Asset Management - Why the regulator is interested

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Asset Management - Why the regulator is interested

  1. 1. Asset management – Why the regulator is interested John Tamblyn, Chairperson, Essential Services Commission Victoria
  2. 2. Introduction <ul><li>Commission’s role </li></ul><ul><li>Establishing a framework for good asset management </li></ul><ul><li>Performance reporting </li></ul><ul><li>Incentives approaches </li></ul><ul><li>Conclusion </li></ul>
  3. 3. Essential Service Commission <ul><li>Established in 2002 under ESC Act </li></ul><ul><li>Three person commission </li></ul><ul><li>Independent from Government </li></ul><ul><li>Primary objective - protect long term interest of consumers with regard price, quality and reliability </li></ul><ul><li>Facilitating objectives – financial viability, long term investment, efficiency </li></ul><ul><li>Coverage – water, electricity, gas, export grain handling, ports, freight rail, taxis & tow trucks, TAC, WorkCover premiums </li></ul>
  4. 4. Water sector responsibilities <ul><li>The Commission became the economic regulator of the entire Victorian water sector on 1 January 2004. </li></ul><ul><ul><li>3 Metropolitan water retailers and Melbourne Water </li></ul></ul><ul><ul><ul><li>responsible for service regulation of retailers since 1995 </li></ul></ul></ul><ul><ul><li>15 regional water businesses </li></ul></ul><ul><ul><li>5 rural water businesses </li></ul></ul><ul><li>The Commission is responsible for decisions on </li></ul><ul><ul><li>customer service standards </li></ul></ul><ul><ul><li>performance monitoring and reporting </li></ul></ul><ul><ul><li>the approval of prices that are to apply from 1 July 2005 </li></ul></ul><ul><ul><li>arrangements for supplying services between water businesses </li></ul></ul>
  5. 5. Why is the regulator interested in asset management? <ul><li>In performing this role, the Commission will aim to: </li></ul><ul><ul><li>provide incentives for water businesses to deliver efficient, reliable, sustainable and affordable services </li></ul></ul><ul><ul><li>ensure that water prices provide sufficient revenue to meet costs of efficient service delivery: </li></ul></ul><ul><ul><ul><li>maintaining and augmenting infrastructure assets </li></ul></ul></ul><ul><ul><ul><li>satisfying obligations imposed by other regulators (such as standards for effluent discharges and drinking water quality) </li></ul></ul></ul><ul><ul><ul><li>meeting the service needs and expectations of customers </li></ul></ul></ul><ul><li>Effective and efficient asset management is central to delivering efficient water services . </li></ul>
  6. 6. Commission’s approach to asset management <ul><li>The Commission seeks to provide the incentive and financial capacity for water businesses to </li></ul><ul><ul><li>maintain service quality and supply reliability in line with the needs and preferences of customers </li></ul></ul><ul><ul><li>to deliver services efficiently, so that customers pay no more than they need to </li></ul></ul><ul><li>The Commission does not seek to make decision about the day-to-day operation or management of assets. </li></ul><ul><li>It does seek assurance that best practice asset planning and management strategies are in place </li></ul>
  7. 7. Framework - overview <ul><li>Commission’s approach has been to: </li></ul><ul><ul><li>incorporate generic requirements for good asset management into regulatory codes </li></ul></ul><ul><ul><ul><li>compliance evaluated by independent regulatory audits </li></ul></ul></ul><ul><ul><ul><li>targeted audits in response to poor performance </li></ul></ul></ul><ul><ul><li>establish meaningful output performance standards/targets </li></ul></ul><ul><ul><li>provide incentives (and sanctions) to encourage efficient service delivery, including: </li></ul></ul><ul><ul><ul><li>public reporting on output performance of regulated businesses </li></ul></ul></ul><ul><ul><ul><li>requiring compensation payments to customers who receive poor service (eg lengthy or frequent supply outages); </li></ul></ul></ul><ul><ul><ul><li>Adjusting price price controls to reflect over or under performance against reliability targets; </li></ul></ul></ul><ul><ul><ul><li>taking enforcement action, as a last resort, where businesses fail to meet requirements of regulatory codes. </li></ul></ul></ul>
