more cost reflective and non-
discriminatory approach would be to have all new customers assigned by default to a
time-of-use tariff, with the option to opt-in to the transitional flat tariff. That is, we
consider that Ausgrid's proposal to assign customers without embedded generation to
a flat tariff does not contribute to the achievement of compliance with the distribution
pricing principles. Energy Australia submitted it is concerned that
Ausgrid’s intention to allocate customers to particular tariffs where there is no obvious difference in the cost of supply to that customer category. More generally, differential treatment of customers both within and between distribution areas will undermine acceptance of tariff reform thereby jeopardising reform objectives. A particular example is Ausgrid’s assignment of new customers with small scale embedded generation to a Time of Use tariff,
222
ENA Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May 2016, p.5-
6 223
AGL Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May 2016, p.4 224
Red Energy Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May
2016, 225
NER, cl.6.18.5(h)(3).
107 New South Wales —Tariff structure statement— Draft decision
while new customers without embedded generation will be assigned to a declining block tariff.
226
We note Origin supported Ausgrid's proposal to assign new residential customers with
an interval meter to a time of use tariff.
We consider the decision to adopt volumetric TOU tariffs represents a sensible
first step along the reform spectrum. For this reason, Origin supports the
approach adopted by Ausgrid to assign new residential customers with an
interval meter to a volumetric time of use (TOU) tariff and in the case of
Endeavour and Essential an opt-in provision to a volumetric TOU tariff.227
Ausgrid is also proposing to introduce new default tariffs for new customers with a 3
phase connection who connect to Ausgrid's network after 1 July 2018. Ausgrid
considers this will result in customers with a 3 phase connection receiving more
consistent and appropriate network price signals and contributing more equitably to the
recovery of residual costs. The proposed tariffs are set out in Table 6-3 below.
Ausgrid's proposed tariffs for new 3 phase connection customers have a time-of-use
tariff structure. We consider Ausgrid's proposed new default tariff for new 3-phase
connections customers contributes to the achievement of compliance with the
distribution pricing principles.
Table 6-3 Ausgrid's proposed 3-phase tariffs for 2018-19
Network Tariff Fixed
c/day
Peak
c/kWh
Shoulder
c/kWh
Off-peak
c/kWh
Residential 3-phase 43.90 25.06 5.55 2.41
Small business 3-phase 125.22 21.95 5.71 1.98
Note: the residential 3-phase tariff has the same rates as the residential time-of-use tariff. The
small business 3-phase tariff has the same rates as the small business time-of-use tariff.
Existing customers
Existing customers, unlike new customers, have already made investment decisions
based on current tariff structures. We consider a transitional tariff which moves towards
cost reflectivity best promotes pricing principles for existing customers that the impact
on customers must be considered228 and the tariff must be reasonably capable of being
understood.229 By being on a transitional tariff with a time-of-use structure but with flat
rates the customer is protected from any bill shock due to re-assignment. By having a
time-of-use structure the transitional flat tariff will better enable customers to see their
226
Energy Australia Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs,
May 2016, p.8 227
Origin Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, May 2016,
p.1-2 228
6.18.5(h) 229
6.18.5(i)
108 New South Wales —Tariff structure statement— Draft decision
consumption behaviour in each charging window. We consider this will promote pricing
principle which sets out that the tariff must be reasonably capable of being understood
by customers assigned to it.230
Ausgrid proposed that existing residential and small business customers who currently
have an interval meter but are on a declining block tariff will be re-assigned to a
transitional flat tariff. These customers can also choose to opt-in to a time-of-use tariff.
Ausgrid has designed its transitional flat tariffs so that an average customer is no better
or worse off in being re-assigned from the declining block tariff. The transitional flat
tariffs proposed by Ausgrid for existing customers with interval meters have the same
fixed charge as the declining block tariff and similar usage rates. Ausgrid's proposed
transitional and time-of-use tariffs for residential and small business customers are set
out in Table 6-4 below.
Table 6-4 Ausgrid's proposed residential and small business tariffs
2018-19
Network Tariff Fixed
c/day
Block 1
c/kWh
Block 2
c/kWh
Block 3
c/kWh
Peak
c/kWh
Shoulder
c/kWh
Off-peak
c/kWh
Residential declining
block 35.27 11.60 8.97 8.35
Residential
transitional flat 35.27 9.14 9.14 9.14
Residential time-of-
use 43.90 25.06 5.55 2.41
Small business
declining block 126.88 10.73 10.51
Small business
transitional flat 126.88 10.62 10.62 10.62
Small business time-
of-use 125.22 21.95 5.71 1.98
Ausgrid submitted:
Ausgrid proposes to adopt a time-of-use structure for this transitional period
with a uniform price applied to energy consumption in the peak, shoulder and
off-peak periods. Ausgrid believes that this approach will provide these
customers with important information about their time-of-use energy
consumption patterns, but without imposing bill shocks on customers with poor
load profiles. Ausgrid expects that this approach will ensure that these
customers make an informed decision about whether to opt-in to the small
business time-of-use tariff.
