load profiling for the nsw gas mass market

NSW Natural GasAchieving Strategic and Operational Readiness For FRC

2001

Load Profiling for theLoad Profiling for the NSW Gas Mass Market NSW Gas Mass Market

Prepared byTrowbridge Consulting

26 June 2001

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Outline of Presentation

Introduction

Full Retail Competition

Forms of Load Profiling

The Objectives of Load Profiling

Summary of Arrangements for NSW Gas

Retailer Impacts

Key Customer Impacts

Profiling in Electricity and Victorian Gas

Conclusions

1

2

3

4

5

6

7

8

9

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Introduction

The wholesale gas market in NSW is a Contract Carriage Model (compared to Victoria which is a Market Carriage Model.)

There is no current spot market for gas in NSW.

Retailers are expected to bring gas to the market in order to meet its customers load in both terms of timing and volume.

With no time of year price signals (eg: a spot market) timing is less important.

1

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Full Retail Competition

Rollout of full retail competition (FRC) to mass market requires a mechanism for allocating the wholesale energy costs for a franchise area between multiple retailers.

Current contestable customers (> 10TJ pa or 2nd Tier > 1 TJ pa) are daily metered and as such timing and volume is known (with appropriate adjustments for UAFG).

Imposing a metering requirement on the mass market would be cost prohibitive and represent a barrier to competition.

Load profiling enables the allocation of wholesale gas and costs to retailers in the absence of daily metering for all customers.

The primary objective of load profiling is to facilitate FRC.

2

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There are two basic forms of load profiling:

Net System Load Profiling (NSLP); and

Load Research Based Profiling.

A third form of profiling (Hybrid NSLP/Load Research Based Profiling) combines elements of these two basic forms.

3

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Net system load profiling is the simplest form of profiling.

It refers to the construction of profiles using the interval (daily in gas, half hourly in electricity) metered system load for a defined geographical area.

The net system load broadly represents:

the aggregate energy consumed during a day (gas) or half hour (electricity) by all customers located in an area; less

the energy consumed by customers in that area that are interval metered (eg. large industrial/commercial customers).

Net System Load Profiling

3

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The following chart illustrates the net system load shape for the Victorian Wholesale Electricity Market on two different days.

Net System Load For Victoria

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

12

:00

AM

2:0

0 A

M

4:0

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M

6:0

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8:0

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M

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Time of Day

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rtio

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y C

on

sum

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on

wit

hin

Half

Ho

ur

Hot Summer Weekend Day

Cold Winter Weekday

3

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The following chart illustrates the net system load shape (normalised) for the three network regions in NSW gas.

3

Source: From Trowbridge Consulting report to Energy Corporation “Study to identify and Examine Options for Load Profiling and

Reconciliation to Support Effective Retail Competition in the NSW Gas Market”; March 2000, based on data provided by participants.

Daily Load Profiles for Three NetworksProportion of Daily Consumption to Annual Network Consumption

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

Date

Pro

port

ion

of

Daily

Con

sum

pti

on

to A

nn

ual N

etw

ork

Con

sum

pti

on

Network 1 Network 2 Network 3

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Forms of Load Profiling3

Load research based profiling draws on a sample of customers’ historical or live interval metered consumption to construct a profile.

The profiles so constructed can be:

Deemed (ie constructed from engineering or other acceptable estimates eg. street lighting);

Static (ie drawn from a historical sample);

Static Adjusted (ie drawn from a historical sample but adjusted for current effects such as weather); and

Dynamic (ie drawn from a “live” sample).

It is more expensive to construct and maintain/refine.

It must be remembered that a profile is “only a profile”.

Load Research Based Profiling

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The Objectives of Load Profiling4

The primary objective of load profiling is to facilitate FRC.

The secondary objectives are:

Promote an efficient market;

Eliminate barriers to customer choice of retailer;

Minimise barriers to entry for competing retailers;

Protect the legitimate interests of customers;

Minimise cross-subsidies between host (incumbent) and second tier retailers;and

Provide an opportunity for market and technological evolutions.

