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tew (12.10.18) - Regulation of natural monopolies & competitive energy markets

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tew (12.10.18) - Regulation of natural monopolies & competitive energy markets

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tew (12.10.18) - Regulation of natural monopolies & competitive energy markets

  1. 1. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 1 REGULATION OF NATURAL MONOPOLIES & COMPETITIVE ENERGY MARKETS – A FOCUS ON TRANSPARENCY Michael Biddison Energy Market & Institutional/Regulatory Advisor USAID Energy Security Project in Ukraine Michael.Biddison@tetratech.com M: +380 97 630 9230
  2. 2. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 2 PRESENTATION OUTLINE I. REGULATORY DEFINITIONS & TERMINOLOGY – REGULATORY TRANSPARENCY – ENERGY NATURAL MONOPOLIES – TYPES OF ENERGY COMMODITIES – COMPETITIVE ENERGY MARKET COMMODITIES II. TRANSPARENCY CHALLENGES IN ENERGY NATURAL MONOPOLY REGULATION III. TRANSPARENT REGULATORY OVERSIGHT OF COMPETITIVE ENERGY MARKETS IV. QUESTIONS TO CONSIDER
  3. 3. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 3 I. REGULATORY DEFINITIONS & TERMINOLOGY
  4. 4. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 4 TRANSPARENCY* • The state in which all relevant data & information is fully & freely available to the public • Transparent markets are desirable because they lead to greater efficiency • Laws & regulations exist in most jurisdictions encouraging or mandating transparency • The perceived quality of intentionally shared information from a sender • It implies openness, communication & accountability • Transparency requires civic engagement across the public sector • A theoretical condition required for a free market to be efficient • Management actions & approaches that radically increase openness *Openness, translucence, clarity
  5. 5. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 5 ENERGY NATURAL MONOPOLIES • An economic term that describes any market situation where the conditions lead to just one firm supplying a product or service, versus more open competition • High barriers to entry – capital intensity (ratio of capital investment to revenues) & substantial investment in fixed assets (relative to variable costs) • Relationship between demand & technology of supply, whereby duplication of the system is incurred at great cost & will provide for lower margins • Energy natural monopoly regulation is necessary to ensure: o Satisfactory performance o Controls over profits o Specific pricing & tariff rates o Quality of service & supply o Extensions & abandonment of service & plant o Even permission to enter the business at all (license requirements) • The classic example is a licensed electric utility in a geographic service territory
  6. 6. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 6 TYPES OF ENERGY COMMODITIES • Natural gas molecules • Energy & power • Gas pipeline capacity • Electricity wireline capacity • Gas storage capacity (depleted reservoirs, salt caverns, LNG facilities, etc.) • Electricity storage capacity (batteries, peak load & demand response power generation plants) • Other (ancillary services & functions)
  7. 7. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 7 COMPETITIVE ENERGY COMMODITY MARKETS • Markets are created when competition between & amongst providers truly exists in the trade of commodity energy services & supplies in a disciplined & well-defined effective & efficient manner o Requires both financial & volumetric balancing & settlements o Level playing field & open access with all entrants & participants o No discrimination – no market dominance tendencies o Provides customer empowerment & customer choices for supplies & services o Efficient & effective energy commodities can translate to lower market prices o Greater market demand can create energy security & reliable energy supplies • Variations of energy commodity markets o Day-ahead, real-time, spot, forward, futures, market exchanges, options, swaps o Firm vs interruptible
  8. 8. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 8 II.TRANSPARENCY CHALLENGES IN ENERGY NATURAL MONOPOLY REGULATION
  9. 9. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 9 THE REGULATOR’S DOCTRINE • Transparency & openness • Quasi-judicial proceedings • Fairness & balance • Reasonableness & objectivity • Consistent & predictable • Gradualism & moderation • Docketed cases drive regulatory proceedings • Regulatory decisions are based on the case docket record • Creative & visionary outlook for regulatory improvements • Pricing & cost awareness • Technology advancements
  10. 10. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 10 INDEPENDENT REGULATORY DECISIONS • All energy regulatory Commissions are driven by defined processes & procedures – based on laws, rules, regulations, policies & mechanisms – Starts with the filings in the docketed proceedings – Follows formal transparent path to arrive at Commission decisions • Decisions are derived democratically by a majority vote of Commissioners • Decisions are only made publicly – Commission public hearings • Decisions can be categorized as Orders, Resolutions, Directives, Procedures, Processes – decisions must be signed & fully explained • Open cases cannot be discussed without ‘open sunshine’ (ex-parte laws)