230
6.18.5(i)
109 New South Wales —Tariff structure statement— Draft decision
Ausgrid has designed the transitional time-of-use tariffs to ensure that these
customers will have access to their energy consumption in the peak, shoulder
and off-peak periods in the expectation that this will assist these customers to
more easily evaluate whether they will be better off financially under a more
cost reflective network time-of-use tariff. Ausgrid is hopeful this will result in an
increase in the voluntary uptake of the more cost reflective time-of-use tariffs
over the medium to longer term.231
For its existing residential and small business customers with a basic meter Ausgrid
proposed these customers will continue to be assigned to a declining block tariff. If
these customers change to an interval meter post 1 July 2018 they will be re-assigned
to a transitional flat tariff. They can also opt-in to a time-of-use tariff. We consider this
contributes to the achievement of compliance with the distribution pricing principles
and rule 6.18.3.
Medium low voltage customers
We are not approving Ausgrid's proposed tariff assignment criteria for medium low
voltage customers. Ausgrid currently assigns medium sized business customers with a
low voltage connection to tariffs using energy consumption as a criterion. Ausgrid
proposed to change the eligibility criteria for such customers with a criteria based on
the size of the current transformer connection. We are not satisfied this change to the
eligibility criteria contributes to the achievement of compliance with the distribution
pricing principles.232 We require Ausgrid to provide further information to justify this
change to the eligibility criteria for medium low voltage customers, having regard to our
concerns below.
We are open to the use of criteria other than consumption levels in tariff assignment
polices. However, we do not consider Ausgrid provided sufficient evidence justifying
the use of current transformer size as a criterion to assign customers to tariffs.
Ausgrid stated customers with similar connection characteristics would receive more
consistent and appropriate price signals using current transformer size as a criterion. In
turn, such customers would make the appropriate contribution to the recovery of
residual costs.233 Ausgrid's tariff structure statement did not explain the meaning of
'connection characteristics'. We therefore require Ausgrid's revised proposal to explain
the connection characteristics current transformer size represents. For example, do
customers with similar sized current transformers have similar peak demands? Or, are
they connected to the network with similar assets?
It is also unclear how the use of current transformer size to assign customers to tariffs
better reflects the distribution pricing principles than a consumption-based approach.
231
Ausgrid Response to AER information request 1, 29.04.2016. 232
NER, 6.18.5(a) and (g). 233
Ausgrid, Tariff structure statement, 27 November 2016, p. 128.
110 New South Wales —Tariff structure statement— Draft decision
As we discuss below, we consider there are several complications in basing tariff
assignments on the size of a customer's current transformer connection.
While the size of the current transformer can be indicative of a customer's maximum
demand levels, determination of a current transformer's size is problematic. Current
transformers come in a wide range of sizes, so it is possible that customers with the
same demand levels could have different sized current transformers. In turn, these
customers would be assigned to different tariffs.
We also understand it is standard practice for meter providers to use a set of standard
current transformer ratios to minimise stock levels, reduce maintenance costs and
improve repair times.234 These company standard ranges are at the discretion of each
meter provider as long as they comply with the NEM metrology procedures. This
means different meter providers may elect to use different current transformers for
customers who otherwise have the same characteristics.
It is, therefore, unclear how the size of a customer's current transformer connection
better reflects a customer's contribution to network costs than its consumption level.
Further, competition for metering is already operating for new customers with type 4
meters (Ausgrid could assign these customers to the current transformer tariffs).235 We
are not aware of any requirements for a meter provider to notify the distributor of the
current transformer ratios they elected to use. This would introduce complications and
costs for Ausgrid when allocating customers to the relevant tariff under the new
eligibility criterion.
For existing customers Ausgrid proposed to introduce transitional tariffs within the low
voltage tariff class who have a current transformer. Ausgrid proposed to only assign
existing customers to this tariff if the voluntarily elect it. The proposed transitional tariff
for existing customers has the same rates as the current small business time-of-use
tariff. This will protect existing customers against bill shock as a result of re-
assignment. We are satisfied this approach contributes to the achievement of
compliance with the distribution pricing, subject to Ausgrid addressing our concerns on
the new eligibility criteria above.
Endeavour Energy and Essential Energy
We are not satisfied that Endeavour Energy's and Essential Energy's proposed tariff
assignment criteria for residential and small business customers promotes efficient use
of electricity services as required by the Rules. Endeavour Energy's and Essential
Energy's proposed tariff statement demonstrates little tariff reform progress. Both
234
Current transformer (CT) manufacturers produce a large range of CT products of varying accuracy and capacity.
We understand meter providers typically select a specific set of CT products from one (or occasionally more)
provider. By standardising on a smaller subset of CT products the meter provider will support reduced stock levels,
reduced maintenance costs and improved repair times. 235
Ausgrid, Tariff structure statement: Attachment 2: General description of Ausgrid’s default network use of system
tariffs, 27 November 2016, p. 8–10; Ausgrid, ES3: Part A: Metering installation requirements, July 2015, p. 1.