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User equity - history matters (ie. past investment decisions, existing tariff regime)

- price shocks / volatility unfair and undesirable

- some cross subsidies are considered socially desirable

Economic efficiency- user pays

- encourages demand side response / load shifting

Competing Objectives

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The Objectives of Load Profiling

Equity and efficiency objectives cannot be satisfied simultaneously in the short term.

Arguably, the move to more cost reflective pricing should not be pre-empted or driven by the selection of a profiling regime.

Instead, it is considered important for the industry to retain the option (but not be compelled) to gradually embrace cost reflective pricing over time.

This view is at odds with the efficient pricing objective of load profiling which links the effectiveness of competition to the removal of cross-subsidies.

The tension between these two views is expressed in the following slide in the case of the gas market:

4

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“CommunityRating”

“CommunityRating”

• Shippers book capacity and enter into wholesale producer contracts to meet the requirements of their portfolios.

• Costs should be shared evenly across all users.

• Shippers book capacity and enter into wholesale producer contracts to meet the requirements of their portfolios.

• Costs should be shared evenly across all users.

“User Pays”“User Pays”

• Poor load factor customers require shippers to book more capacity and purchase greater MDQ per unit of AQ

• These customers should pay for the incremental “peak period”supply costs whilst good load factor customers should receive appropriate discounts to their end use prices.

• Poor load factor customers require shippers to book more capacity and purchase greater MDQ per unit of AQ

• These customers should pay for the incremental “peak period”supply costs whilst good load factor customers should receive appropriate discounts to their end use prices.

Key Considerations• Load profiling should not force an immediate move to “user

pays”.• In IPART’s words “end users have made decisions on

location, production and investments in energy consuming equipment based on existing pricing structures and

locational differences. It would be inequitable to substantially change prices in the short term”.1

Key Considerations• Load profiling should not force an immediate move to “user

pays”.• In IPART’s words “end users have made decisions on

location, production and investments in energy consuming equipment based on existing pricing structures and

locational differences. It would be inequitable to substantially change prices in the short term”.1

1: IPART Draft Decision of 28 October 1999 on AGLGN’s Access Arrangement (Attachment 7, Economic Principles for Network Pricing).

1: IPART Draft Decision of 28 October 1999 on AGLGN’s Access Arrangement (Attachment 7, Economic Principles for Network Pricing).


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The Wholesale Gas Market will be balanced based on

Net System Load Profiling (Net Section Load - NSL)

NSL at regional level (Network Section)

Will mean a large number of NSLs (30 or more)

Annual Apportionment (although business rules allow administrator to change)

Forward Reconciliation

Payback over 28 days for Total Reconciliation Amounts (Adjustment to Forecast Withdrawals)

Global Reconciliation (eg: use of equalisation amount)

5

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Summary of Arrangements for NSW Gas5

Key Advantage Key Disadvantage

NSL Simplest form to implement tofacilitate FRC

Does not provide cost reflective pricing

Regionalisationof NSL

Smaller Areas are balancedindividually

Volatility of small areas

Impact of large consumers

Regionalised price signals (not based on truecustomer usage)

AnnualApportionment

Maintains pricing signals incurrent tariffs

Avoids breach of voluntary pricingprinciples

Least Cost Reflective

ForwardReconciliation

No need to recreate Gas Day Does not reflect time of use price signals

28 DayPayback Period

Reduces Risk for Small Portfolios Does not minimise Cummulative ReconciliationBalances

GlobalSettlements

Spread Errors Across allParticipants

Both 1st and 2nd Tier Customers need to beprofiled

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Apportionment

Required to allocate the NSL on a daily basis

Used for both forecast withdrawals and deemed (estimated) withdrawals

Carried out at customer level but summed for retailer

Annual Apportionment

Annual consumption (maybe normalised for weather)

No seasonal effects

Quarterly Apportionment

Annual consumption (maybe normalised for weather)

