Electricity Networks Service Standards: An Overview

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1 Electricity Networks Service Standards: An Overview A Report for the NSW Department of Premier and Cabinet 2 September 2014 Final Report HoustonKemp.com

2 Report Author/s Ann Whitfield Tom Graham Contact Us Level 40, 161 Castlereagh Street, Sydney NSW 2000 Phone: Disclaimer This report is for the exclusive use of the HoustonKemp client named herein. There are no third party beneficiaries with respect to this report, and HoustonKemp does not accept any liability to any third party. Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information. The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligations is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof. All decisions in connection with the implementation or use of advice or recommendations contained in this report are the sole responsibility of the client. HoustonKemp.com

3 Contents Summary iii Standards set by NSW Government ensure network reliability in NSW How is network reliability measured? What are the current reliability standards in NSW? Who sets the Reliability Standard and how is it changed? What legislative arrangements underpin network reliability in NSW? How do the arrangements in NSW compare with those in other jurisdictions? 14 Interaction between the regulatory framework and service standards How are service standards taken into account in the regulatory framework? Incentives to improve service standard performance 19 How does NSW s electricity network reliability performance compare with other states? Electricity distribution Electricity transmission 27 A1. HoustonKemp.com i

4 Figures Figure 1: Electricity Supply Chain 1 Figure 2: SAIDI reliability standards applying to Ausgrid, by feeder-type (vertical lines denote reviews of the standards) 9 Figure 3: Roles and responsibility for determining network reliability standards in NSW 13 Figure 4: Example of interaction between licence standard and incentives under the STPIS scheme 21 Figure 5: Distribution reliability has comparable in NSW to other states, SAIDI 24 Figure 6: Distribution reliability is comparable in NSW to other states, SAIFI 24 Figure 7: SAIDI performance of privately owned distributors is comparable to public businesses 26 Figure 8: SAIFI performance of privately owned distributors is comparable to public businesses 26 Figure 9: Annual Energy Not Supplied in NEM jurisdictions from 2002/03 to 2011/12 27 Figure 10: Transmission reliability is comparable in NSW to other states 28 Figure 11: Privately owned transmission businesses have a comparable level of reliability to publicly owned businesses 28 Tables Table 1: Current distribution reliability standards in NSW (across all customers) 4 Table 2: Distribution reliability standards across the NEM 16 Table 3: Transmission reliability standards across the NEM 17 HoustonKemp.com ii

5 Summary This report provides a summary of the reliability standards applying to the NSW transmission and distribution businesses, and describes the current framework under which these standards are set. This report has been commissioned in the context of the proposed partial lease of the NSW transmission business (TransGrid) and two of the distribution businesses (Ausgrid and Endeavour Energy). It highlights that the framework for setting reliability standards for these network businesses, and the reliability standards themselves, are independent of ownership. These arrangements, and the reliability outcomes the businesses are required to meet, will therefore not change as a consequence of the proposed partial lease of the businesses. Government will continue to be responsible for setting reliability standards The legislative arrangements in NSW that govern the responsibilities and process for setting reliability standards include: The NSW Government is responsible for determining the reliability standards that the network businesses are required to meet. The reliability standards applying to the three distribution businesses are set out as a condition of each of their licences, and are determined by the Minister for Resources and Energy. The reliability standard applying to TransGrid, the NSW transmission business, is contained in a direction to TransGrid from the NSW Government. The partially leased network businesses would continue to need to meet these standards. The businesses would not be free to set their own reliability standards. In all other National Electricity Market (NEM) jurisdictions, reliability standards for both distribution and transmission businesses are also determined independently to the businesses, either by the relevant state/territory governments or by the relevant state/territory economic regulator. These arrangements apply in South Australia (where the network businesses are privately owned), as well as in Queensland, Tasmania and the ACT, where the businesses are publicly owned. In Victoria, the network businesses are subject to reliability targets under the Service Target Performance Incentive Scheme (STPIS), enforced by the Australian Energy Regulatory (AER). The STPIS scheme also applies to the network businesses in the other jurisdictions, in addition to their jurisdictional reliability standards. Reliability standards in NSW are clearly specified For the NSW distribution businesses, reliability standards are expressed in terms of the average frequency of interruptions a customer may face each year, and the average time those outages may last. These standards vary depending on where a customer is located in the network. Customers are entitled to claim a payment if the level of reliability they receive is below the required level. For transmission, the reliability standard is expressed in terms of the amount of redundancy TransGrid must build into its network, in order to ensure that electricity continues to be supplied in the event that some elements of the transmission network suffer a failure. Transmission standards are typically expressed in these terms (rather than in terms of the number of allowed interruptions) due to the material consequences if an outage actually occurs. HoustonKemp.com iii