111 New South Wales —Tariff structure statement— Draft decision
businesses have proposed to continue their current 'opt-in' centred approach to tariff
reform, which despite being in place for a number of years has resulted in 98 per cent
of Endeavour Energy's residential customers still being on tariffs which are not cost
reflective, along with 97 per cent of small business customers. For Essential Energy 97
per cent of residential customers are on tariffs which are not cost reflective, along with
86 per cent of small business customers.
Given the lack of success in of the opt-in policy, we consider Endeavour Energy's and
Essential Energy's tariff statement proposals display insufficient progress towards tariff
reform to comply with the cost reflectivity requirements of the rules. Accordingly we
consider Endeavour Energy's and Essential Energy's tariff assignment policies do not
contribute to the achievement of compliance with pricing principles.
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
we consider there is opportunity for distributors to reform their 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.
Other distributors have proposed changes to their tariff assignment policies which we
have generally found to be acceptable, subject to minor amendments. These
approaches include Ausgrid, ActewAGL and SAPN
We note that while some other distributors (e.g. the Queensland distributors) have also
proposed to rely on opt-in centred approaches, they have at least showed greater tariff
reform by introducing a more cost reflective form of opt-in tariff, being a demand based
tariff.
Endeavour Energy and Essential Energy did not propose any changes to their
customer tariff assignment criteria.
Endeavour Energy’s customer assignment is as follows:
Low voltage Energy Tariff class
The default tariffs for residential and small business customers that consume less than
160MWh/annum are:
A declining block tariff for residential customers, and
An inclining block tariff for small to medium commercial customers
Where the customer has installed an interval meter a time-of-use energy tariff is
available to customers on a voluntary opt-in basis.
Specifically:
Opt-in time-of-use residential and small business tariffs,
112 New South Wales —Tariff structure statement— Draft decision
Opt-in controlled load tariffs – available to any residential and small
business customers where the electricity load is separately metered and
controlled at a connection point.
Low voltage demand tariff class
Within the low voltage demand tariff class Endeavour Energy plans to offer
A LV time-of-use demand tariff (default tariff for customers that consume
more than 160MWh per annum); and
A LV time-of-use transitional demand tariff (a mandated transitional tariff
for customers whose annual consumption requires a demand based
tariff, but who cannot be directly transferred to the LV TOU demand tariff
due to a lack of metering capable of supporting this tariff). This tariff is
not available on customer or retailer request.
Essential Energy's proposed tariff assignment criteria are as follows:
Residential and small business customers
Residential and small business customers will be assigned to a default declining block
tariff. However, opt-in TOU tariffs are available for any customers that have a meter to
support the tariff.
Medium sized businesses
Medium sized businesses will continue to be assigned to one of the following tariffs:
Low voltage time of use average daily demand
Low voltage time of use three rate demand
Low voltage time of use demand alternative
Since submitting its proposal Essential Energy has subsequently told the AER that it is
aware of approximately 1700 medium/large business customers who should be on
either demand or time-of-use tariffs, but are currently assigned to the wrong tariff.236
Essential Energy is concerned that re-assigning these customers to their correct tariff
may create bill shocks. Essential Energy has flagged they may introduce transitional
tariffs in their revised tariff statement proposal to address this issue. However, in their
initial tariff statement proposal did not address this issue or propose any transitional
tariffs.
236
Essential Energy advised in particular customers who consume over 160MWh per annum are required to be on a
demand based tariff, and customers who consume over 100MWh are required to be on a TOU tariff. There are
around 1100 customers currently consuming over 160MWh that need to be moved to demand tariffs, and another
600 that need to be moved from the DBT to TOU. These changes may result in significant bill increases. Essential
Energy has advised that they plan to consult with directly affected customers and consumer groups, provide
information to and educate directly affected customers on demand and TOU based tariffs and develop transitional
tools including a transitional tariff to assist the worst affected customers.
113 New South Wales —Tariff structure statement— Draft decision
6.3 Large business tariff assignment policies
We approve the NSW distributors' tariff assignment policies for large customers. We
are satisfied the NSW distributors proposed tariff assignment criteria for large
customers contribute to the achievement of compliance with the distribution pricing
principles. This is because the NSW distributors proposed to assign large customers to
time-of-use and demand tariffs. These tariffs provide signals regarding the timing of
consumption and network capacity we consider this promotes efficient use of the
network.
We consider Ausgrid's proposed transmission connected tariff for new customers will
result in savings to the customer as it will no longer pay for costs related to the
distribution network. We consider this contributes to the achievement of compliance
with pricing principles that the revenue recovered from the tariff reflects the distributor's
efficient costs.237
We are satisfied that the tariff assignment criteria proposed by the NSW distributors for
their large business customers contribute to the achievement of compliance with the
distribution pricing principles. The NSW distributors' tariff structures for large
customers include time-of-use and capacity tariffs.