  8. 8. Asset management - code obligations <ul><li>As an example: regulated electricity businesses are required to </li></ul><ul><ul><li>assess and record the nature, location, condition and performance of their distribution system assets </li></ul></ul><ul><ul><li>develop and implement plans for the acquisition, creation, maintenance, operation, refurbishment, repair and disposal of its distribution system assets – </li></ul></ul><ul><ul><ul><li>to comply with the laws and other performance obligations which apply to the provision of distribution services </li></ul></ul></ul><ul><ul><ul><li>to minimise the risks associated with the failure or reduced performance of assets </li></ul></ul></ul><ul><ul><ul><li>in a way which minimises costs to customers </li></ul></ul></ul><ul><ul><li>Undertake contingency planning </li></ul></ul>
  9. 9. Establishing standards / target <ul><li>Commission normally sets service standards/targets as part of periodic pricing decisions: </li></ul><ul><ul><li>unambiguous service performance requirements </li></ul></ul><ul><ul><ul><li>consultation with users on service expectations </li></ul></ul></ul><ul><ul><ul><li>Clarify implications for capex and opex </li></ul></ul></ul><ul><ul><li>incorporated into 5 year price determination </li></ul></ul><ul><ul><li>Provide financial incentives for meeting service targets </li></ul></ul><ul><li>Network standards are based on : </li></ul><ul><ul><li>historic performance trends </li></ul></ul><ul><ul><li>service preferences of customers & their willingness to pay for improvements </li></ul></ul><ul><ul><li>iterative process between regulator and business </li></ul></ul>
  10. 10. Performance Monitoring <ul><li>ESC publishes annual performance reports covering quality, reliability, affordability & customer service </li></ul><ul><ul><li>reports published for electricity and gas distributors and metropolitan water retailers </li></ul></ul><ul><ul><li>Yardstick comparisons provide improvement incentives </li></ul></ul><ul><ul><li>Time series data allows comparisons over time </li></ul></ul><ul><ul><li>opportunity for businesses to comment/explain </li></ul></ul><ul><li>Reporting plays an important role in </li></ul><ul><ul><li>informing consumers about the level of service </li></ul></ul><ul><ul><li>increasing transparency and accountability of regulated businesses </li></ul></ul><ul><li>ESC has seen substantial benefits from public reporting </li></ul>
  11. 11. Financial incentives <ul><li>Without financial incentives to maintain service, the cost imperative could result in erosion of quality </li></ul><ul><ul><li>X factor and S factor in price cap to balance cost and service efficiency incentives </li></ul></ul><ul><li>Financial incentives to meet service Standards include: </li></ul><ul><ul><li>integration of quality of service regulation with price setting processes </li></ul></ul><ul><ul><li>compensation to customers through guaranteed service levels </li></ul></ul><ul><ul><li>statutory penalties for non-compliance with standards </li></ul></ul>
  12. 12. Conclusion <ul><li>In combination, these incentives, comparative competition and code compliance measures have </li></ul><ul><ul><li>proved to be effective in the energy industry in encouraging regulated businesses to focus on efficient asset management and investment practices, which have </li></ul></ul><ul><ul><li>delivered improvements in the quality and reliability of service to customers. </li></ul></ul><ul><li>Such arrangements in the water industry are expected to be effective in similar ways </li></ul><ul><ul><li>Commission considering appropriateness of these approaches to water </li></ul></ul>
  13. 13. Further Information <ul><li>Essential Service Commission </li></ul><ul><li>2 nd floor, 35 Spring St; Melbourne Vic 3000 </li></ul><ul><li>Phone: +61 3 9651 0222; Fax: +61 3 9651 3688 </li></ul><ul><li>Email: reception@esc.vic.gov.au </li></ul><ul><li>Website: http://www.esc.vic.gov.au </li></ul>

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