6 NSW reliability standards are taken to be an obligation on the network businesses in determining regulated revenues The network businesses in NSW are regulated by the AER, under the National Electricity Rules (the Rules). The AER also regulates all of the other network businesses across the NEM, under the same Rules. The Rules require the AER to assess the expenditure proposed by the regulated business to determine whether it reflects the efficient expenditure required to meet the obligations the business faces, including the relevant jurisdictional service standards. That is, for the NSW network businesses the reliability standard determined by the NSW Government is required to be taken as an independent obligation on the business by the AER in making its revenue determination. This requirement is regardless of the ownership of the network. The AER provides incentives for improved reliability outcomes The regulatory framework also includes an incentive scheme for distribution and transmission businesses to improve their level of service performance compared to historic outcomes over time (as well as penalties if their performance level deteriorates). This incentive scheme is determined by the AER under the Rules, and again applies to all transmission and distribution businesses in the NEM. Currently the NSW distribution businesses have been participating in the scheme as a paper trial. However, the incentive scheme will begin to apply to the businesses in the next regulatory period (ie, ), regardless of ownership. The NSW transmission network business, TransGrid, is already subject to the incentive scheme, and will continue to be so. Reliability outcomes in NSW are comparable with other jurisdictions Finally, this report also presents data on reliability outcomes for each of the NSW network businesses since 2006, and compares this with the performance of other distribution and transmission businesses in the NEM. In summary, the data shows that: The reliability performance of the NSW network businesses has traditionally been comparable to that of other network businesses in the NEM; and The reliability performance of privately owned network businesses (ie, those in Victoria and South Australia) is typically quite high (relative to the other network businesses) and has not deteriorated over time. This evidence runs counter to claims that the partial lease of the NSW network business can be expected to lead to a deterioration in reliability outcomes. HoustonKemp.com iv

7 Standards set by NSW Government ensure network reliability in NSW In NSW, the Government is currently responsible for setting reliability standards for the distribution and transmission networks. This responsibility will not change as a consequence of the proposed partial lease of the network businesses. The reliability standards are clearly specified in legislative instruments: The reliability standards applying to the three distribution businesses are set out as a condition of each of their licences, and are determined by the Minister for Resources and Energy; and The reliability standard applying to TransGrid, the NSW transmission business, is contained in a direction to TransGrid from the NSW Government. In all other NEM jurisdictions, reliability standards for network businesses are also determined independently to the businesses, either by the relevant state/territory governments or by the relevant state/territory economic regulator. 2.1 How is network reliability measured? This section describes the measures most commonly used to measure the reliability of electricity networks, and explains what they mean. The electricity supply chain, and the position of the network businesses in that supply chain, is shown in Figure 1 below. Figure 1: Electricity Supply Chain Generation Generates electricity Transmission Carries HV electricity long distances Distribution Carries LV electricity to customers Retail Sell electricity to enduse consumers Electricity Consumers Home, factories, offices etc that use electricity Electricity Networks The term reliability in this report refers to customers experiencing an interruption in their electricity supply as a direct result of the performance of either the transmission network or the distribution network that supplies them. HoustonKemp.com 1

