- Not for attribution - E xperience with TFP methods in regulation of E xperience with TFP methods in regulation of North American electric utilities North American electric utilities Presentation to Australian Energy Australian Energy Market Commission Market Commission 201 Elizabeth Street 201 Elizabeth Street Sydney Sydney A.J. Goulding, President A.J. Goulding, President ajg@londoneconomics.com ajg@londoneconomics.com London Economics International LLC London Economics International LLC November 18 th th , 2008 , 2008 November 18
Key messages Key messages � Use of TFP is the exception, rather than the norm, for North � Use of TFP is the exception, rather than the norm, for North America America � Where TFP is used, no agreed upon model exists for either � Where TFP is used, no agreed upon model exists for either analysis or for the regulatory framework analysis or for the regulatory framework � Hybrid models incorporating earnings sharing mechanisms � Hybrid models incorporating earnings sharing mechanisms (ESMs ESMs) often preferred ) often preferred ( � Regulators struggle with choice of relevant geographical � Regulators struggle with choice of relevant geographical regions and historical time periods for comparative analysis regions and historical time periods for comparative analysis � On the wires side of the business, North American � On the wires side of the business, North American regulators have tended to be followers rather than leaders, regulators have tended to be followers rather than leaders, with limited awareness of trends overseas with limited awareness of trends overseas 2 NOT FOR ATTRIBUTION
Plan of presentation Plan of presentation Overview of North America Overview of North America California California Canada Canada New England New England 3 NOT FOR ATTRIBUTION
There is significant variety in utility There is significant variety in utility ownership structures in the US ownership structures in the US Total wires assets (above Capacity by ownership Number of consumers (2005) served (2005) 230 kV) owned (2006) Other Coop 3% 4% Cooperative 11.70% Federal Federal 7% 0.03% Public 14.57% Power Marketer Cooperative 4.66% Non-Utility 37% 31% IOU 58% IOU IOU 69.03% Muni 48% 7% Publicly owned 5% Source: Energy Velocity 4 NOT FOR ATTRIBUTION
Overlapping regulatory jurisdictions Overlapping regulatory jurisdictions hinder market evolution hinder market evolution INTERSTATE COMMERCE WITHIN STATE BORDERS FERC FEDERAL EPA FERC jurisdiction over ROLE SEC transmission for FERC FERC FERC bundled retail DoJ consumers NRC FTC ELECTRIC electricity retail electricity wholesale consumer transmission ISOs LDCs sales generation trading long distance gas retail consumer gas LDCs GAS pipelines production sales state siting state siting STATE ROLES state commission & commission & commission environmental environmental bodies bodies 5 NOT FOR ATTRIBUTION
Wires business has not been major focus Wires business has not been major focus of North American regulators of North American regulators � US regulators in particular lack “ “clean slate clean slate” ” � US regulators in particular lack unable to force unbundling unable to force unbundling � � different forms of organization different forms of organization � � mix of state and federal jurisdiction mix of state and federal jurisdiction � � � Focus largely on whether or not to move to competitive Focus largely on whether or not to move to competitive � wholesale markets wholesale markets US now seeing “ US now seeing “return to return to ratebase ratebase” ” � � concern about generation concern about generation- -driven price spikes to end users driven price spikes to end users � � retail markets and procurement take up much of regulators’ retail markets and procurement take up much of regulators ’ � � time in unbundled states time in unbundled states renewables programs also absorb regulatory bandwidth programs also absorb regulatory bandwidth renewables � � � Financial stability also key regulatory concern Financial stability also key regulatory concern � “ring ring- -fencing fencing” ” of finances of finances “ � � consideration of mergers consideration of mergers � � 6 NOT FOR ATTRIBUTION