For larger customers it is easier to identify the costs associated with providing
electricity compared to smaller customers where the prices are more averaged. The
tariff structures for large customers are better able to reflect the costs of the network
through charging windows and capacity charges. Endeavour Energy and Essential
Energy proposed to assign their large customers to the high voltage and sub-
transmission tariffs based on their size, connection to the network and metering. We
consider Endeavour Energy and Essential Energy's tariff assignment criteria for its
large customers contribute to the pricing principles.
Our consideration of each of the distributors proposed tariff assignment policies are set
out below.
Ausgrid
We are satisfied that the tariff assignment criteria proposed by Ausgrid for its large
business customers contribute to the achievement of compliance with the distribution
pricing principles.
Ausgrid did not propose to change its tariff assignment criteria for large customers
except for transmission connected customers.
Ausgrid proposed to introduce a transmission connected default tariff for new
customers from 1 July 2018 as set out in Table 6-5. Ausgrid proposed that new
customers connected to Ausgrid's network will be assigned to a standard transmission
237
6.18.5(f) and (g)
114 New South Wales —Tariff structure statement— Draft decision
use of system (TUOS) only tariff, rather than the current sub-transmission voltage time-
of-use tariff. Ausgrid submits that this will result in greater efficiency as these
customers will not incur a distribution use of system charge when they do not
contribute to the costs of operating that segment of the network.
Table 6-5 Ausgrid's proposed Transmission connected time-of-use
capacity tariffs for 2018-19
Network Tariff Fixed
c/day
Peak
c/kWh
Shoulder
c/kWh
Off-peak
c/kWh
Capacity
charge
c/kW/d
Transitional LV time-of-use
Capacity (CT Connection <
400Amps)*
0 1.25 1.25 1.25 3.10
Ausgrid's proposed tariff assignment criteria for high voltage customers are:
The high voltage time-of-use capacity (system) tariff is the default tariff for all new
business customers that satisfy the eligibility.
The high voltage time-of-use capacity (substation) tariff is an optional tariff available
to all distribution customers that satisfy the eligibility criteria and which have an
exclusive dedicated feeder connection to a transmission node identity transmission
substation.
The high voltage capacity (substation) tariff is only available to business customers
with Type 3 or better metering.
For sub-transmission customers Ausgrid's proposed tariff assignment criteria are:
The sub-transmission voltage time-of-use capacity (system) tariff is the default tariff
for all new distribution customers that satisfy the eligibility criteria.
The sub-transmission voltage time-of-use (substation) is an optional tariff available
to all distribution customers that satisfy the eligibility criteria and which have an
exclusive dedicated feeder connection to a transmission node identity transmission
substation.
Individually calculated network tariffs are available to all existing customers that
either:
o Satisfy the eligibility criteria to be assigned to the transmission connected
tariff class; or
o Satisfy the eligibility criteria to be assigned to the high voltage tariff class or
sub-transmission voltage tariff class and consume more than 40 GWh per
annum or have a maximum demand in excess of 10 MW.
Endeavour Energy and Essential Energy
We are satisfied that the tariff assignment criteria proposed by Endeavour Energy and
Essential Energy for their large business customers contribute to the achievement of
compliance with the distribution pricing principles.
115 New South Wales —Tariff structure statement— Draft decision
Endeavour Energy did not propose any changes to its tariff assignment criteria for
large customers. Accordingly for high voltage customers Endeavour Energy will offer:
A high voltage demand tariff this is the default tariff; and
An individually calculated high voltage time-of-use demand tariff
The individually calculated high voltage time-of use demand tariff is a mandated,
customer specific tariff where the customer’s:
Electricity consumption has been equal to or greater than 100 GWh in total for the
36 months preceding the application; or
Electricity consumption has been equal to or greater than 40 GWh per annum in
each of the financial years preceding the application; or
Monthly peak demand has been equal to or greater than 10 MVA for 24 of the 36
months preceding the application.
For its sub-transmission customers Endeavour Energy proposed:
A sub-transmission time-of-use demand tariff as the default tariff; and
An individually calculated sub-transmission demand tariff
The individually calculated high voltage time-of-use demand tariff is a mandated,
customer specific tariff where the customer’s:
Electricity consumption has been equal to or greater than 100 GWh in total for the
36 months preceding the application; or
Electricity consumption has been equal to or greater than 40 GWh per annum in
each of the financial years preceding the application; or
Monthly peak demand has been equal to or greater than 10 MVA for 24 of the 36
months preceding the application.
Essential Energy did not propose any changes to its tariff assignment criteria for large
customers. Accordingly for high voltage customers Essential Energy offers:
High voltage time-of-use monthly demand applies to business customers whose
consumption is connected to the high voltage distribution system and metered at
high voltage.
High voltage time-of-use average daily demand applies to business customers
whose consumption is connected to the high voltage distribution system and
metered at high voltage. Available to customers who have a monthly load factor
greater than 60 per cent for at least 4 of the most recent 12 months coinciding with
a minimum on season anytime monthly demand of 1500 kVA
For subtransmission customers Essential Energy offers:
Sub-transmission 3 rate demand. Applicable to connections at a sub-transmission
voltage.
