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Electricity Tariff Setting Benchmarking and Comparative Analysis: Australia and Thailand.

Introduction

Although incentive regulation of energy networks is now widespread, the countries over the world have different tariff mechanisms. Every country has its own tariff's structure that designed to cater their economic and political needs. In the past few years, many researches have emphasized on the best practice of tariff setting mechanism.

In this paper, we are particularly interested to delve out the practices of electricity tariff setting in Australia and Thailand. The study aims to make a benchmark and comparison on tariff's price determination given with different country's regulation and policies, socio-economics environment and demographic structure. We explore the determinants and methods used in electricity network regulation covering different chains of electricity networks namely generation, transmission and distribution. The primary objective of this paper is to provide a benchmark and comparative analysis which eventually will contribute to the process to encourage efficiency and to ultimately pass any efficiency gains on to consumers, in the form of lower prices and higher quality of service.

As for this paper, we formalize the lessons from the summary of our interviews with the respective regulators and compare the tariff setting mechanisms in selected countries. Apart from the interviews, we had also gathered data and information from published materials including tariff schedule books, statistics from regulators' websites as well as journals, analysts' reports and other literatures.

Literature Review

Benchmarking is typically used during the electricity price review process to arrive an efficient improvement for utility firms. There is a variety of benchmarking techniques to choose from. All of the methods aim to compare the performance of firms to each other and to identify sources of inefficiency. The choice of method is, however, complicated. Different methods can produce different results. The final choice very much on timing, sector and country context (Agrell and Bogetoft, 2004; Farsi et al., 2007).

Haney and Pollitt (2011) in an attempt to explore the determinants of 'bestpractice' benchmarking in electricity network regulation had concluded that the existence and experience of an independent regulator is the most important institutional determinant of best practice regulation. In addition, small numbers of network companies act as a constraint on the use of advanced benchmarking methods. The findings however has led to another question whether one 'best practice' model is in fact applicable to countries with very different political and economic contexts.

In addition, the ultimate use of benchmarking results by regulators may differ. This can be affected by the role of the regulator in a particular jurisdiction and by the decision-making processes in place, i.e. if there are inputs other than benchmarking results for regulatory decision-making. As benchmarking techniques constitute a central component of incentive regulatory schemes, there has been considerable interest in the choice of techniques across jurisdictions (Jamasb and Pollitt, 2001, 2007, Haney and Pollitt, 2009).

Jamasb and Pollitt (2001) highlighted that it is important that for the regulators collect national and international data through formal co-operation and exchange. New regulators need to pay ample attention to developing good data collection and reporting systems. A precondition for international comparisons is to focus on improving the quality of the data collection process, auditing, and standardization within and across countries. This effort has begun but needs to be advanced.

Data and Methodology

This study has utilized both primary and secondary data and information. The primary data were gathered from our interview with the Electricity Generating Authority of Thailand (EGAT) and Australian Energy Regulator (AER) while the secondary data were sourced from various published literatures including tariff schedule books, statistics from regulators' websites, academic journals, analysts' reports and other literatures.

Discussion and Findings

Australia

Market Structure

Energy Council of Australia has created three agencies to oversee major functions of policy, rules and regulation, compliance and market operations. They are;

a) Australian Energy Market Commission

The Australian Energy Market Commission (AEMC) governs the National Electricity Rules, National Gas Rules and the National Energy Retail Rules for the National Electricity Market, natural gas and energy retail markets.

b) Australian Energy Regulator (AER)

It is a national energy market regulator. AER sets the allowable revenue supposed to be made by the network operators. The revenue should be able to cover the operation cost of network operators. AER is also in charge to allow maximum prices the operators can charge to end customers. The regulator also monitors electricity markets and enforces compliance with rules and legislation. In addition, AER also regulates energy retail markets in some jurisdictions where it can; i) authorise retailers to sell energy, ii) approve retailers' policies for dealing with customers in hardship, iii) administer a national retailer of last resort scheme, and manage the national energy price comparison.

c) Australian Energy Market Operator

The Australian Energy Market Operator (AEMO) is responsible for the day-to-day management of wholesale and retail energy market operations. It monitors i) the National Electricity Market, ii) Victorian Declared Wholesale Gas Market, iii) Short Term Trading Market, and retail markets. The regulation also facilitates retail competition, allowing customers to purchase energy from a supplier at their choice.

Electricity Tariff Setting

The costs encountered by electricity retailers (see Table 1), which consequently used as a reference for the determination of retail electricity prices can generally be classified into three categories namely; i) retail operation costs, such as meter, billing and marketing costs, ii) network costs and iii) wholesale electricity costs. Of these,10 percent weighted from retail component while 45 percent each from network and electricity costs.