Use of TFP in electric distribution Use of TFP in electric distribution ratesetting relatively rare in North America relatively rare in North America ratesetting Maine: TFP has been used in rates for Central Maine Power and Bangor Hydro Electric Companies. Expired end-2007, still awaiting next phase Proposals/interest in using Ontario: TFP TFP to inform rate design in considered in Alberta and British Columbia ratesetting for all distribution companies. Now on Massachusetts: third generation PBR TFP has informed rate design as part of Settlement Agreement with Nstar SPP IRM: 35.6% Wind: - California: TFP used for Hydro: 4% rate setting for San Diego Gas and Electric and Southern California Edison from mid-1990s until 2000-01 crisis TFP has been used in a small number of gas distribution cases, including in Ontario, Massachusetts (Boston Gas, Berkshire Gas and Bay State Gas), and in California (SDGE and SCE gas distribution) 7 NOT FOR ATTRIBUTION
Jurisdictions using TFP differ in population Jurisdictions using TFP differ in population and usage and usage Population (millions) 40 35 30 25 20 15 10 5 0 Alberta California Maine Massachusetts Ontario Electricity consumption (MWh per capita) 25 20 15 10 5 0 Alberta California Maine Massachusetts Ontario Source: US Census Bureau, Statistics Canada and Energy Velocity 8 NOT FOR ATTRIBUTION
Summary of TFP features in case studies Summary of TFP features in case studies Jurisdiction Company Length X Factor Inflation Other features of term Factor California Southern California 6 years Rolling with 1.5% CPI ESM and Z factor Edison (SCE) average San Diego Gas and 4 years Rolling with 1.5% Industry ESM and Z factor Electric (SDG&E) average specific Ontario All distribution 3 years 0.72% plus 0.2-0.6% GDP-IPI Z factor, companies stretch factors incremental capital module Maine Central Maine Power 7 years Rolling with 2.57% GDP Price ESM and Z factor (CMP) average Index Bangor Hydro Electric 6 years Rolling with 2.4% GDP Price ESM and Z factor Company average Index Massachusetts Nstar 7 years Rolling with 0.63% GDP Price ESM and Z factor average Index 9 NOT FOR ATTRIBUTION
Plan of presentation Plan of presentation Overview of North America Overview of North America California California Canada Canada New England New England 10 NOT FOR ATTRIBUTION
California is dominated by three distcos distcos and and California is dominated by three rate design is influenced by the 2000- -01 crisis 01 crisis rate design is influenced by the 2000 Three major investor- -owned utilities are owned utilities are Market snapshot - California � � Three major investor Key facts PG&E, SCE and SDG&E, which serve over PG&E, SCE and SDG&E, which serve over Population 36.5 million 2/3rds of state customers 2/3rds of state customers Consumption 242.5TWh Number distcos 41 Challenges include growing load, � � Challenges include growing load, Source: FERC "Electric Power particularly into more remote areas, and particularly into more remote areas, and Markets: California" and California Public Utility Commission natural disasters (e.g. wildfires) natural disasters (e.g. wildfires) www.cpuc.ca.gov/puc Distcos severely affected by 2000 severely affected by 2000- -01 01 � � Distcos electricity crisis, which bankrupted the electricity crisis, which bankrupted the largest utility PG&E and forced a return to largest utility PG&E and forced a return to California Public Utilities Commission cost of service regulation: cost of service regulation: • Responsible for regulating privately owned electric, natural gas, Severe criticism at regulatory and trading Severe criticism at regulatory and trading � � telecommunications, water, railroad, rail arrangements, including price cap on arrangements, including price cap on transit and passenger transportation companies rates, no pass through of underlying costs rates, no pass through of underlying costs • Staff of over 1,000 and no ability to hedge against spot price and no ability to hedge against spot price • Responsibilities in electricity include: ensuring provision of safe and reliable Return to vertically integrated cost of Return to vertically integrated cost of utility service and infrastructure; � � determining reasonable rates; service plus ROE regulation following service plus ROE regulation following environmental enhancement; and crisis. PBR continued only in meeting crisis. PBR continued only in meeting supporting the Californian economy specified performance targets specified performance targets 11 NOT FOR ATTRIBUTION
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