116 New South Wales —Tariff structure statement— Draft decision
A Our consultation process
This appendix details our consultation process and lists stakeholders who provided us
with written submissions in response to the distributors' tariff statement proposals and
our issues paper.
A.1 Issues paper, submissions and information requests
We published an issues paper in March 2016. This summarised key aspects of
Ausgrid, Endeavour Energy and Essential Energy's tariff statement proposals. It
highlighted issues we consider relevant to our assessment and invited stakeholder
submissions.
Seventeen submissions were received in response to the businesses proposals and
our issues paper. The majority of submissions addressed all three businesses
proposals and/or our issues paper. The exceptions are Southern Sydney Regional
Organisation of Councils’ submission addressed Ausgrid's proposal only and Central
NSW Councils’ submission addressed Essential Energy's proposal only.
Submissions were received from the following stakeholders:
1. AGL
2. Ausgrid
3. Central NSW Councils (Centroc)
4. Cotton Australia and NSW Irrigators’ Council (NSWIC)
5. Energy Consumers Australia (ECA)
6. Endeavour Energy
7. Energy Australia
8. Energy Networks Association (ENA)
9. Essential Energy
10. Energy and Water Ombudsman NSW (EWON)
11. Jemena
12. NSW Council of Social Services (NCOSS)
13. Origin Energy
14. Public Interest Advocacy Centre (PIAC)
15. Red and Lumo Energy
16. Solar Citizens
17. Southern Sydney Regional Organisation of Councils (SSROC)
A.2 Public forum
117 New South Wales —Tariff structure statement— Draft decision
We held a public stakeholder forum in Sydney on 6 April 2016. Presentations were
made at the forum by AER the Board, AER executive, AER staff, Public Interest
Advocacy Centre (PIAC) and Energy Australia. The forum was attended by
representatives of the following:
1. ActewAGL
2. AEMC
3. AGL Energy
4. Ausgrid
5. City of Sydney - City Infrastructure and Traffic Operations
6. Cotton Australia
7. Department of Industry, Innovation and Science
8. Endeavour Energy
9. Energia
10. Energy and Water Ombudsman NSW
11. Energy Australia
12. Energy Consumers Australia
13. Essential Energy
14. Ethnic Communities Council of NSW
15. Houston Kemp
16. Jemena
17. Living Utilities Lend Lease
18. Lumo
19. Macquarie Securities Group
20. Next Energy
21. NSW Department of Industry
22. NSW Irrigator's Council
23. Origin
24. Public Interest Advocacy Centre
25. Solar Citizens
26. TransGrid
27. Western Sydney Regional Organisation of Councils
A.3 Other consultation
We issued information requests to each of the NSW businesses, seeking information
not provided in their tariff statement proposals to inform our considerations.
118 New South Wales —Tariff structure statement— Draft decision
Information requests issued:
Ausgrid238
Endeavour Energy239
Essential Energy240
We received responses to our information requests,
Ausgrid241
Endeavour Energy242
Essential Energy243
We also met with Essential Energy on 28.04.2016.
238
04.04.2016, 24.05.2016 239
24.05.2016 240
23.04.2016 241
29.04.2016; 07.06.2016;10.06.2016; 17.06.2016; 28.06.2016 242
31.05.2016; 08.06.2016; 09.06.2016 243
30.05.2016; 08.06.2016; 09.06.2106
119 New South Wales —Tariff structure statement— Draft decision
B Ausgrid’s proposed tariff structures
Table B-1 sets out Ausgrid’s proposed tariffs for the low voltage tariff class.
Table B-2 sets out Ausgrid’s proposed tariffs for its other tariff classes.
Table B-1 Ausgrid’s proposed tariffs for the low voltage tariff class
Proposed tariffs Customer type Assignment
Meter type
Tariff structure Notes
Residential (EA010) New/existing customers with single phase connection
without a small scale embedded generator Default/ opt out Type 6
Declining block +
fixed Closed from 1 July 2018.
Small business (EA050) New/existing customers with single phase connection
without a small scale embedded generator Default/ opt out Type 6
Declining block +
fixed Closed from 1 July 2018.
Controlled load 1 (EA030) Available to LV customers on EA010, EA025, EA050,
EA225, EA302, EA334, or EA335 Opt-in
Separately
metered Flat usage + fixed
Controlled load 2 (EA040) Available to LV customers on EA010, EA025, EA050,
EA225, EA302, EA334, or EA335 Opt-in
Separately
metered Flat usage + fixed
Residential TOU (EA025)
New customers with single phase connection and a
small scale embedded generator; existing customer with
single phase connection and type 5 meter
Default / opt out Type 4 or 5 Usage + fixed Opt in for EA332 customers.
Small business TOU
(EA225)
New customers with single phase connection and a
small scale embedded generator; existing customer with
single phase connection and type 5 meter
Default / opt out Type 4 or 5 Usage + fixed Opt in for EA333 customers.