Allows for some seasonal effects

5

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Reconciliation Amounts

Calculated as Daily Amount

Difference between

Deemed (Estimated) Withdrawals; and

Actual Withdrawals (from Meter read, adjusted for UAFG)

Actual will have “sculpting factor” applied to get Daily Share from cumulative meter read

Considered as Borrowed or Loaned Gas

5

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Forward Reconciliation

Gas Repaid by Adjusting Future Forecast and Deemed (Estimated) Withdrawals

28 Day Payback

Based on Total Reconciliation Amount (TRA) for Day

Each TRA paid back over 28 days

5

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Replicating Portfolio (Theoretical)

Even Share of all “profiled” market segments

Large enough portfolio

Even distribution of timing of meter reads

Retailer will replicate NSLP

No Reconciliation Amounts

Host Retailers will (closely) replicate NSLP (particularly initially)

Other Retailers will head towards replicating portfolios if

Target all Mass Market

Win Large Enough Share

5

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Effects of Payback (eg: Temperature Sensitive Load)

5

Illustration of Withdrawal Profiles for Retailer with Temperature Sensitive PortfolioBased on Annual Apportionment

0

2,000

4,000

6,000

8,000

10,000

12,000

Janu

ary

Febr

uary

Mar

chApr

ilMay

June Ju

ly

Augus

t

Sept

embe

r

Octob

er

Novem

ber

Decem

ber

Date

Dail

y C

on

sum

pti

on

(G

J)

True Withdrawal

Deemed Withdrawal No Payback

Deemed Withdrawal 100% Payback

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Effects on Reconciliation Amounts (Host & Ret2 Replicating, Ret3 Temp Sensitive, Ret4 Baseload)

5

Illustrative Cumulative Reconciliation Amount Annual Apportionment

No PayBackNetwork 1

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

January February March April May June July August September October November December

Date

Cu

mu

lati

ve R

eco

nci

liati

on

Am

ou

nt

GJ

Host Retailer Retailer 1 Retailer 2 Retailer 3

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Effects on Reconciliation Amounts

5

Illustrative Cumulative Reconciliation Amount Annual Apportionment100% Forward Payback

Network 1

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

January February March April May June July August September October November December

Date

Cu

mu

lati

ve R

eco

nci

liati

on

Am

ou

nt

GJ

Host Retailer Retailer 1 Retailer 2 Retailer 3

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End of Year Cumulative Amount is Caused by

Difference

Weather Experienced

Weather Used for Calculating Apportionment Factors

Example Assumes Current year is colder than that used for apportionment.

Lag caused by Meter Reading Cycle and calculation of Cumulative Reconciliation Amounts.

5

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Retailer Impacts

Profiling solutions attempt to maintain competitive neutrality between retailers with respect to their status ie:

incumbent / host / first-tier Vs

new entrant / second tier.

In the absence of a regulatory price cap, net system load profiling will act to equalise the unit energy costs loaded into a host retailer’s offered price regardless of the true load characteristics of a customer.

The equalisation occurs at the boundary used for the NSLP.

Level Playing Field

6

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Retailer Impacts

Equalisation of Price Loaded for Energy Costs

Equalisation of Energy Costs

1 2 3 4 5 6 7 8 9

Customer Type

Un

it E

nerg

y C

ost

($

/MW

h o

r $

/GJ)

CompetitionForces host to price at NSLP Cost or risk losing customers 6 to 9

Opportunity GainIf Host prices at true energy cost, host will be giving up the opportunity to price in the energy cost faced by the STR for customers 1 to 4

NSLP Cost

6

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There are a number of other issues that concern retailers:

choice of profiling area - must provide for host and new entrant to price off the same profile;

diversification benefits - the net system load will typically exhibit lower volatility than the true profile of small portfolios of customers;

reconciliation of meter reads and losses - unaccounted for energy must be fairly allocated;

informational asymmetry - host has privileged understanding of the load characteristics of its former franchise area;

Retailer Impacts

Other Issues

6

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availability of hedges - there is some prospect that intermediaries will offer hedges based on profiles; and

regulatory risk - appears to fall more heavily on host retailers as second tier retailers have a greater ability to “walk away” from an unprofitable market segment.

