❓ A parliamentary question on notice addresses electricity subsidies, price resets, and revenue loss for Verve Energy, with the Minister's response detailing the reasons for the subsidy and the factors affecting electricity pricing.
AnsweredQoN 6232Legislative Council
QuestionView source ↗
(1) What has happened in the past four months that would cause a need for $280 million subsidy for the whole system?
(2) In percentage terms, what was the cut in price of electricity paid to Verve by Synergy as a result of the price reset referred to in Verve’s September and December quarterly reports?
(3) How much revenue will Verve lose in a full year as a result of the price reset?
(4) Will the Minister table Office of Energy’s report recommending the cut in price paid by Synergy for Verve’s electricity?
(2) In percentage terms, what was the cut in price of electricity paid to Verve by Synergy as a result of the price reset referred to in Verve’s September and December quarterly reports?
(3) How much revenue will Verve lose in a full year as a result of the price reset?
(4) Will the Minister table Office of Energy’s report recommending the cut in price paid by Synergy for Verve’s electricity?
AnswerView source ↗
Answered
18 June 2008
Responded by
Leader of the House representing the Minister for Energy
Response time
43 days
(1)
The Government decision to provide the $280 million Community Service Obligation payments to subsidise consumers from July 2009 is not connected to any event or change to the financial position of the Government owned electricity corporations in the first four months of this year.
The Community Service Obligation payments to Synergy, which will take effect from 2009/10, are needed due to the significant increase in the costs of electricity supply in recent years, combined with Government's commitment to phase in the required price increases for consumers over time.
Residential retail tariffs have not increased since 1997 (excluding GST) and are already insufficient to allow Synergy to pay an appropriate price for generation supply to Verve Energy, as evidenced by Verve Energy's negative profitability.
On the other hand, costs to supply electricity in Western Australia have seen substantial increases over this period.
Western Australia's strong economy and international demand for energy, energy infrastructure, commodities and labour have placed substantial cost pressures on electricity suppliers in the form of increased capital, labour, fuel and other costs.
Further cost increases are expected in 2009-10 to reflect the significant investment program being undertaken by Western Power to improve network safety and reliability and develop infrastructure to support the State's fast growing economy. Costs will also be associated with the implementation of climate change policy initiatives.
The Community Service Obligation payment to Synergy will cover the difference between the cost reflective tariff (i.e. the tariff that is reflective of all the costs to supply electricity including generation, transport and retail costs) and the glide path tariff chosen by Government.
(2)
The forecast average price that Verve Energy will receive for supply to Synergy under the Vesting Contract in 2007/08 has reduced by about 9 per cent compared to Verve Energy's original forecast.
Synergy pays Verve Energy for energy and Capacity Credits under the Vesting Contract based on netback pricing, meaning that Verve Energy is paid a price that reflects:
Synergy's revenue from tariff customers and inherited retail contracts covered by the Vesting Contract:
less a net retail margin, which is kept by Synergy;
less network tariffs paid to Western Power; and
less other defined costs relating to Synergy's participation in the wholesale electricity market.
Given the tariff freeze, there is a limited amount of tariff revenue available to support Synergy, Verve Energy, and Western Power.
It was determined during the design of the Vesting Contract that it would be inappropriate to charge Synergy and Verve Energy a different price for access to Western Power's networks than is charged to other retailers and generators that use the network. This is appropriate as Western Power's tariffs are governed by its Access Arrangement, and are independently regulated by the Economic Regulation Authority.
Therefore, given the tariff freeze, the total amount of tariff revenue available to support Synergy and Verve Energy under the Vesting Contract is currently determined primarily by tariff customers' consumption and by total network charges.
The risk of a shortfall in tariff revenue under the Vesting Contract was allocated to Verve Energy. This is because Verve Energy has significant physical assets to support debt, while Synergy has few assets, and therefore Verve Energy is best able to meet these risks.
It would have been possible to allocate the remaining tariff revenues (after deducting network and other costs) differently between Synergy and Verve Energy. However, since Synergy has limited ability to support debt and earns narrow retail margins, it has limited capability to take such risks. As a result, any other allocation of the tariff revenue would simply re-distribute the shortfall between the two corporations.
It was not projected during the disaggregation process that the tariff freeze would cause the scale of financial difficulties that Verve Energy is currently experiencing. While unfortunate, no credible authority at the time was projecting the magnitude of cost increases that are being experienced in the market generally, and in the generation and network sectors in particular. The negative impacts on Verve Energy are therefore greater than originally projected.
The prices that Verve Energy receives for supplying electricity under the netback pricing mechanism under the Vesting Contract are reset on an annual basis to account for changes in Synergy's vesting revenues (determined largely by tariff volumes and the regulated tariff rates) and by costs (largely Western Power's network tariffs).
Verve Energy's forecasts for 2007-08 had assumed a higher netback price than the price determined through the reset process. As a result, Verve Energy simply had to change its forecasts based on the Vesting Contract reset calculations, as opposed to its forecast calculation.
