On 15 June 2012, the Commission announced that it had decided to commence an investigation of the wholesale electricity component of the retail costs that make up the standing contract price.
On 18 December 2012, the South Australian Government announced a major policy change regarding price regulation of retail energy prices. In light of this announcement, the Commission has suspended its wholesale electricity cost (WEC) review.
Given the significance of its standing contract price setting role, the Commission is seeking public comment on the issues raised in the Discussion Paper, and any relevant related issues, in order to ensure that it has the best available evidence to draw on in making and reporting any findings.
The Commission’s 2010 determination of the standing contract price included wholesale cost allowances that were based on the long run marginal cost of generation. The Commission was unable to rely on wholesale contract data for that review, given the lack of liquidity in the trading of wholesale contracts. Wholesale market liquidity has since increased, and market data suggests that wholesale costs incurred in retailing to standing contract customers may have changed from the amount determined through the long run marginal cost approach.
The Commission flagged in its 2010 Price Determination that such a review may occur, should liquidity in the wholesale market improve.
The Commission intends to conduct the investigation over the course of the next 6 months. If the Commission determines that there has been a material change in the wholesale electricity relevant to the standing contract price, it will make any consequential change to the standing contract price in December 2012, to apply from 1 January 2013.
Comments are sought on the Discussion Paper by close of business on Wednesday, 18 July 2012.
Publications
The Commission has received a total of 20 written submissions in response to the issues raised in the Wholesale Electricity Costs Discussion Paper.
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A late written submission was received from Uniting Communities.
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A supplementary submission was received from AGL following up on its previous submission to the Commission's Discussion Paper. This subsequent submission is in response to a number of issues raised by various stakeholders in their submissions.
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A further submission was received from the SA Council of Social Services (SACOSS).
Submissions
The Commission sets and regulates retail prices for the 25% of small customers (residential and business customers using less than 160 megawatt hours per annum) who have a “standing contract” offered by AGL SA. The other 75% of customers have elected to sign “market contracts” with their retail provider, which are not price regulated.
In setting the retail price for the standing contract, ESCOSA takes into account all the costs the retailer incurs, including the wholesale electricity cost – the expected cost a prudent and efficient retailer must incur to buy electricity to serve standing contract customers.
To provide retail contracts to electricity to their customers, retailers buy from the electricity spot market. Buying from the spot market means that prices can be very volatile. Prudent retailers generally “insure” against this spot price risk through hedging arrangements. As hedging costs are significant, the wholesale electricity cost is significantly above the average spot price. The wholesale energy costs represent about a third of the total cost of supplying electricity to retail consumers.
In setting the 2011-14 standing contract price in December 2010, ESCOSA did not use its preferred Energy Purchase Cost method (observing market data), as uncertainty over carbon pricing resulted in less public trading of hedging contracts. ESCOSA instead used the long run marginal cost (LRMC) of electricity generation in South Australia. The LRMC is the long-run cost of building new generation plant.
ESCOSA has monitored data on market-based contracts since the 2011-14 price was set and in July 2012 determined there was sufficient evidence to review the wholesale cost component of the standing contract price. Uncertainty over carbon pricing has dissipated and trading in hedging contracts has increased significantly.
Preliminary evidence indicated wholesale costs were lower than had been estimated in 2010 and this was confirmed in a subsequent investigation. Therefore, ESCOSA now proposes to reduce the wholesale electricity cost component of the electricity standing contract price to reflect this change. As a result, ESCOSA proposes an 8.1% reduction in the electricity standing contract price. This would reduce the average bill of a typical residential standing contract customer by around $160 per annum (GST inclusive).
The Commission has released today a Draft Determination to change the wholesale cost allowance for public consultation.
ESCOSA welcomes comment from all interested parties on the Draft Determination and will consider all submissions in making its Final Determination. Comments are required by COB 26 October 2012.
ESCOSA will make a Final Determination in early December and the change in the standing contract price (if any) will apply from 1 January 2013. As the Commission’s Final Determination will take account of submissions on its Draft Determination and subsequent changes in wholesale costs, the Commission’s Final Determination may be different to its Draft Determination.
Publications
On 2 October 2012, the Commission released for public consultation its Draft Determination to change the wholesale cost component of electricity standing contract prices. As part of that consultation process, a stakeholder has requested access to certain specific data used by Frontier Economics in its wholesale electricity cost model. To facilitate consultation, the Commission will publicly release the data on its website on Monday, 22 October 2012.
To give stakeholders reasonable opportunity to study the further data set, the Commission will extend the closing date for consultation on the draft determination from 26 October 2012 to Monday, 5 November 2012. However, this will mean that the Commission will not be able to release a final determination by early December; instead, it will release its final determination shortly after 19 December. Should that determination lead to a change in the standing contract price, it remains the Commission's intention that such a change would be effective from 1 January 2013.
On 2 October 2012, the Commission released for public consultation its Draft Determination to change the wholesale cost component of electricity standing contract prices. As part of the consultation process, the Commission has released requested wholesale electricity cost modelling data developed by Frontier Economics Pty Ltd. The material is available from the Commission's website from today, Monday, 22 October 2012.
As previously notified, in order to provide stakeholders with an opportunity to review this material, the Commission will extend the closing date for consultation on the Draft Determination from 26 October 2012 to Monday, 5 November 2012. Accordingly, this will mean that the Commission will not be able to release its final determination by early December, as originally proposed; instead, it will seek to release its final determination shortly after 19 December 2012 with a view that, should the determination lead to a change in the standing contract price, that such a change would be effective from 1 January 2013.
Publications
The Commission has received written submissions in response to its Draft Determination of the wholesale cost component of electricity standing contract prices.
Submissions
On 18 December 2012, the South Australian Government announced a major policy change regarding price regulation of retail energy prices. In light of this announcement, the Commission has suspended its wholesale electricity cost (WEC) review.
The Commission provided a media release with a statement from Paul Kerin, CEO.
Publications
From 1 February 2013, energy prices in South Australia were deregulated and the Commission no longer has responsibility for setting electricity and gas standing contract prices. The Commission therefore did not make a Final Determination of its review of the wholesale energy component of the electricity standing contract price.