8 2.1.1 Electricity distribution For distribution networks, network reliability is generally measured in relation to supply disruptions, ie, when customers experience an interruption to their electricity supply. Measures of supply disruptions can relate to both the number of disruptions that customers experience, and the length of those disruptions. The most commonly used measures of distribution network reliability are: 1 System Average Interruption Frequency Index (SAIFI); and System Average Interruption Duration Index (SAIDI). SAIFI measures the number of times on average that customers have their electricity cut in a given period, and is typically measured over a year. 2 SAIFI may be calculated across all of a distribution network, or may be calculated for particular areas of the network, or particular types of electricity lines (called feeders ), such as long lines in rural areas. SAIDI measures the total length of time (in minutes) that, on average, a customer would have their electricity supply cut over a given period. 3 Again, SAIDI is typically measured over a year and may be calculated across the whole network, or for particular areas or types of line. These two reliability measures capture two key sources of inconvenience to electricity customers from supply disruptions, ie, how long their electricity supply is off for as well as how often their electricity supply is off. Customers experience less inconvenience (ie, a better level of supply reliability), the lower each of these measures. Reliability standards applied to distribution networks typically set minimum requirements in relation to each of these two measures Electricity transmission An outage on the electricity transmission network could cause widespread and severe disruptions to the supply of electricity. As a result, transmission networks are designed and built to provide a high level of reliability to ensure that the number of outages that actually occur is very low. According to data from the Energy Supply Association of Australia, transmission outages in caused less than three minutes of unsupplied energy (in total) in each of New South Wales, Victoria and South Australia; Tasmania had around nine minutes of unsupplied energy. 4 As a consequence, measures of the reliability of transmission networks do not tend to focus on interruptions in the way that distribution reliability measures do. Instead, transmission reliability standards are typically expressed in terms of the amount of redundancy that must be built into the network to avoid supply outages. 1 Another measure of network reliability that is becoming more commonly reported is the MAIFI. MAIFI captures the average number of momentary disruptions on the network, over a given period (typically a year). Momentary disruptions are defined as disruptions that last less than a certain length of time (currently less than 1 minute, in the case of NSW). These disruptions are typically excluded from measures of SAIDI and SAIFI. Momentary interruptions can inconvenience customers are they require appliances such as clocks and electronic appliances to be reset. 2 SAIFI is calculated as the total number of interruptions that have occurred during the relevant period, divided by the number of customers. Momentary interruptions (which in NSW are currently defined as interruptions less than one minute) are typically not included. 3 SAIDI is calculated as the sum of the duration of all customer interruptions over the period divided by the number of customers. Momentary interruptions (ie, those of less than one minute) are typically not included. 4 ESAA, Electricity Gas Australia No data were reported for Queensland. HoustonKemp.com 2

9 redundancy can be illustrated using the analogy of electric cars, which primarily use an on-board electric engine to take drivers from A to B but typically also have a back-up petrol or diesel engine in case the electric engine fails or runs out of charge. The back-up engine can be considered the redundant element in the electric car, as it is only required if the electric engine cannot operate. Elements of the transmission network include lines, transformers and other network equipment. Redundancy is generally expressed in N-x terms, where x reflects the number of elements that could fail on the network without electricity supply being lost. For example: N-1 means that electricity supply will not be disrupted if one element of the network fails; and N-2 means that supply will not be disrupted if two separate elements on the network fail. Generally speaking, the higher the x, the more reliable the network, as it means that electricity will continue to be supplied, even with more elements of the network not operating. Reliability standards expressed this way are called deterministic standards. Different reliability standards can be defined for different parts of the transmission network. In addition to these input standards, there are also some measures of transmission network outages that are reported on, and are captured within the incentive scheme developed by the AER. 5 These measures focus on interruptions to supply, or failure of network elements, and include: the average circuit outage rate; the frequency of loss of supply events (where an event is defined as being an outage that lasts longer than a pre-specified number of minutes); average outage duration; and the number of times that protection and control equipment fails to operate correctly. 2.2 What are the current reliability standards in NSW? Customers typically prefer higher levels of reliability to lower levels. That is, customers would prefer not to have their electricity supply cut that often, and for interruptions to be fixed more quickly. However it is not costless to improve reliability. Generally, a more reliable network is more costly to provide than a less reliable network. This is because, in order to achieve improved reliability outcomes, more investment in the network is typically needed. There is therefore a trade-off between achieving higher levels of network reliability and the costs associated with providing that reliability. Different customers have different preferences regarding the level (and associated cost) of reliability they receive. The large number of electricity customers means that it would not be practical for them to negotiate directly with their electricity network regarding their preferred level of reliability. In addition, the level of reliability provided by the network cannot generally be varied for each customer. As a consequence, governments or other central bodies typically determine the standard of network reliability that must be provided to customers. The role played by government also reflects a view that electricity is an essential service for customers. 5 This incentive scheme is discussed in section 3.2. HoustonKemp.com 3