  11. 11. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 11 PROCEDURAL REGULATORY STEPS • Pre-filing meeting between utility & regulator before case is filed in a docket • Docket filings (tariff & other) – public utilities, stakeholders, Commissioners • Filings reviewed & considered – schedule procedures for the case within 30-60 days • Notice of proceeding & opening of record by the Commission • Interrogatories & data requests are filed in the docket • Filed testimony in the docket by expert legal & technical witnesses • Evidentiary & technical hearings – parties cross examine & build the record • Public hearings – open to the public & held within the service territory • Rebuttal testimony – on issues within the docketed case • Settlements & stipulations – can be accepted throughout the process • Commission orders – draft, final, findings of fact & law • Appeals to courts – constitutional, statutory, procedural
  12. 12. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 12 COMMISSION DECISION-MAKING PROCESS = The minimum steps to assure public transparency Submit application to Commission Docketing Department Commission sets & publishes the hearing schedule Pre-hearing to identify parties, clarify issues, & set comment schedule Parties file comments & testimony Parties review filings & submit rebuttal responses Prehearing Hearing Post Hearing Public hearing Written draft decision addressing all issues & comments Chairman and Commissioners debate & vote on decision Decision is decided & announced publicly Initial appeal to Commission. If denied, Parties can appeal to courts Courts can deny appeal or order Commission to reconsider decision within legal framework Technical Hearing
  13. 13. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 13 EXAMPLES OF MAJOR CASE DOCKET CATEGORIES • Tariff rate design and pricing mechanisms • Fuel cost adjustments • Information gathering and forums • Health & safety matters • Customer service concerns • Filing of annual reports • Non-compliance of Licensees • Enforcement proceedings • Environmental issues • Proposed rules, regulations, policies & procedures • Emergency situations & conditions • Applications for Licenses • Findings & recommendations • Public outreach & media campaigns • Energy security issues • Corruption & self-dealings
  14. 14. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 14 OPEN ACCESS TO COMMISSION RECORDS & DOCKETED CASES • Access of the public & stakeholders to docketed data & information • Annual & other financial reports of utilities • Tariff rate case filings • Commission studies and reports • Maps and other information • Balancing openness and security concerns • All commission decisions must be supported by the record with proper notice & due process
  15. 15. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 15 ILLUSTRATIVE REGULATORY RESPONSIBILITIES • Manage licensing applications & procedures • Initiate codes of conduct • Mandate quality of services & supply standards • Carry-out public relations & public outreach campaigns • Ensure transparency & open communications • Provide for independent & transparent regulatory decisions based on materials filed within the docket • Ensure compliance to natural monopoly & competitive commodity market laws, rules, regulations, policies & license requirements • Conduct docketed cases according to regulatory procedures
  16. 16. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 16 ILLUSTRATIVE REGULATORY RESPONSIBILITIES – 2 • Strengthen EU/international practices & standards • Ensure functional tariff methodology procedures as designated for each individual utility • Develop & simulate energy market forecasts & models • Utilize regulatory accounting standards & Uniform Systems of Accounts • Define & differentiate technical & non-technical losses • Implement docketing procedures & case filing processes • Monitor & evaluate licensee compliance • Strengthen enforcement procedures & penalty processes • Provide responsive customer services & consumer affairs • Specify reporting analyses & record-keeping safeguards
  17. 17. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 17 III. TRANSPARENT REGULATORY OVERSIGHT OF COMPETITIVE ENERGY MARKETS
  18. 18. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 18 CUSTOMER EMPOWERMENT & CUSTOMER CHOICE • Competitive commodity markets drive opportunities to choose suppliers, prices & types of services • Automation, embedded intelligence, smart technologies & small scale resource innovations support the energy marketplace • Distributed assets are cost-competitive with old "economies of scale" centralized production models – allows for variations in customer supplies • Advances environmental & conservation concerns through customer choice of electric power generation (demand of RE generation & usage) • Provides market information on performance standards (licensee reports) • More reflective of true pricing & costs of energy – upstream to downstream
  19. 19. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 19 MARKET REGULATION • Rules that improve market performance & provide safeguards • “Competitive commodity markets” are still subject to various forms of natural monopoly regulation as well as self-regulation • Licensing, certification & registration of market traders, brokers, aggregators • Codes of Practice • Insurance and liability • Patents and intellectual property rights • Customer services & protection • Antitrust and trade regulation • Subject to litigation & filed complaints • Health, safety, environmental & labor laws • Exchange markets • Quality of services & supply standards
  20. 20. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 20 EVOLUTION OF REGULATORY MARKETS • Codes of conduct (ethics) • Openness and transparency • Alternative dispute resolution • Revenue neutrality • Competitive market commodities • Non-discriminatory open access aggregators • Adjustment clauses • Future test year • Unbundling & restructuring • Open access to networks • Bypass of the utility • Economic development rates • Stranded assets • Security & cyber-security