120 New South Wales —Tariff structure statement— Draft decision
LV TOU capacity CT 100–
400 Amps (EA302)
New business customers with a 3 phase current
transformer connection between 100–400 Amps Default (no opt out) Type 4 or 5
Demand + usage +
fixed
Formerly named ‘LV 40–160
MWh (system) tariff’. Existing
customers with the relevant
CT connection can opt in to
this tariff.
LV TOU capacity CT 400 to
1600 Amps (EA305)
New business customers with a current transformer
connection between 400–1,600 Amps; existing EA310
customers with 400–1,600 Amp connection
Default (no opt out) Type 3 or 4 Demand + usage +
fixed
Formerly named ‘LV 160–
750 MWh (system) tariff’.
Existing customers with the
relevant CT connection can
opt in to this tariff.
LV TOU capacity CT > 1600
Amps (EA310)
New business customers with a current transformer
connection above 1,600 Amps Default (no opt out)
Type 3 or
better
Demand + usage +
fixed
Formerly named ‘LV > 750
MWh (system) tariff’. Existing
customers with the relevant
CT connection can opt in to
this tariff.
Transitional residential 3
phase (EA330)
Existing customers with a 3 phase connection on
declining block tariff (EA010) Default / opt out Type 6
Declining block +
fixed
Transitional small business 3
phase (EA331)
Existing customers with a 3 phase connection on
declining block tariff (EA050) Default / opt out Type 6
Declining block +
fixed
Transitional residential TOU
(EA332)
New customers with single phase connection without a
small scale embedded generator; existing customers
with single phase connection on declining block tariff
(EA010)
Default / opt out Type 4 or 5 Transitional flat
usage + fixed
Transitional small business
TOU (EA333)
New customers with single phase connection without a
small scale embedded generator; existing customers
with single phase connection on declining block tariff
(EA050)
Default / opt out Type 4 or 5 Transitional flat
usage + fixed
Residential <100 Amps 3
phase TOU (EA334)
New customers with a 3 phase WC connection with a
small scale embedded generator; existing customers
with a 3 phase WC connection on single phase tariff
(EA025)
Default / opt out Type 4 or 5 Usage + fixed Opt in for EA351 customers.
121 New South Wales —Tariff structure statement— Draft decision
Small business <100 Amps
3 phase TOU (EA335)
New customers with a 3 phase WC connection with a
small scale embedded generator; existing EA225 or
EA302 customers with 3 phase WC connection
Default / opt out Type 4 or 5 Usage + fixed Opt in for EA352 customers.
Transitional LV TOU kW
capacity 100–400 Amps
(EA336)
Existing EA225 customers with CT connection Default / opt out Type 4 or 5 Demand + usage +
fixed
Demand charge is zero as a
transition.
Transitional LV TOU kVA
capacity 100–400 Amps
(EA337)
Existing EA305 customers with 100–400 Amp
connection Default / opt out Type 3 or 4
Demand + usage +
fixed
No customers in this
segment (included for
completeness only).
Transitional LV TOU kVA
capacity 400–1,600 Amps
(EA338)
Existing EA302 customers with 400–1,600 Amp
connection Default Type 4 or 5
Demand + usage +
fixed
No customers in this
segment (included for
completeness only).
Transitional LV TOU kVA
capacity > 1,600 Amps
(EA339)
Existing EA305 customers with ≥ 1,600 Amp connection Default Type 3 or 4 Demand + usage +
fixed
No customers in this
segment (included for
completeness only).
Transitional residential TOU
3 phase (EA351)
New customers with a 3 phase connection without a
small scale embedded generator; existing customers
with 3 phase connection on declining block tariff
(EA010)
Default / opt out Type 5 Transitional flat
usage + fixed
Transitional small business
TOU 3 phase (EA352)
New customers with a 3 phase connection without a
small scale embedded generator; existing customers
with 3 phase connection on declining block tariff
(EA050)
Default / opt out Type 5 Transitional flat
usage + fixed
LV connection (Stand-by)
(EA325) Existing customer Default
Type 4 or
better
Demand + usage +
fixed Closed tariff
Source: Ausgrid, Tariff structure statement, 27 November 2015; Ausgrid, Tariff structure statement: Appendix 2: General description of Ausgrid’s default network
use of system tariffs, 27 November 2015; Ausgrid, Response to AER TSS issues paper: Attachment 2, May 2016.