10 In NSW the level of reliability that must be provided by the transmission and distribution networks is determined by the NSW Government. The remainder of this section describes the current standards and the legislative and institutional framework under which these standards are determined Electricity distribution The reliability standards applying to the distribution networks in NSW are defined in terms of: required levels of SAIDI and SAIFI, which are specified both for individual feeder types (eg, urban or rural) and as averages for the network across each feeder type; and Guaranteed Service Level (GSL) payments to customers who experience network service performance below the average level. Feeder type refers to the different categories of distribution line within a network. The different feeder types for which reliability standards are set are: Sydney CBD (for Ausgrid only); those in urban areas; and those in rural areas with rural feeders also being distinguished on the basis of length (whether they are short or long ). The rationale for distinguishing reliability standards according to these different line types is that the costs of improving reliability, and the value that customers in those different areas are likely to place on reliability improvements, are likely to be different. These reliability standards are specified as a condition of the distributors licences. The legislative framework underpinning the current reliability standards is discussed further in section 2.4. The current reliability standards applying to the NSW distributors are shown in Table 1 below. Table 1: Current distribution reliability standards in NSW (across all customers) Network Overall Reliability Standards Individual Feeder Reliability Standards Feeder Type SAIDI (minutes per customer) SAIFI (number per customer) SAIDI (minutes per customer) SAIFI (number per customer) Sydney CBD Ausgrid Urban Short-rural Long-rural Urban Endeavour Energy Short-rural Long-rural na na Urban Essential Energy Short-rural Long-rural Source: The Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, p available at: tory_instruments_-_dnsp_conditions_14_-_19_-_july_2014 HoustonKemp.com 4

11 In assessing whether a network business has met these standards, interruptions due to factors outside of the distribution networks control (such as a major storm, or the failure of a customer s electrical installation) are excluded from the measures of actual behaviour. 6 The table shows that the reliability standards that apply to an individual feeder are less stringent than the average that is required to be met across all of the feeders of that type in the network. For example, a customer on an individual feeder in Ausgrid s Sydney CBD network could experience outages totalling 90 minutes over a year (which would be within the 100 minute standard required for any individual CBD feeder), but Ausgrid also needs to ensure that on average customers connected to feeders in the Sydney CBD do not experience outage durations of more than 45 minutes. Since SAIDI and SAIFI are measured as averages across all customers, there may be individual customers who experience service reliability below the required service standard (even though on average the reliability standard is met). The NSW distributors licences therefore also require payments to be made to customers who experience poor service, ie, service that doesn t meet the applicable standards. Specifically, the current licence conditions require NSW distribution businesses to pay: 7 $80 to a customer, where the customer experiences a service interruption that exceeds the interruption duration standard at the customer s premises, and where the customer has made a claim within three months of the interruption. $80 to a customer where the number of interruptions experienced by the customer exceeds the interruption frequency standard at the customer s premises in a financial year, and the customer has made a claim within three months of the end of the financial year to which the interruptions relate. These payments are called GSL payments. As a condition of their licence, the distribution businesses also have to submit the following reliability reports within one month of the end of each quarter to the Minister: 8 A network overall reliability standards quarterly report covering performance against the SAIDI average standards and SAIFI average standards by feeder type and reasons for any noncompliance; An individual feeder standards report on feeders that exceeded the relevant individual feeder standards; and A customer service standards report covering the number of payments made to customers under the GSL conditions of the licence. 6 Specifically, the following interruptions are excluded: Interruptions of less than one minute; interruptions resulting from load shedding, a failure of the transmission system, automatic load shedding due to a power system under-frequency condition, or a direction issued to interrupt supply; planned interruptions; major event days; interruptions caused by a customer's electrical installation. 7 The Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, p. 5 - available at: latory_instruments_-_dnsp_conditions_14_-_19_-_july_ The Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, pp available at: latory_instruments_-_dnsp_conditions_14_-_19_-_july_2014 HoustonKemp.com 5