Retailer Impacts6

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Retailer Impacts

A number of factors will impact on the regionalised profiles

Localised Weather;

Gas penetration (size of area);

Impact of Large (profiled) customers

Customer Types;

Residential versus Commercial;

Appliance penetration.

Consideration when forecasting NSLP

Impact on volatility of profile.

6

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Retailer Impacts6

Three Different TRS/POTS Profiles

Source: From Trowbridge Consulting report to Energy Corporation “Study to identify and Examine Options for Load Profiling and Reconciliation to

Support Effective Retail Competition in the NSW Gas Market”; March 2000, based on data provided by participants.

Illustration of Daily Load Profiles for Selected POTS/TRSProportion of Daily Consumption to Annual Area Consumption

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Date

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of

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to A

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ual A

rea C

on

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pti

on

TRS/POTS 20 TRS/POTS 15 TRS/POTS 3

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Retailer Impacts6

Historical Net System Profile Load Factors Based on Geographical AreasBroken Down to Individual Trunk Receiving and Packaged Offtake Stations

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

Area

Lo

ad

fact

or

TRS/POTSGroupedNetwork

Region 1 Region 4Region 2 NetworksRegion 5

Illustration of Historical Load Factor for Networks,Geographical Areas, TRS/POTS



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Retailer Impacts6

Comparison of Load Factor and Annual Consumption for TRS/POTS

Illustration of Historical Load Factor for Different Trunk Receiving and Packaged Offtake Stations (TRS/POTS) - Note Wilton not included.

20%

25%

30%

35%

40%

45%

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000

Average Annual Consumption GJ

Lo

ad

facto

r



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Retailer Impacts6

Comparison of Historical HDDs for different Geographical Areas

Comparision of Annual HDD by Site

0

500

1,000

1,500

2,000

2,500

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Year

An

nu

al

HD

D

CanberraAirport

Bathurst

ArmidaleUniversity of New England

Albury

Wagga Wagga

BegaMeringo Street

DubboCoorena Road

BankstownAirport

Wollongong

SydneyObservatory Hill

Newcastle

Source: Compiled by Trowbridge Consulting from Data provided by the Bureau of Meteorology

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Retailer Impacts6

Forecast Variations in Load Factor due to Weather



Illustration of Geographic and Network Load Factor Variation for Different Weather ScenariosBased on Forecast Consumption

30%

35%

40%

45%

50%

55%

60%

Geographic Area or Network Area

Lo

ad

Fact

or

Max

Average

Min

Max 56% 48% 45% 47% 55% 56% 46%

Average 51% 42% 42% 45% 50% 53% 43%

Min 45% 36% 38% 41% 44% 51% 40%

Region 1 Region 2 Region 4 Region 5 Network 1 Network 2 Network 3

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Retailer Impacts6

Load profiling is generally not mentioned in retailers’ communications with customers. It is commonly regarded as a matter of interest only to retailers for settling their wholesale energy purchase costs;

Regulators have also tended to shy away from communicating with customers on the method used by their retailer to determine the customer’s energy costs;

Numerous customer surveys reveal that customers are mainly interested in the price implications (ie net overall effect of load profiling) of FRC. Customers also generally require a significant price cut before they will be persuaded to switch supplier;

Most customers found the process of switching under a load profiling regime relatively easy and seamless;

Key Observations From Overseas Implementations

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Retailer Impacts6

Some customers have complained about the difficulty of making price comparisons between retailers, particularly in respect of dual fuel offerings;

We are aware of one utility which has had to defend litigation on its adopted load research based profiling approach for agricultural customers on the grounds that the utility did not have sufficient data to produce statistically significant results. Although the utility in question successfully defended the litigation, the case highlights the need for the industry to tread carefully when adopting load research based profiles for some customer classes.