Network Costs

The 'network' costs can be grouped into two categories namely; i) Transmission network- the costs involve the transmission of high voltage electricity from the generators to the states in the country. ii) Distribution network costs- It comprises of lower voltage power lines linking the transmission network to end customers. The transmission costs contribute 10 percent of the retail prices while the distribution costs represent about 35 to 50 percent. Both segments are highly capital intensive and typically is being monopolized by one service provider.

On a different note, AER's pricing typically derived from the allowed amount of revenue that reasonably be required to cover costs (as stated in the National Electricity Rules). The costs include i) Operational and maintenance expenditure,(i.e wages and rents, ii) Return on capital (capital expenditure, iii) Depreciation costs and iv) Taxes.

The Return on Capital (ROC)

ROC can be annually determined within one period of tariff review. This can be achieved by determining the value of network assets at the beginning of the period and roll out until the end of the year. The assets should be then adjusted the depreciation, inflation and expected capital expenditure. Secondly, the utility firm applies a Weighted Average Cost of Capital (WACC) on the assets base at the beginning of the year. In this case, the WACC also considered as a commercial return on capital. It is important to note that capital expenditure is a crucial driver for the asset base and AER typically approves its capital expenditure in every 5 years.

Weighted Average Cost of Capital

WACC is determined at the beginning of regulatory period. It comprises of five main components (see Table 2):

The WACC can be written as equation below:

WACC = gearing ratio * (risk-free rate investment assets + debt risk premium) + (1 - gearing ratio) * (risk-free rate investment assets + market risk premium * equity beta)

= NRFR + 0.6 * debt risk premium + 0.4 * 0.065 * 0.8 (1)

Wholesale Electricity Costs

The wholesale electricity market in eastern and southern Australia is traded through the National Electricity Market (NEM). The NEM is a wholesale spot market where the generators sell the electricity. The Australian Energy Market Operator (AEMO) schedules the lowest cost generation to meet demand every five minutes up to 30 minutes to arrive a spot price. The Generators bid the prices they are willing to sell in every five minutes interval. The Australian Electricity Market Operator (AEMO) then starts the bids initially from the lowest priced bid up to the price where the market reaches it equilibrium in the session (interval).

Thailand

In Thailand, the Ministry of Energy (MOE) manages the national energy policy. The electricity tariff setting regulatory falls under the Energy Regulatory Commission. The function of the commission includes regulating the generation, transmission and distribution of electricity in the country. The energy market in the country is controlled by three government-linked utility companies namely i) Electricity Generating Authority of Thailand (EGAT), ii) Metropolitan Electricity Authority (MEA) and iii) Provincial Electricity Authority (PEA). EGAT carries out power development planning, and their new power development plan. EGAT purchases power from IPPs and small power producers (SPPs) and from neighbouring countries (Lao PDR and Malaysia) and supplies it wholesale to the Metropolitan Electricity Authorities (MEAs) and Provincial Electricity Authorities (PEAs) which then distribute the power to the states within the country. The electricity is also being sold directly to major customers. They also hold power transmission and supply facilities as an operator of the power grid. EGAT is also accountable for the regulation of; i) Electric power generation, ii) Transmission and iii) Bulk sale.

Generation

Main electricity generating companies include; i) Electricity Generating Authority of Thailand (EGAT). EGAT generates, transmits and sells electricity to MEA and PEA which then distribute and sell electricity to customers, ii) Electricity Generating Public Company Limited (EGCO) and Ratchaburi Electricity Generating Holding Public Company Limited- the company involves in the private electricity generation business and iii) other independent power producers including small power producers with power plants.

Transmission

EGAT is a sole operator of the electricity transmission system in the country.

Distribution

There are two distribution companies in the country namely i) MEA- It is responsible for electricity distribution in Bangkok city area and ii) PEA- It distributes electricity outside of the Bangkok and city area. The supply of electricity in Thailand id dominated by government-linked company through single buyer scheme. In this case, EGAT is the single buyer of bulk electricity under terms and conditions adhered by the Energy Regulatory Commission (ERC) to ensure the best and fair prices for customers as well as energy resource optimization. Other supplying electricity to MEA and PEA, EGAT's direct customers, as prescribed by law include Siam Cement Group (SCG), Chonlaprathan Cement Company Limited, and HMC Polymers as well as neighboring countries

Electricity Tariff Setting

There is a separation between fixed investment and variable cost in Thai's tariff structure. The government currently maintain uniform tariff policy where there is a cross-subsidy between urban and rural utilities. The EGAT, MEA, and PEA electricity tariffs are closely regulated by the independent Energy Regulatory Commission. Ultimate approval rests with the NEPC and the cabinet. The tariff structure aims to (i) reflect economic costs and promote the efficient use of electricity, (ii) secure the financial health of these three state-owned power utilities, (iii) reduce subsidies between different categories of consumers, and (iv) adjust electricity tariffs through a mechanism that is flexible and automatic.