12 The distribution businesses are also required as a licence condition to produce an annual independent audit report to the Minister and the NSW Independent Pricing and Regulatory Tribunal (IPART) Electricity transmission As explained above, the reliability standards applying to transmission networks typically focus on the standards that need to be met in planning the network (ie, are input standards ), rather than on performance outcomes ( output standards ). The applicable regulatory obligations for the quality, reliability and security of supply that apply to TransGrid are set out in the Transmission Network Design and Reliability Standard for NSW ( the Transmission Standard ), issued by NSW Trade and Investment. NSW Trade and Investment is the lead economic development agency in New South Wales, and comes under the responsibility of several NSW Government Ministers, including the Minister for Energy and Resources. 10 The Transmission Standard specifies that deterministic planning standards apply, under which TransGrid is required to plan its network to meet certain redundancy criteria. The Transmission Standard also states that TransGrid s planning process must be interlinked with the licence obligations placed on the distributors in NSW, ie, TransGrid must ensure that its transmission network is adequately planned to enable the distributors licence requirements to be met. 11 The reliability standards applying to TransGrid require it to plan on the basis of an N-1 criteria (ie, supply can still be provided with one element of the network out) for all areas with the exception of the Sydney CBD, where a higher standard of N-2 is required (ie, supply can still be provided with two elements of the network unavailable). 12 The higher level of redundancy required for the Sydney CBD reflects the greater economic cost associated with supply disruptions to the CBD area, compared with other parts of the transmission network. TransGrid is also required to comply with Schedule 5.1 of the National Electricity Rules (the Rules), which sets out the default planning, design and operating criteria that must be applied by all transmission and distribution businesses in the NEM in operating their networks. Schedule 5.1 does not specify specific levels of redundancy in N-x terms, but does define matters such as: the credible contingency events that must be used by these businesses in planning and operating their networks; minimum standards for certain network services, such as power transfer capability during normal operating conditions (defined the satisfactory operating state ) as well as during the most critical single element outage on the power system. 9 The Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, pp available at: latory_instruments_-_dnsp_conditions_14_-_19_-_july_ See 11 NSW Industry and Investment, Transmission Network Design and Reliability Standard for NSW, December 2010, p NSW Industry and Investment, Transmission Network Design and Reliability Standard for NSW, December 2010, p. 4. In practice the standard is a modified N-2 standard, as it refers to no inadvertent loss of load under agreed combinations of two circuits, two transformers or a circuit and a transformer (rather than all possible combinations of two elements). HoustonKemp.com 6

13 2.2.3 Quality of supply measures The focus of this report is primarily on the framework and standards relating to the reliability of the NSW distribution and transmission networks. However, in addition to network reliability standards, there are also other standards that apply to both the transmission and distribution businesses in NSW. These standards primarily relate to power quality, rather than to interruptions to supply. Power quality refers to factors such as voltage fluctuations and power frequency, which can affect the quality of the electricity supply at a customer s premise. Poor power quality is associated with events such as lights flickering or dimming, rather than supply being disrupted. Poor power quality can affect the operation of electric appliances (for example, requiring them to be re-set) and can be a particular issue for high-tech manufacturing businesses. The NSW network businesses are required to comply with the standards set out in Schedule 5.1a of the Rules, which relate to aspects of power quality. These standards specify the desirable power quality attributes of electricity networks and are aimed at limiting adverse outcomes such as interferences with customer appliances (eg, home electronics, lights flickering etc) or the malfunction of customer or network equipment. 13 These Rules requirements apply to all of the network businesses operating in the NEM, not just those in NSW. Changes to these standards can only occur following a Rule change process undertaken by the Australian Energy Market Commission (AEMC). The Rule change process requires consultation prior to any changes to the Rules being made. 2.3 Who sets the Reliability Standard and how is it changed? Electricity distribution In NSW the Minister for Resources and Energy sets the reliability and performance licence conditions for the distribution businesses. IPART administers the licensing regime on behalf of the Minister and advises the Minister on: 14 the granting, variation or transfer of a licence; the imposition, variation or cancellation of licence conditions; any action to be taken for a contravention of licence conditions; and any remedial action that may be warranted as a result of a contravention of licence conditions. 13 Specifically, the standards set out in the Rules include the following technical system attributes: the frequency operating standards (which are determined by the AEMC Reliability Panel); system stability requirements (transient, oscillatory and voltage); power frequency voltage; voltage fluctuations; voltage waveform distortion (where the businesses are required to comply with Australian Standards); voltage unbalance; and fault clearance times. 14 IPART website, available at: HoustonKemp.com 7

