2014 CAMPUT Energy Regulation Course

Transcription

1 2014 CAMPUT Energy Regulatin Curse Regulatry Refrm and Perfrmance-Based Regulatin Willie Grieve, QC, Chair, Alberta Utilities Cmmissin Tuesday July 1, 2014

2 Intrductin Alternative ecnmic regulatin f prices apprach Mst utility legislatin mandates a frm f cst f service regulatin - rate base rate f return (RBROR) Cncerns abut cst f service incentives, effectiveness f traditinal regulatry tls and regulatry burden have led t examinatins f new appraches t ecnmic regulatin. Legislative prvisins have been added in sme jurisdictins t encurage incentives fr greater efficiency. 2

3 Regulatry tls f RBROR Frward-lking test year f csts and demand with reasnableness assessment After the fact prudence reviews fr assets in rate base and ptential disallwances Cst versight and ptential disallwances f past csts fr frecast purpses Establish service quality levels and standards (penalties) 3

4 Incentive features f RBROR Preference t invest in capital assets (rate base) t imprve earnings (higher rate base means greater earnings) Few incentives t minimize perating, maintenance and administratin csts (reduced csts means lwer rates) Incentives t frecast high csts and lw demand grwth Few regulatry tls t examine prudency f expenses r capital csts and vercme perverse incentives (the capital -expense mix) 4

5 Histrical envirnment Pure utility Vertically integrated utilities Scale and scpe ecnmies Simple crprate structure Limited gegraphic reach Limited technlgical change N affiliates N r limited cmpetitin Full visibility fr regulatrs 5

6 Industry Changes Hlding cmpanies Brad gegraphic reach with utilities spread acrss the cuntry Dis-integratin int generatin, distributin, transmissin, retail Lss f ecnmies f scale and scpe Creatin f affiliates bth regulated and unregulated Technlgical change new alternative energy surces self-generatin Prtins may n lnger be mnplies Transmissin still largely mnply Distributin mnply ISOs 6

7 New tls added fr RBROR Mini rate bases (cst allcatins) Transfer prices frm affiliates Pass thrugh csts and prices deferral and reserve accunts Cdes f Cnduct fr cmpetitin fr affiliate pricing t prtect custmers RBROR incentives remain and may be exacerbated by changes Regulatry burden increases 7

8 Need fr new regulatry appraches Need t address the perverse incentives created by cst f service regulatin traditinal incentives new incentives caused by industry evlutin Need t imprve efficiency incentives and efficiency f regulatin while nt lsing the purpse f regulating Sme frms f incentive regulatin have been adpted and adapted in many jurisdictins fr this purpse 8

9 Hw d cmpetitive markets create incentives? Firm makes tradeffs between price and quality t respnd t custmers Firms largely price takers, nt price setters Firms cannt influence price and s fcus n efficiency Price largely set by marginal cst f mst efficient cmpetitr s fcus is n reducing cst Firms must cntinually imprve t match r better cmpetitin instead f exerting effrt in influencing regulatrs Firms must cpe/adapt t externalities and shcks (as d their cmpetitrs) 9

10 Incentive Appraches RBROR time lags (rate freeze) Cmpany remains in cntrl f timing f next rate case All RBROR incentives remain in place but are muted until applicatin Frward test years Incentives fr greater static efficiency after rates set (but nt t much) Incentives t frecast high csts and lw demand in test perids Dynamic efficiency incentives manifested in regulatry strategy 10

11 Incentive Appraches Earnings Bands Allw greater earnings befre regulatry actin (similar incentives t frward test years) Benchmark r Yardstick Bases rates n rates f peer r similar utilities Almst impssible t find peers because f histry and unique lcal issues f cmpanies Smetimes used as a reference pint fr size f X factrs in PBR (Ontari) 11

12 Incentive Appraches Scial cntract Very flexible Mst ften used fr plitical needs like infrastructure develpment, jb creatin r quality imprvement Can be used t emulate market utcmes thrugh PBR elements Price Regulatin Frmula-based (FBR) r perfrmance-based (PBR) Time-limited s perverse cst-based incentives still arise e12