Larger users will be especially price conscious and aware of the savings available from switching suppliers. Transfer/switching rates for these customers are also generally higher.

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Retailer Impacts6

Marketers do not appear to have neglected the lower income/disadvantaged consumers, but the methods employed for marketing to these consumers are clearly different (greater percentage of door to door selling in UK).

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Customer Segments for each Retail Area

Key Customer Impacts7

Tariff Market Consumption Split for AGLGN

Residential56%

Commercial/Industrial44%

Residential

Commercial/Industrial

Tariff Market Consumption Split for GSN

Residential76%


Residential Commercial/Industrial

Tariff Market Consumption Split for AGC

Residential72%


Residential Commercial/Industrial

Source: IPART Issues Paper “Review of the Delivered Price of Natural Gas to Tariff Customers Served from AGL Gas Network in NSW”; May 1998 and “Review of the Delivered Price of Natural Gas in Wagga Wagga and Albury”; October 1999

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Geographical BreakDown of Mass Market (in terms of annual consumption)


Source: IPART Issues Paper “Review of the Delivered Price of Natural Gas to Tariff Customers Served from AGL Gas Network in NSW”; May 1998

Geographical Dispersion of Tariff Market Consumption for AGLGN

Sydney79%

Wollongong4%

Newcastle6%

Country Areas11%

Sydney

Wollongong

Newcastle

Country Areas

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Customers who are “peakier” than the NSLP (temperature sensitive customers) are subsidised by “flatter” (non temperature sensitive).

We explore the key customer impacts of load profiling under the following headings:

The cross subsidies inherent within the existing tariffs; and

Effect on a customer’s bill; and

Incentives for interval metering.

7

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Consumer to consumer cross-subsidies exist at present as retail tariffs do not reflect the true energy costs.

A load profiling regime that sought to reflect the customer’s “true” energy purchase costs (eg. a load research based profiling regime) or indeed the installation of daily meters would “undo” a significant level of cross subsidy which currently exists.

This may in lead to breach of the voluntary pricing principles and the risk falls to the incumbent retailer because 2nd tier retailers are not bound to compete for unprofitable segments of the market.

In the absence of a reduction in the non energy components of a customer’s bill, the effective price faced by some customer segments would rise.

Cross Subsidies Inherent Within the Existing Tariffs

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Currently in NSW gas, most residential and small business tariffs are based on Uniform Tariffs (No time of Use Signals)

Will this change???

Households with access to gas mains that are actually connected.

AGL Retail Area 60%

Wagga Wagga 80%

Albury 85%

Potential growth (especially in AGL area)

Potential for Tariff Structure to Change

Cross Subsidies Inherent Within the Existing Tariffs

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Load profiling only impacts the energy purchase cost component of a customer’s bill.

Victorian Electricity Example

Network Charges46%

Retail Costs11%

Wholesale Energy Costs17%

Retail Gross Margin24%

NEMMCO Charges

2%

Network Charges52%

Retail Costs9%

Wholesale Energy Costs27%

Retail Gross Margin

9%

NEMMCO Charges

3%

Effect on a Customer’s Bill

Source: From Trowbridge Consulting report to Victorian Distributors “Victorian Electricity Load Profiling Study”; March 2000, based on data provided by participants.

Metropolitan General Domestic Customer(Annual Bill $660)

Rural Hot Water Domestic Customer(Annual Bill $810)

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Illustration of cross subsidies for NSW residential gas customers under NSLP (ignoring Payback).


Comparison of Median Consumer Cross Subsidies by Profiling OptionExpressed as a % of Bills for House Dwellers with 3 Occupants

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Appliance Mix

Cro

ss S

ub

sid

ies

as

% o

f B

ill

Annual NSL

Quarterly NSL

Monthly NSL

Annual NSL -2% 14% -4% -4% 6%

Quarterly NSL -1% 7% -2% -3% 3%

Monthly NSL -1% 4% -2% -2% 2%

CK CH HW CK + HW CH + HW + CK



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Illustration of cross subsidies for NSW commercial gas customers under NSLP (ignoring Payback).