14 The Minister may, at his discretion, review the licence conditions at any time in accordance with the Electricity Supply Act In doing so, the Minister must consult with the Minister administering the Protection of the Environment Administration Act 1991 before varying the conditions of a licence. 16 The current conditions in relation to network reliability came into effect on 1 July 2014, following a review by the Minister. As part of the latest revision, the Minister undertook consultation with key stakeholders including the licence holders (ie, Ausgrid, Endeavour Energy and Essential Energy) and the Minister for the Environment and Minister for Heritage. 17 The Minister also had regard to a review undertaken by the AEMC on the costs and benefits of different levels of distribution reliability that could be provided by the electricity distribution networks in the NEM. 18 This review was requested by the COAG Energy Council, on which the NSW Minister for Energy and Resources sits. Prior to the most recent review, the licence conditions relating to reliability had last been varied on 1 December 2007, and then previously from 1 August The Minister stated that the changes arising from the most recent review are aimed at more efficiently meeting the reliability targets. 20 A key outcome of the latest review was the removal of the deterministic planning obligations placed on distributors (ie, N-x redundancies, similar to those applying to TransGrid). By focusing solely on the output standards for reliability (expressed in terms of SAIDI and SAIFI), the licence conditions provide more discretion for the businesses to determine the most appropriate ways to plan their network to meet the standard, and the most appropriate degree of redundancy to adopt. This discretion is expected to result in the reliability standards being met at a more efficient cost. The reliability standards in NSW gradually increased over the period 2005/06 to 2010/11, ie, the distribution networks have been required to operate increasingly reliable networks, as reflected in tightening standards in relation to SAIDI and SAIFI. This is illustrated in Figure 2 in the case of the overall network SAIDI standards applying to Ausgrid. The tightening of the standards has been both a consequence of the reviews of the standards and consequent changes to the licence obligations, as well as the obligations themselves being specified as gradually tightening requirements. 21 The standards currently applying are fixed until such time as the requirements are reviewed in future. 15 The Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, p. 3 - available at: latory_instruments_-_dnsp_conditions_14_-_19_-_july_ NSW Electricity Supply Act 1995, Schedule 2, Clause 7.2(2) 17 The Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, p. 3 - available at: latory_instruments_-_dnsp_conditions_14_-_19_-_july_ AEMC website, available at: 19 The Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, p. 2 - available at: latory_instruments_-_dnsp_conditions_14_-_19_-_july_ Letter from the Hon. Anthony Roberts MP (Minister for Resources & Energy) to Mr Vince Graham (Chief Executive Officer of Networks NSW), received 13 January 2014 available at: Ausgrid, Regulatory Proposal 1 July 2014 to 30 June 2019, Attachment 5.06, p For example, the licence obligations that applied from 1 December 2007 until 1 July 2014 specified gradually tightening annual standards for SAIDI and SAIFI. Specifically, the licence obligations that applied from 1 December 2007 specified reliability standards for each NSW distributor for 2005/06, 2006/07, 2007/08, 2008/09, 2009/10 and from 2010/11, which tightened annually. HoustonKemp.com 8

15 Figure 2: SAIDI reliability standards applying to Ausgrid, by feeder-type (vertical lines denote reviews of the standards) Note: As outlined in section above, a reduction in SAIDI represents an improvement in reliability. Sources: Ian Macdonald MLC Minister for Energy, Design Reliability and Performance Licence Conditions for Distribution Network Service Providers, 1 December 2007, p. 21 available at: and the Hon. Anthony Roberts MP Minister for Resources & Energy, Reliability and Performance Licence Conditions for Electricity Distributors, Commencement Date 1 July 2014, p available at: tory_instruments_-_dnsp_conditions_14_-_19_-_july_ Electricity transmission The applicable regulatory obligations for the quality, reliability and security of supply that apply to TransGrid are set out in the Transmission Network Design and Reliability Standard for NSW published by NSW Trade and Investment. The standard was published in December 2010, and formalised the previous arrangements between the NSW Government and TransGrid in relation to the required service standards. The Transmission Standard operates as a direction from the NSW Government and places a requirement on TransGrid to plan and develop its network in accordance with the criteria set out in the Standard. 22 The Standard can be changed by NSW Trade and Investment. The process to be followed in making future changes is not prescribed by legislation. In addition, the NSW Electricity Supply (Safety and Network Management) Regulation 2008 requires TransGrid to produce a Network Management Plan and describe the standards that have been adopted (the regulation does not prescribe specific standards itself). A new regulation (Electricity Supply (Safety and Network Management) Regulation 2014) will require that TransGrid needs to have (and get independently verified) an Electricity Network Safety Management System that complies with an independently defined standard (AS 5577). However, this primarily relates to safety, rather than reliability, including safety of people working on the network, the public and 22 NSW Industry and Investment, Transmission Network Design and Reliability Standard for NSW, p. 4. HoustonKemp.com 9

16 contractors, protection of property, protection of the environment (from bushfire and other damage) and the safety risks due to loss of electricity supply AEMC review of a national framework for setting reliability standards The Australian Energy Market Commission (AEMC) recently undertook a review of the framework for setting reliability standards for both distribution and transmission across the NEM, and set out proposals for a national framework for reliability standard setting. The review was undertaken at the request of the COAG Energy Council, on which the NSW Minister for Energy and Resources sits. Importantly, the national approaches would continue to include the NSW Government maintaining responsibility for determining the appropriate level of the reliability standards in NSW (with the option to delegate responsibility for applying the framework to the AER or another body which is independent of the transmission and distribution networks). The COAG Energy Council is currently considering an opt-in model for the adoption of a national framework for reliability. 23 Further work on the development of this model is being progressed. There would need to be a number of Rule changes made before a national arrangement could be introduced, which would involve further public consultation. Key features of the AEMC national framework for both electricity distribution and transmission are outlined in Box 1. 24,25 23 COAG Energy Council Meeting Communique, 1 May 2014, p AEMC website available at: 25 AEMC website available at: HoustonKemp.com 10