13 Basics f PBR Start with Phase II cst f service prices Fcus n changes in prices (nt csts) ver time and n quality f service Set plan t cntinue t prvide pprtunity t earn fair rate f return during the PBR perid Eliminate reviews f csts during PBR perid s as nt t distrt incentives Reduce regulatry burden -- eliminate ld regulatry filings (sme new filings) Allw fr price adjustments fr significant unexpected events 13

14 Clser t cmpetitive incentives Utilities mve frm being price setters t price takers Price changes external t the individual utility s cst changes Set by frmula (I X) Inflatin factr: I Prductivity ffset: X Shift frm bttm up pricing t incentives Utility must re-fcus n managing csts Less pprtunity t flw thrugh actual csts Rate cases t influence price reduced Reduced regulatry effrt 14

15 What we want t achieve Cmpanies fcused n management f peratins rather than management f regulatin Regulatin fcused n prices and quality Maintain quality f service Reductin in regulatry burden Rate f change in price increases less than expected under cst f service regulatin 15

16 Alberta PBR Principles (Bulletin ) 1. A PBR plan shuld, t the greatest extent pssible, create the same efficiency incentives as thse experienced in a cmpetitive market while maintaining service quality. 2. A PBR plan must prvide the cmpany with a reasnable pprtunity t recver its prudently incurred csts including a fair rate f return. 3. A PBR plan shuld be easy t understand, implement and administer and shuld reduce the regulatry burden ver time. 4. A PBR plan shuld recgnize the unique circumstances f each regulated cmpany that are relevant t a PBR design. 5. Custmers and the regulated cmpanies shuld share the benefits f a PBR plan. 16

17 Calculatin f PBR rates Annual frmula adjustment with factrs such as I: Inflatin X: Prductivity Stretch factr Exgenus adjustment(s) Flw-thrugh Earnings sharing (if any) Service quality adjustments Other 17

18 Hw are rates calculated? (cnt) Results in smething like: Rt = Rt-1* (1+(I-X)) E S +/- Z Where: Rt = Current year s rate fr each class Rt-1 = Prir year s rate fr each class I = Inflatin Factr X = Prductivity Factr =1.2 E = Custmer prtin f Earnings Sharing S = Service quality penalties, if any Z = Exgenus Adjustment 18

19 Prir Year Rates Tw distinct issues First year ging-in r base rates Sets the rates upn which the frmula is based Usually accept mst recent COS applicatin be it histrical r prspective Rate established is independent f PBR frmula Onging, subsequent years Prir year s rates adjusted by frmula New cst f service case t re-base 19

20 I (Inflatin) Cmpensates fr inflatin increases Cmmn measure is CPI. Hwever CPI is a cnsumer basket f gds nt utility csts. fr example watermeln prices unrelated t transfrmer prices CPI is what is knwn as an utput measure Based n utputs nt inputs (i.e., based n changes in retail prices nt the csts f prductin inputs) 20

21 Output Versus Input Price Indices Output measures likely include prductivity imprvements A $ cmputer vs. a $ cmputer has prductivity imprvements reflected in the price 1990 versus 2010 liter f gas is the same s price cmparisn is pure inflatin 21

22 Output Versus Input Price Indices T address embedded prductivity, industry-specific indices related slely t inputs were develped The I and X variables are ften interlinked and/r require tradeff If I based n an utput measure such as CPI, then need t adjust X t back ut prductivity gains already in the utput measure 22

23 Illustratin: Different Measures f I 23

24 Illustratin f Different Indices 24

25 Illustratin f Different Measures: Gegraphy Surce: Enmax Pwer Crpratin FBR Applicatin Prceeding 12 Exhibit 18 page 13 25

26 X (Prductivity Factr) Prductivity is the rate f grwth f utputs less the rate f grwth f inputs calculated as a percentage Under PBR, utilities cmpete against an external (industry-wide) histrical prductivity measure This is a prxy fr cmpetitive market price pressures 26

27 Ttal Factr Prductivity Ttal Factr Prductivity study is a technique which measures all inputs and utputs t derive a single measure suitable fr cmparisn Range frm ecnmy-wide dwn t industry specific Gegraphic dispersin May nt be a factr fr steel r transfrmers, but may be fr labur Usually disaggregate inputs t Labur Capital Other (materials, rents, services etc) 27

