BORAL ENERGY HOLDINGS LIMITED ACN 004 132 423
Planning & Development
Level 39, AMP Centre 50 Bridge Street Sydney NSW 2000
GPO Box 910 Sydney NSW 1041
Telephone 02 9220 6300 Facsimile 02 9235 1661
Writer’s Direct Dial: 9220 6438
31 March 1998
Mr Stephen Kelly
Associate Director
NECA Limited
Level 7
14 Martin Place
SYDNEY NSW 2000
By facsimile: (02) 9224 8943, Original by mail
Dear Mr Kelly,
Re: Transmission and Distribution Pricing Review
Boral Energy Holdings Limited (Boral) is pleased to provide the National
Electricity Code Administrator (NECA) with written comment in response to its
Transmission and Distribution Pricing Review.
Boral and its subsidiary companies are substantial participants in the
Australian energy market. Through the Boral Building Products and Boral
Construction Materials Groups we are a major consumer of energy in this
country. The Boral Energy group is a significant electricity retailer and trader,
a significant supplier and retailer of natural gas, and is one of the largest
marketers of LPG in Australia.
Boral has taken an active interest in the structure and incidence of
transmission pricing, particularly as it relates to interconnectors. Boral has
actively participated in discussions and correspondence with the Australian
Competition and Consumer Commission (ACCC), Transgrid, Powerlink and
various interested parties over the derogation to the Code involving the
Queensland – New South Wales Interconnect (QNI). Boral has also been an
active participant in the consultation process between the Transitional
Inter-Regional Committee (TIRC) and industry over the Riverlink proposal.
Hence, Boral is particularly interested in those areas of the review which
investigate the incidence of Transmission Use Of System (TUOS) charges and
the locational signals offered by the manner in which they are charged.
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The Scope of the Review
The review is required by its Terms of Reference to consider inter alia:

the locational signals resulting from the transmission and distribution
pricing regimes, including the appropriate balance between cost
reflective and postage stamp elements of charges and the incidence
and treatment of cross-subsidies.
The ACCC in its draft determination on the National Electricity Market Access
Code has further called for the more onerous requirement to:

“re-examine and justify the appropriate balance between cost
reflective network pricing and postage stamp allocation of costs for
TUOS charges;” (p.xvii)
It is this dichotomy between Cost Reflective Network Pricing (CRNP) and
postage stamp pricing and its effects on economic efficiency that are the
primary focus of our comments.
Locational Signals
There is general acceptance that a move to full nodal pricing of Transmission
systems in the NEM is unworkable at this point in time. Whenever full nodal
pricing is not economically justifiable there must inevitably be a trade off
between the degree of complexity of various zonal pricing models and the
simplicity of postage stamp pricing. The dilemma is fundamentally one of the
size of the zone. As the number of zones within a geographical area
increases and the size of the zones decreases, the more cost reflective the
pricing and the more accurate the locational signals become, however there is
an inversely proportional increase in complexity and therefore costs. It is the
role of the NECA review to determine the appropriate balance.
Several market participants favour postage stamp pricing within state
transmission systems, which they argue, are largely unconstrained meshed
systems. However, unconstrained trade will remove price distortions within a
market, it does not imply one delivered price. The argument for one postage
stamp price should be based on simplicity, not lack of constraint.
Unfortunately the simplicity serves to hide price signals to embedded
generation and demand side management options.
The lack of transmission pricing signals promotes the economically inefficient
location of generators. Generators faced with one transmission zone will
locate to minimise fuel transportation charges, regardless of the assets
required to supply their power to the market, perhaps hundreds of kilometres
distant. Zonal transmission pricing within regions is the only way to cost
effectively produce the correct cost reflective price signals in the market.
Given the desire to increase the similarities between the deregulated electricity
and deregulated natural gas industries it is interesting to note that Victoria has
adopted the zonal pricing of transmission systems for pricing the Natural Gas
Transmission system in that state. The Energy Projects Division of the
Victorian Department of Treasury and Finance has chosen to separate the
8 March, 2016
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system into 8 zones, with a further zone to cover the interconnector between
Barnawatha in Victoria and Culcairn in New South Wales.
Interconnectors
The approach adopted in the Code is to regulate all existing interconnectors
and if QNI and Riverlink are any indication it is also the intention for all future
interconnectors to be regulated. The treatment of regulating interconnectors
is to roll the interconnector into the asset base of the Network Service Provider
(NSP), and therefore its revenue is regulated as a return of and on the capital
investment apportioned to the interconnector. This treatment serves to
remove locational signals and is an anathema to the CRNP principles
espoused in the Code.
The nature of interconnectors is that they are relatively straight forward links
between A and B designed to transport product, in this case electricity,
between the two centres. It is logical to treat this transportation link as a
separate zone within a zonal transmission pricing model. This treatment
conforms to CRNP principles and sends the appropriate pricing signals to the
market. Any other treatment of interconnectors artificially promotes the
economically inefficient location of generators and creates a bias in the market
to favour interconnectors over new generation or demand side management
alternatives.
Inter-Regional Surplus
The regulation of interconnectors leads to further distortions in the market
when one looks at the Inter-Regional Surplus (IRS). The IRS is essentially
the revenue that could be captured by an entrepreneurial interconnector for
the transportation of product between regions of disparate price. It is
obviously inappropriate for this surplus to be allocated to regulated
interconnectors, as their revenue is funded through a return on the assets
employed. Hence the appropriate allocation of the IRS is unclear.
By treating all new interconnectors as unregulated and allowing them to
develop hedging products between the markets these artificial market
distortions could be avoided. This action would have the additional benefit of
exposing the interconnector to the same level of risk as its competitors,
generation alternatives and demand side management.
Transition to Zonal Pricing
The introduction of zonal transmission pricing will obviously alarm some
businesses that have unwittingly located in economically inefficient areas, at
least in terms of TUOS costs. Businesses may have made significant
investment decisions under the expectation that the existing postage stamp
pricing regime would continue. The need for some kind of transitional
arrangements, particularly for those businesses are at the extremities of the
network, should be acknowledged.
However, the transitional arrangements must take the form of external
subsidies, they should not be covered in the code, nor should they be funded
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by the market. Any subsidy must be treated in the same manner as
Community Service Obligations and be funded by government. The benefits
of electricity reform to the economy and the Competition Principles Agreement
payments should adequately compensate.
Conclusion
Boral supports the introduction of cost reflective zonal transmission pricing to:
increase the level of price signals in the market; allow the locational benefits of
embedded generation to be assessed against transmission system
augmentation; and encourage major electricity consumers to make investment
decisions to locate in economically efficient locations. Further, all new
interconnectors should be treated as unregulated interconnectors to avoid the
market distortions which creates the IRS and expose the interconnector to
comparable risk as its competitors.
Yours sincerely
JOHN HAYWARD
General Manager, Planning and Development
8 March, 2016