17 Box 1: Summary of the key features of the AEMC national framework for setting reliability standards The AEMC national framework for both electricity distribution and transmission proposes a number of key changes from the current situation. The key features of the proposed framework are: Jurisdictional ministers being responsible for determining the appropriate level of reliability with the option to delegate responsibility to the AER or a jurisdictional body; The ability for jurisdictional ministers to specify additional reliability requirements for areas of economic or social importance; Decision making on reliability targets by a body which is independent of the distribution businesses; A transparent and public process for setting reliability targets which requires the assessment and considerations used in setting reliability targets to be published; An economic assessment process to inform the setting of reliability targets. This would involve evaluating the way network costs vary with different levels of reliability and explicitly assessing the expected costs of investments against the value that customers place on reliability and the probability of interruptions; Expressing distribution reliability targets based on the duration and frequency of unplanned interruptions; The expression of transmission reliability standards in terms of network redundancy and requirements relating to when supply would need to be restored following an outage; Greater opportunities to consult with customers and consider community preferences; and National reporting and auditing of reliability performance and planning. HoustonKemp.com 11

18 2.4 What legislative arrangements underpin network reliability in NSW? Figure 3 shows the roles and responsibility of different institutions that apply in relation to determining the network reliability standards in NSW. The NSW Electricity Supply Act 1995 gives the NSW Minister for Resources and Energy the responsibility for setting licence conditions for the NSW distribution businesses. Each of the three distribution network business in NSW is required to hold a licence in order to operate. Schedule 2 of the NSW Electricity Supply Act 1995 covers the granting, variation, transfer and cancellation of distribution licences. Specifically, Schedule 2 states that if the licence holder has knowingly contravened the conditions of the licence, the Minister may either impose a monetary penalty of up to $100,000 on the licence holder, or cancel the licence. 26 The licence conditions include requirements in relation to network reliability. As discussed in section 2.3.1, the Minister may, at his discretion, review the licence conditions at any time. The Act requires that in doing so, the Minister must consult with the Minister administering the Protection of the Environment Administration Act IPART administers the licensing scheme on behalf of the Minister. The reliability standards applying to the NSW transmission business, TransGrid, are set out in the Transmission Network Design and Reliability Standard, rather than in a licence. The other body which plays an important role in relation to the network business operation in NSW is the national energy regulator, the AER. The AER is responsible for: assessing whether the expenditure proposed by the transmission and distribution businesses reflects the efficient expenditure required to meet the reliability standards they are required to meet; and the design and operation of the STPIS, which is an incentive scheme under which network businesses are rewarded for improving their service performance from historic levels, and face penalties if their performance deteriorates. The AER s role in relation to network reliability standards is discussed further in section NSW Electricity Supply Act 1995, Schedule 2 Clause (8), 27 NSW Electricity Supply Act 1995, Schedule 2, Clause 7.2(2) HoustonKemp.com 12