  21. 21. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 21 EVOLUTION OF REGULATORY MARKETS – 2 • Marginal-cost pricing • Least-cost integrated resource planning • Demand-side management & demand response • Distributed resources • Smart grid technologies • Customer aggregation • Mini-grid & micro-grid systems • Management & regulatory audits • Universal service supplier • Social ratemaking – safety-net customers • Public-benefits charges & subsidies • Value-based & market-based ratemaking • Incentive & performance-based regulation
  22. 22. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 22 MARKET EXPECTATIONS • Advance customer rights, reliable of supplies, protection, universal service • Provide market information to customers & ensure market transparency • Address environmental concerns & resource options (e.g., distributed resources & demand response) • Provide dispute resolution & settlement processes • Establish performance standards & frequently evaluate performance • Design data and information monitoring & evaluation platforms to ensure open access & enforce market rules • Develop systems to resolve disputes • Allocate transition costs into a market environment (public benefits, stranded costs) • Measure & promote workable competition
  23. 23. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 23 NATURAL MONOPOLY RATEMAKING WITH A CORE MARKET FUNCTION • Considerable discretion by Commission decision-makers may be made in the regulation of a natural monopoly utility with market supply tendencies • Determination of utility revenue requirements & cost of service assessment for a test year o Allocation of costs to customers based on procurement & usage patterns o Subsidies & cross-subsidies will continue within & between customer classes o Block rates & time-of-day rates are designed to encourage customer efficiency & energy conservation • Rate design to recover natural monopoly & competitive market costs through tariff rates for utility services & market charges for commodities o Utility billing has two parts in a competitive energy market: (i) natural monopoly & (ii) market commodity portions are combined in each monthly bill
  24. 24. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 24 PERFORMANCE MONITORING & KPIs
  25. 25. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 25 INCENTIVE REGULATION & KPIs • Focus on results vs. process (ends over means) • Regulatory efficiency, supply reliability & cost effectiveness are key • Incentives can be positive (rate of return) or negative (disallowances, penalties) for public utilities • A coherent system of incentives & accountability – vs. regulatory micromanagement • Effective performance regulation o Indicators, timing & schedules are negotiated upfront o Performance monitoring with quarterly reviews o Key Performance Indicators (KPIs) o Easy to measure milestones & benchmarks
  26. 26. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 26 FINANCIAL KPIs Key Performance Indicator Monitoring Generation Transmission Distribution Return on investment Benchmark √ √ √ Earnings before interest & taxes (EBIT) Track √ √ √ Current Ratio Benchmark √ √ √ Gearing Ratio Benchmark √ √ √ Interest Service Coverage Ratio Benchmark √ √ √ Debt Service Coverage Ratio Benchmark √ √ √
  27. 27. Indicator Monitoring Generation Transmission Distribution Accounts Receivable (Days) Benchmark √ √ √ Bad Debt Benchmark √ √ √ Working Capital Track √ √ √ Revenue Collection Rate Benchmark √ Revenue Growth Rate Track √ √ √ 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 27 COMMERCIAL KPIs
  28. 28. Key Performance Indicator Monitoring Generation Transmission Distribution Number of customers per employee Track √ √ √ Energy generated, transmitted & distributed per employee Track √ Energy sold per employee Track √ √ √ Energy sold per customer Track √ Operating cost per revenue Track √ √ √ 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 28 EFFICIENCY KPIs
  29. 29. Key Performance Indicator Monitoring Generation Transmission Distribution Number of households connected & electrified Track √ Number & types of customer service complaints Track √ √ Number of customer service responses Track √ √ Customer services complaint response time Track √ 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 29 SOCIAL IMPACT KPIs
  30. 30. Key Performance Indicator Monitoring Generation Transmission Distribution Plant Availability (per generation plant) Benchmark >85% Network Availability Benchmark >95% Capacity Factor Benchmark √ Transmission Technical Losses Benchmark <5% Distribution System Loss (Technical + Non-Technical) Benchmark <20% Reserve Margin Benchmark >15% MWh of load shed (due to breakdowns) Track √ √ √ System Average Interruption Frequency Index (SAIFI) & Duration Index (SAIDI) Track √ Customer Average Interruption Frequency (CAIFI) & Duration Index (CAIDI) Track √ 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 30 TECHNICAL KPIs
  31. 31. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 31 IV. QUESTIONS TO CONSIDER
  32. 32. 10/16/2018 USAID ENERGY SECURITY PROJECT (ESP) 32 QUESTIONS TO CONSIDER • Engineering – technologies, infrastructure, reliability • Are markets governed by clear rules, with appropriate enforcement mechanisms? • Can market efficiency & performance be achieved & reflected in costs & prices? • Can substantial additional benefits be achieved by customer choice & market competition? • Are energy commodity markets & customer & supplier behavior meeting expectations? • What are the next steps for natural monopoly regulation & competitive market oversight?

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