(3)
The estimated reduction in Verve Energy's forecast revenue under the Vesting Contract for 2007-08, compared to its original forecast, is approximately $86 million.
(4)
The report on the Vesting Contract reset outlines the annual revisions to the pricing arrangements. However, as the pricing under the Vesting Contract is commercially confidential, this report is also confidential.
It should be noted that the reset was undertaken in line with the requirements of the Vesting Contract and that both Verve Energy and Synergy were fully involved in this process.
Notice: This document is created or edited using unregistered or evaluation copy of rtLib valid for testing or development purposes only. To use it for productive or any other purposes please register it. You may purchase the license on
http://www.rtlib.com
The Government decision to provide the $280 million Community Service Obligation payments to subsidise consumers from July 2009 is not connected to any event or change to the financial position of the Government owned electricity corporations in the first four months of this year.
The Community Service Obligation payments to Synergy, which will take effect from 2009/10, are needed due to the significant increase in the costs of electricity supply in recent years, combined with Government's commitment to phase in the required price increases for consumers over time.
Residential retail tariffs have not increased since 1997 (excluding GST) and are already insufficient to allow Synergy to pay an appropriate price for generation supply to Verve Energy, as evidenced by Verve Energy's negative profitability.
On the other hand, costs to supply electricity in Western Australia have seen substantial increases over this period.
Western Australia's strong economy and international demand for energy, energy infrastructure, commodities and labour have placed substantial cost pressures on electricity suppliers in the form of increased capital, labour, fuel and other costs.
Further cost increases are expected in 2009-10 to reflect the significant investment program being undertaken by Western Power to improve network safety and reliability and develop infrastructure to support the State's fast growing economy. Costs will also be associated with the implementation of climate change policy initiatives.
The Community Service Obligation payment to Synergy will cover the difference between the cost reflective tariff (i.e. the tariff that is reflective of all the costs to supply electricity including generation, transport and retail costs) and the glide path tariff chosen by Government.
(2)
The forecast average price that Verve Energy will receive for supply to Synergy under the Vesting Contract in 2007/08 has reduced by about 9 per cent compared to Verve Energy's original forecast.
Synergy pays Verve Energy for energy and Capacity Credits under the Vesting Contract based on netback pricing, meaning that Verve Energy is paid a price that reflects:
Synergy's revenue from tariff customers and inherited retail contracts covered by the Vesting Contract:
less a net retail margin, which is kept by Synergy;
less network tariffs paid to Western Power; and
less other defined costs relating to Synergy's participation in the wholesale electricity market.
Given the tariff freeze, there is a limited amount of tariff revenue available to support Synergy, Verve Energy, and Western Power.
It was determined during the design of the Vesting Contract that it would be inappropriate to charge Synergy and Verve Energy a different price for access to Western Power's networks than is charged to other retailers and generators that use the network. This is appropriate as Western Power's tariffs are governed by its Access Arrangement, and are independently regulated by the Economic Regulation Authority.
Therefore, given the tariff freeze, the total amount of tariff revenue available to support Synergy and Verve Energy under the Vesting Contract is currently determined primarily by tariff customers' consumption and by total network charges.
The risk of a shortfall in tariff revenue under the Vesting Contract was allocated to Verve Energy. This is because Verve Energy has significant physical assets to support debt, while Synergy has few assets, and therefore Verve Energy is best able to meet these risks.
It would have been possible to allocate the remaining tariff revenues (after deducting network and other costs) differently between Synergy and Verve Energy. However, since Synergy has limited ability to support debt and earns narrow retail margins, it has limited capability to take such risks. As a result, any other allocation of the tariff revenue would simply re-distribute the shortfall between the two corporations.
It was not projected during the disaggregation process that the tariff freeze would cause the scale of financial difficulties that Verve Energy is currently experiencing. While unfortunate, no credible authority at the time was projecting the magnitude of cost increases that are being experienced in the market generally, and in the generation and network sectors in particular. The negative impacts on Verve Energy are therefore greater than originally projected.
The prices that Verve Energy receives for supplying electricity under the netback pricing mechanism under the Vesting Contract are reset on an annual basis to account for changes in Synergy's vesting revenues (determined largely by tariff volumes and the regulated tariff rates) and by costs (largely Western Power's network tariffs).
Verve Energy's forecasts for 2007-08 had assumed a higher netback price than the price determined through the reset process. As a result, Verve Energy simply had to change its forecasts based on the Vesting Contract reset calculations, as opposed to its forecast calculation.
(3)
The estimated reduction in Verve Energy's forecast revenue under the Vesting Contract for 2007-08, compared to its original forecast, is approximately $86 million.
(4)
The report on the Vesting Contract reset outlines the annual revisions to the pricing arrangements. However, as the pricing under the Vesting Contract is commercially confidential, this report is also confidential.
It should be noted that the reset was undertaken in line with the requirements of the Vesting Contract and that both Verve Energy and Synergy were fully involved in this process.
Notice: This document is created or edited using unregistered or evaluation copy of rtLib valid for testing or development purposes only. To use it for productive or any other purposes please register it. You may purchase the license on
http://www.rtlib.com
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