The tariff is divided into a base tariff and a fuel adjustment charge. The base tariff is a bulk supply tariff, comprising the wholesale tariff that EGAT charges MEA and PEA and the fixed retail tariff that MEA and PEA charge power consumers during each regulatory period. The factors used to calculate the base tariff include forecasts of the demand for electricity; fuel prices; and expenses for power generation, transmission, and distribution. They also take into account capital expenditures by EGAT, MEA, and PEA, as well as a return on invested capital.

Automatic Tariff Adjustment Mechanism

The Automatic Tariff Adjustment (Ft ) is a mechanism for adjusting the power tariff so that it reflects the actual fuel cost for power generation at a given period of time, thus making the tariff charged on consumers fair, transparent and reflects the actual power supply cost.

Ft will be adjusted in line with changes in EGAT fuel cost , the power purchase cost and the impact of policy expense which are beyond control of the Power Utilities.

Ft and Base Fuel Cost

BFC is calculated from the fuel cost, power purchase cost and policy expense, which correspond to the retail Ft for the round of May - August included in the base tariff.

Estimated Fuel Cost - Estimation of the fuel cost, power purchase cost and policy expense for the present round.

Fuel Adjustment cost- The difference between the "Estimation" and the "Base" of fuel cost for the present round (the Ft for the present round).

Accumulated Factor (AF) - The accumulated difference between the "actually calculation-derived Ft" and the "Ftcharged" in the previous round Ft for the present round

= the sum of FAC and AF divided by the estimated retail units in the present round (EU) Where, Ft = (FAC + AF) / EU

Conclusion

The tariff setting methodologies are varies among countries around the globe depending on the geographical areas and the needs to support the nations' rules and policy. The Australia's generation market is known as "network" which supplies a bulk demand to the wholesale market. In Thailand, it is known as transmission market. From the transmission, the electricity then transferred to consumers and known as "retail" in Australia and "distribution" in Thailand. The Thai's electricity industry is governed by the government through ERC. The country established EGAT, who is the sole generator of the electricity in the country. On the distribution side, MEA plays a role to distribute electricity in the urban areas while PEA responsible to distribute electricity in rural areas. As for Australia, the country has AEMC, AER and AEMO to rule the national electricity market, regulate network businesses and monitor the electricity market operation respectively. The electricity market is open where there are a number of power generators and wholesalers i.e Origin Energy, AGL Energy and Amaysim Energy.

In terms pricing, in Australia, the prices of electricity from retailers to households and small businesses confined by the price cap imposed by state regulators (except in Victoria). On the upstream level, there is no fuel adjustment charge is allowed for the Australia tariff setting. On the other hand, the Thai's tariff is subject to the change of fuel prices, which is revisable for very four months. However, the Australia's wholesale market allows the tariff to be determined by the players in the market. The generators bid the prices that they feel fair for them in five minutes interval.

Acknowledgements

This study is part of the research project granted by Tenaga Nasional Berhad (TNB) through UNITEN R&D Sdn Bhd under TNB Seed Fund, U-TE-RD-17-08.

References

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Zulkifli Abdullah (*)

College Business and Accounting, Universiti Tenaga Nasional, Malaysia

Noriza Mohd Saad

College Business and Accounting, Universiti Tenaga Nasional, Malaysia

Norhayati Mat Husin

College Business and Accounting, Universiti Tenaga Nasional, Malaysia

Nora Yusma Mohamed Yusof

College of Business Management & Accounting, Universiti Tenaga Nasional, Malaysia.

Email: ZulkifliAbd@uniten.edu.my

Joon Ibrahim

Ahmad Lutfi Mohayiddin

Mohamad Taufik Mohd Arshad

Department of Regulatory Economics, Tenaga Nasional Berhad, Kuala Lumpur, Malaysia.

(*) Corresponding Author
Table 1: Costs Considered by Electricity Retailer.

Market            Weight  Tariff Setting

Retail Operation  10      1) Reset every 1-3 years
Costs                     2) Includes customer acquisition and
                             retention, billing, meter
                             reading etc.
Network costs     45      1) Reset every 5 years
                          2) Network revenues capped by the Australian
                             Energy Regulator
Wholesale         45      1) Determined every 5 minutes
electricity               2) Set in the National Electricity Market 3)
                             Price cap exists, but is rarely binding

Table 2: Weighted Average Cost of Capital

Gearing ratio           Set at 0.6. It is being used as the weight given
                        to the cost of debt in
                        the WACC.
Nominal risk-free rate  Proxied by 0-year CGS's yield.
Debt risk premium       Proxied by 10-year BBB+ rated corporate bonds'
                        spread.
Market risk premium     Set at 6.5 percent
Equity beta             Set at 0.8
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Article Details
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Author:Abdullah, Zulkifli; Saad, Noriza Mohd; Husin, Norhayati Mat; Yusof, Nora Yusma Mohamed; Ibrahim, Joo
Publication:Global Business and Management Research: An International Journal
Geographic Code:8AUST
Date:Apr 1, 2018
Words:2864
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