122 New South Wales —Tariff structure statement— Draft decision
Table B-2 Ausgrid’s proposed tariffs for the high voltage, subtransmission and transmission tariff classes
Proposed tariffs Customer type Assignment
Meter type
Tariff structure Notes
Hig
h v
oltage
HV TOU capacity (system)
(EA370) New/existing HV business customers Default
Type 3 or
better
Demand + usage +
fixed
HV TOU capacity
(substation) (EA380)
HV business customers with an exclusive dedicated
feeder connection to a TNI transmission substation Opt-in
Type 3 or
better
Demand + usage +
fixed
Individually calculated
network tariff
HV customer consuming > 40GWh annually or have
maximum demand > 10 MW Opt-in
Type 3 or
better Various
HV connection (Stand-by)
(EA360) Existing customer Default
Type 3 or
better
Demand + usage +
fixed Closed tariff
Subtr
ansm
issio
n
Subtransmission voltage
TOU capacity (system)
(EA390)
New/existing customers assigned to the
subtransmission tariff class Default
Type 3 or
better
Demand + usage +
fixed
Subtransmission voltage
TOU capacity (substation)
(EA391)
Subtransmission customers with an exclusive dedicated
feeder connection to a TNI transmission substation Opt-in
Type 3 or
better
Demand + usage +
fixed
Individually calculated
network tariff
Subtransmission customer consuming > 40GWh
annually or have maximum demand > 10 MW Opt-in
Type 3 or
better Various
Tra
nsm
issio
n
Transmission voltage TOU
capacity (system) (EA501)
New/existing customers assigned to the transmission
tariff class Default
Type 3 or
better
Demand + usage +
fixed New tariff
Individually calculated
network tariff
Transmission customer connected to a TNI substation
transmission connection point in Ausgrid’s network area Opt-in
Type 3 or
better Various
123 New South Wales —Tariff structure statement— Draft decision
Source: Ausgrid, Tariff structure statement, 27 November 2015; Ausgrid, Tariff structure statement: Appendix 2: General description of Ausgrid’s default network
use of system tariffs, 27 November 2015; Ausgrid, Response to AER TSS issues paper: Attachment 2, May 2016.
124 New South Wales —Tariff structure statement— Draft decision
C Distributors' customer consultation and
customer impact analysis
This appendix details the NSW distributors consultation process and comments on
their customer impact analysis as outlined in their tariff structure statements.
C.1 Customer consultation
We consider that the NSW distributors' customer consultation could be improved by
starting discussions earlier and providing more information about alternative models
focused around potential customer impact.
Ausgrid, Endeavour Energy and Essential Energy all undertook customer consultation
in a three phase process. This consisted of:
Phase 1: 2013-15
Discussion on tariff reform in 2013-14
Tariff conversation triggered via a range of presentations, workshops, roundtables
and other consultations conducted by NNSW and the three distributors
Phase 2: September—November 2015
One-to-one interviews with key tariff structure statement (TSS) stakeholders to
inform preferred engagement process
Release and distribution for comment of a TSS Issues paper from NNSW
TSS stakeholder roundtables and TSS stakeholder forum
one-on-one interviews with key TSS stakeholders
comments and submissions from NNSW TSS public consultation Have Your Say
online portal (hosted by NSW government)
Social media dialogue and feedback
Distributors engagement with customer consultative committees, Local
Government Areas, other stakeholder groups.
Phase 3:
Feedback to stakeholders on their submissions to the issues paper
Development of plain English TSS for customers
Submit draft TSS to AER for review
Complete quantitative and qualitative research
Embed engagement on tariffs in community engagement plans for each network
business
Conversation with customers continues.
125 New South Wales —Tariff structure statement— Draft decision
This consultation process is best summarised in the following figure.
Figure C-1 NSW distributors' consultation process
Stakeholders were critical of the NSW distributors’ consultation process before lodging
their tariff statements. At the public forum, the deficiency of the NSW distributors’
consultation process and their declining block tariffs were the two major issues that
occupied most of the forum and where there was widespread agreement among
stakeholders. Several stakeholders at the public forum described the NSW distributors
as following the ‘DAD’ (‘decide’, ‘announce’, defend’) approach to consultation. At the
forum, the NSW distributors acknowledged they need to improve their consultation
process for the second round of tariff structure statement proposals.
We understand that the consultation process for phase 1 and phase 2 was managed
by Networks NSW, whereas the consultation process on the second round of tariff
structure statement proposals will be managed by the individual distributors.
The Energy and Water Ombudsman NSW (EWON) stated that it shares some of the
concerns that have been raised by other stakeholders about the quality of that NSW
distributors’ consultation process, which it took part in. EWON stated for the next round
of tariff structure statement proposals, it expects early discussions about tariff design
and full information about alternative models focused around potential customer
impact, and in particular potential impacts on vulnerable customers.244
EnergyAustralia would like to see meaningful reform starting immediately; particularly
as it believes the introduction of fully cost reflective tariffs to all residential and small
business customers should occur over a reasonably long timeframe (i.e. over two or
three regulatory periods). This period allows for the complexity of the tariffs, current
customer perceptions, and the importance of certainty and stability in tariff structures.
244
Energy and Water Ombudsman NSW (EWON) Submission: AER issues paper: Tariff structure statement
proposals: NSW electricity DNSPs, May 2016, p.4-5.
126 New South Wales —Tariff structure statement— Draft decision
Customers require certainty and stability in order to make significant changes to their
consumption profiles and appliance mix, and to invest in infrastructure that helps them
manage their consumption.245
EnergyAustralia views the proposals in South Australia and Queensland, where the
stock of smart meters is also relatively small, as feasible alternatives for the NSW
networks. This relates to both the approach (the gradual introduction of demand
charges for residential and small business customers) and the manner in which reform
will occur (voluntary or where there is a particular trigger).246
Energy Consumers Australia (ECA) submitted that it has been disappointed with the
quality of the consultation by the NSW networks for the current round of tariff structure
statements.