28 Prductivity Variability Annual fluctuatins suggest lnger time series is required Fuel cst hike in airlines shws as decrease in prductivity in ne year when lng term trend is prductivity increase Different time measures, different numbers 25 years: Canada: -0.04% (a decline) versus US: 0.91% Canada-wide prductivity grwth fr averaged 0.8% per year 28

29 Illustratin f TFP Variability 29

30 Stretch Factr A percentage amunt added t X factr Designed t capture gains in excess f industry average prductivity grwth Firms under COS assumed t be less efficient than cmpetitive firms Evidence that prductivity imprvements greater during initial PBR term Stretch factr usually eliminated after the first PBR term 30

31 Exgenus Adjustments Defined as: Unplanned, unexpected r unfrecast Uncntrllable change in csts r revenues Independent f I, X r ther factrs in frmula Nt included in the base rate Material financial impact n utility Can include in rates if the abve criteria met In sme cases the impact is transitry and is a ne time adjustment nly If carries n, may r may nt be subject t the I-X adjustment 31

32 Exgenus Adjustments (cntinued) Utility incented t pass thrugh any negative shcks such as increases in csts, decreases in revenues Allwed exgenus adjustments reduce risk fr bth utilities and custmers Hwever nly utility can take cncrete steps t mitigate thrugh: Planning Cntingency plans Other Fr example, disaster planning, insurance versus self insurance etc. 32

33 Exgenus Adjustments (cntinued) Materiality Determine whether yu can add different sub-material items t get a material adjustment In Alberta Enmax case, chse 1% f revenue as materiality threshld Deal with as situatins arise Difficult t catalgue a list f events that are truly exgenus events 33

34 Exgenus Adjustments (cntinued) Three types: 1. Flw thrugh 2. Exgenus, 3. Off ramps N clear demarcatin between the three. All three allw actual csts t be included in rates One f nly tw classes f items in PBR where actual csts impact rate changes (the ther is capital adjustment if included) 34

35 Flw thrugh Usually agreed at utset f plan Uncntrllable nrmal curse f business charges such as ISO charges t distributin entities Regular, e.g., mnthly ISO charges r gas cst adjustments Nt captured in I r X; in ther wrds independent f these factrs item shuld affect the industry slely and nt ecnmy in general e.g., general tax increase captured in I s des nt apply 35

36 Off-ramps Pre-determined, significant issues Returns beynd specified threshlds Cnsistent service standard breaches If triggered, PBR arrangement either terminated r whlly re-pened Usually smething that raises questins as t whether the structure shuld be revisited 36

37 Earnings Sharing Mechanism Often in initial PBR terms because f uncertainty abut new mechanism Sme early PBRs resulted in very large earnings Parties cncerned with ver/under earning and perceptins Retains vestiges and incentives f RBROR regulatin What ges int the net incme calculatin What are allwable expenses Mutes incentives Why shuld there be any additinal sharing at all? 37

38 Capital Depreciatin embedded in ging-in rates and in TFP studies Factrs Influencing Depreciatin Grwth: new additins increase depreciatin Replacement csts different frm riginal cst changes depreciatin Replacing $ s transfrmer with $ transfrmer Depreciatin decreases when asset fully depreciated Depreciatin rate changes 38

39 Capital (cnt) If depreciatin increases are greater than rates (I-X) and grwth, then shrtfall arises therefre, sme plans include adjustments if capital-related expenses exceed certain threshlds There is n a priri cnclusin as t whether capital additins require an adjustment factr 39

40 Quality f Service PBR creates incentives t cut csts and therefre service quality may be at risk Need t ensure that cmpanies maintain quality Penalties fr specific and general failure t maintain service quality Asset mnitring as a tl fr quality mnitring 40

41 Review/Renewal prcess Review and renewal alternatives include: Full RBROR rebasing Reduces incentives as gains clawed back Increased regulatry cst Keep details fr prudence determinatin Adjust parameters such as I and X Generally the X r stretch factr Adjusts frmula n a g-frward basis Past is past Leaves incentives intact 41

42 Term Length f time between reviews invlves tradeffs Lnger timeframe - mre incentive Lnger term adds certainty t regulatry treatment Lnger term prvides incentive t invest lng term dynamic efficiency Shrter term reduces risk, mutes psitive incentives and exacerbates perverse incentives Indefinite term appears t maximize incentives 42

43 Cnclusin Questins? 43