19 Figure 3: Roles and responsibility for determining network reliability standards in NSW HoustonKemp.com 13

20 2.5 How do the arrangements in NSW compare with those in other jurisdictions? The arrangements for service standards in NSW have many similarities with those applying in other jurisdictions, in particular the role of the state government in determining the appropriate level of reliability that must be met by the network businesses in that state. Table 2 and 3 summarise key features of the arrangements relating to network reliability standards across each of the NEM jurisdictions, for distribution and transmission businesses respectively. The table shows that in each jurisdiction, with the exception of Victoria, reliability standards are determined by the state government or by the state regulator, with this process conducted independently from the network businesses. In all cases changes in reliability standards are subject to a consultation process. The role of the state government in independently setting standards does not depend on ownership of the network businesses. In Queensland (public ownership) and the ACT (public/private ownership), the standards are determined by the state government, similar to NSW. The difference between these jurisdictions and NSW relates to the legislative arrangements, with the standards being set out in Industry Codes, rather than directly as licence conditions. However the network businesses in those states are required to comply with the relevant Industry Code, either as a condition of their licence (ACT), 28 or as a consequence of the relevant Electricity Act (Queensland). 29 In South Australia (private ownership) and Tasmania (public ownership) reliability standards are also set out in Industry Codes, although in these states the codes are determined by the state regulator, rather than directly by the government. Again, the network businesses are required to comply with the relevant industry code as a condition of their operating licence The arrangements in Victoria differ to those in the other states. Reliability outcomes for the Victorian distribution businesses are driven solely by the AER s Service Standard Performance Incentive Scheme (STPIS). The Victorian government has decided not to apply additional minimum reliability standards. The Victorian distribution businesses face targets for SAIDI, SAIFI and Momentary Average Interruption Frequency Index (MAIFI) under the STPIS scheme, which are based on the historical outcomes for each business over the previous regulatory period. Financial penalties apply under the STPIS where reliability outcomes are below these levels. Rewards apply where the business achieves performance that exceeds the target. The STPIS scheme also applies to all of the other distribution businesses in the NEM (including those in NSW) and is discussed in more detail in section 3.2. The distinction in the other states is that there are also independent standards applying in addition to the STPIS targets. There is also a different approach adopted to network planning in Victoria. The Australian Energy Market Operator (AEMO) is responsible for transmission network planning in Victoria, and adopts what is termed a probabilistic planning approach. Under a probabilistic planning approach, there is an 28 ICRC, Licence to provide electricity distribution and connection services under the Utilities Act 2000 (ACT) granted to ACTEW Distribution Ltd ACN and Jemena Networks (ACT) Pty Ltd ACN trading as ActewAGL Distribution, as varied on 25 March 2009 Clause 6.2(2). 29 Energex, Regulatory Proposal for the period July 2010 June 2015, July 2009, p ESCOSA, Distribution Licence SA Power Networks, last varied 28 August 2013, Clause Office of the Tasmanian Economic Regulator, ELECTRICITY SUPPLY INDUSTRY DISTRIBUTION LICENCE issued to TASMANIAN NETWORKS PTY LTD, Effective 21 December 2008, clause 3.1 HoustonKemp.com 14

21 explicit assessment of the expected benefits from the higher reliability associated with a network investment, compared to the costs of that investment. This assessment is undertaken on a projectby-project basis, and is sometimes termed an economic approach to planning. The probabilistic planning approach differs from the deterministic (N-x) approach adopted in other jurisdictions, where network planning standards are described in terms of the amount of redundancy required (see discussion in section above). 32 A consequence of the probabilistic planning approach is that there is no separately specified reliability standard imposed on the transmission business in Victoria. Importantly, this difference is driven by the difference in planning approach, rather than the private ownership of the Victorian transmission business. Both approaches to network planning were recognised by the Productivity Commission as being valid alternatives to achieving the same objective in terms of a reliable network As noted in the table, South Australia adopts a hybrid of the deterministic and probabilistic approaches. 33 See for example the discussion at: Productivity Commission, Electricity Network Regulatory Frameworks, Inquiry Report, Volume 2 No. 2, 9 April 2013, pp HoustonKemp.com 15

22 Table 2: Distribution reliability standards across the NEM Jurisdiction Ownership Source of Oversight Jurisdictional/regulatory oversight of reliability standards Reliability standards setting process AER determines efficient expenditure to meet standards NSW Public License conditions Set by the Minister for Resources and Energy. IPART advises the Minister and administers the licensing regime on behalf of the Minister Consultation prior to imposing new license conditions QLD Public Electricity Industry Code Standards are in the Electricity Industry Code, which is issued by the Minister Consultation process specified in Queensland electricity legislation ACT VIC Public/ private Private Electricity Distribution (Supply Standards) Code Businesses subject to reliability targets under AER STPIS scheme* The ACT Government administers the Electricity Distribution (Supply Standards) Code DNSPs face targets for SAIDI, SAIFI and MAIFI under the AER s STPIS scheme. Financial penalties apply under the STPIS where reliability outcomes are below these levels. Standards have not been changed since ActewAGL is required to publish new standards each year (at least as good as the Code) standards) The STPIS targets are based on the historical outcomes for each business over the previous regulatory period SA Private Electricity Distribution Code Electricity Distribution Code is issued by the Essential Services Commission of SA Normal regulatory process, including consultation TAS Public Tasmanian Electricity Code The Tasmanian Electricity Code is administered by the Office of the Tasmanian Economic Regulator Normal Code change procedure, including consultation * Note: The AER STPIS scheme also applies across the other jurisdictions, in addition to the minimum standards established under jurisdictional arrangements. See discussion in section 3.2. HoustonKemp.com 16

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