In bringing these concerns to the attention of the AER and the businesses in question, ECA’s is keen to contribute to the development of significantly improved processes for the next round of TSS development. We encourage the NSW networks to approach the task of engaging with consumers to improve outcomes for all participants, including networks.
247
The Public Interest Advocacy Centre (PIAC) submitted that it has some concerns
about how the consultation was conducted.
Firstly, we are concerned that the overall timeline for consultation was too narrow and limiting. PIAC, as all consumer advocates submitting to the process, require time to develop policy positions and consult our consumer reference panel and representative members. It is difficult for us to do this if we are only given four weeks to prepare submissions after the release of the TSS. PIAC brings a representative consumer voice to network processes. To do this we need time to engage with the relevant stakeholders that we represent, and effectively participate in the consultation process.
248
C.2 Customer impact analysis
We consider Endeavour Energy and Essential Energy could improve their customer
impact analysis by including all their tariffs in their customer impact analysis and by
also showing the change in tariffs in absolute dollar terms.
We consider all of the NSW distributors customer impact analysis could be improved
by including the following:
For each tariff where there is an option to opt-in to another tariff a comparison
between the tariffs could be made. For example at the residential and small
245
Energy Australia Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6
May 2016, p.7 246
Energy Australia Submission: AER issues paper: Tariff structure statement proposals: NSW electricity DNSPs, 6
May 2016, p.3 247
Energy Consumers Australia (ECA) Submission: AER issues paper: Tariff structure statement proposals: NSW
electricity DNSPs, May 2016 p.12 248
Public Interest Advocacy Centre (PIAC Submission: AER issues paper: Tariff structure statement proposals: NSW
electricity DNSPs, 6 May 2016, p.3-4
127 New South Wales —Tariff structure statement— Draft decision
business level a comparison between the declining block tariffs and the time-of-use
tariffs could be made.
The analysis of time-of-use tariffs could show different profiles of peak and off-peak
usage so that customers can see how changing their behaviour can influence their
bill.
An example of customer impact comparison between types of tariffs at the residential
level between the declining block tariff and the time-of-use tariff is set out in the
following figure.
Figure C-2 Residential customer consumption 5 MWh per annum
The customer impact analysis provided by each of the NSW distributors is limited. Of
the three distributors Ausgrid provided the most information regarding customer
impact. This included figures showing customer impact under Ausgrid's indicative
tariffs for 2018-19 compared to current 2015-16 tariffs in absolute dollar terms and in
percentage terms. The analysis showed the customer impact for each level of annual
consumption. An example of Ausgrid's customer analysis is set out below in Figure C-3
and Figure C-4.
700
720
740
760
780
800
820
840
860
880
900
Block tariff TOU P18% S29%OP53%
TOU P20% S35%OP45%
TOU P33% S33%OP33%
Do
lllar
s p
er
ann
um
128 New South Wales —Tariff structure statement— Draft decision
Figure C-3 Customer impact under Ausgrid's indicative network use of
system prices - declining block tariff FY 2015-16 vs FY2018-19
129 New South Wales —Tariff structure statement— Draft decision
Figure C-4 Customer impact under Ausgrid's indicative network use of
system prices - residential declining block tariff - percent terms FY 2015-
16 vs FY 2018-19
Ausgrid provided this analysis for each of its proposed tariffs. Ausgrid also provided the
same analysis for a high volume and low volume scenarios.
Endeavour Energy's customer impact analysis was limited to its residential declining
block tariff and its small business (general supply) inclining block tariff. It showed only
the percentage change in bills for customers on these tariffs for each of the financial
years 2016-17, 2017-18 and 2018-19, as set out below in Figure C-5. It did not show
the change in absolute dollar terms. We consider additional information showing the
change in dollar terms would provide customers with a better understanding of the bill
impact and would be easier for customers to understand. Further we consider the
customer impact analysis should have been extended to all of Endeavour Energy's
tariffs.
130 New South Wales —Tariff structure statement— Draft decision
Figure C-5 Endeavour Energy's indicative pricing impact
Essential Energy's customer impact analysis is limited to the impact in percentage
terms to average annual MWh for the different customer groups as set out below:
Residential declining block tariff and time-of-use customers consuming 5MWh per
annum,
Non-residential declining block tariff and time-of-use consuming 8MWh per annum,
LV demand customers consuming 496MWh per annum,
HV demand customers consuming 5.7GWh per annum, and
Subtransmission customers consuming 13.2GWh per annum.
It does not show the change in absolute dollar terms or the impact on customers with
either higher or lower consumption. We consider Essential Energy could improve its
customer impact analysis by including all their tariffs in their customer impact analysis
and by also showing the change in tariffs in absolute dollar terms.
131 New South Wales —Tariff structure statement— Draft decision
Figure C-6 Essential Energy customer bill impacts by tariff type year on
year change