Comparison of Median Consumer Cross Subsidies by Profiling OptionExpressed as a % of Bills for Sample I&C Customers

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Sample Customer

Cro

ss S

ub

sid

ies

as

% o

f B

ill

Annual NSL

Quarterly NSL

Monthly NSL

Annual NSL -5% 27% -6% 32%

Quarterly NSL -3% 20% -4% 23%

Monthly NSL -2% 15% -2% 17%

Small No Heating Small Heating Large No Heating Large Heating



P_13072000_energy2000 45


Payback reduces level of cross subsidies

Depends on class of business

eg: Central Heating Only Customer - reduce from 14% to 10%. (subsidised by others)

Cross subsidies exist in current tariff structure (as discussed)

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Customers with more desirable load characteristics than NSLP

Reasonable size

Clear economic signals for interval metering

As Metering Costs come down size threshold for economic metering will also reduce

Incentives for Interval Metering

7

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Incentives for Interval Metering

7

Annual Consumption per Customer Required Before there is a $400 Cross SubsidyBased on EAPL Costs and Annual NSL Profiling

0

100

200

300

400

500

600

700

800

900

1,000

Customer's Load Factor Calculated Using Quarterly Bill Data

An

nu

al

Co

nsu

mp

tio

n R

eq

uir

ed

(G

J)

Consumption 98 289 1,311 1,458 629 453 376

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mandating of Daily Meters Could be Considered

Retailer has Economic Incentive to Install Meter

Source: From Trowbridge Consulting report to Energy Corporation “Study to identify and Examine Options for Load Profiling and Reconciliation

to Support Effective Retail Competition in the NSW Gas Market”; March 2000, based on data provided by participants.

P_13072000_energy2000 48


Over time the net system load shape will “deteriorate” but become more representative of the load characteristics of the profiled customers.

Incumbent sets tariffs based on NSLP for all customers

The new NSLP ispeakier but more

representative of

remaining customers

Flatter (Non Peaky)

have economic

incentive to install

interval meters

Flatter/non-peakycustomers areovercharged underNSLP

Evolution of a NSLP Regime

7

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Trowbridge Consulting has undertaken quantification studies in load profiling options for the mass market in:

Victorian Electricity (Vic DBs - public document)

Victorian Gas (DNRE - public document)

NSW Gas (ENCorp)

NSW Electricity (advised NSW retailer on response to MIG paper)

The following summarises the current situation in terms of implementation of profiling for FRC.

Profiling in Electricity and Victorian Gas8

P_13072000_energy2000 50

Victorian Gas

FRC expected to commence in mid 2002

5-10TJ customers contestable from 1 Sept 2001 based on a metering solution for 2nd tier only customers.

Net System Load Profiling will be used as balancing arrangement.

5-10TJ customers can choose between metering or profiling once full contestability implemented.

Profiling at Distribution Business Boundary Area (DBBA)

Partial settlements

Backward Reconciliation (Victoria has a daily spot market)

Apportionment Factors based on customer level “like billing period” data, adjusted for EDDs.


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NSW Electricity

FRC expected to commence in 1 January 2002.

There has been a staggered approach for 40-100MWh and 100-160MWh commercial customers (based on metering solution for 2nd Tier.)

Net System Load Profiling to settle wholesale market.

NSLP at Local Network Service Provider (LNSP) boundary

Partial settlements

Controlled Load Profiles (CLPs) (basically Off Peak Hot Water) will be “peeled off” NSLP for both 1st and 2nd Tier customers.

CLPs will be based on sampling


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VIC Electricity

FRC expected to commence in 1 January 2002.

Net System Load Profiling to settle wholesale market.

NSLP will be undertaken at Local Network Service Provider (LNSP) boundary

A Partial settlements regime will operate.

No allowance for “peel-off” of off-peak loads (Hot Water)


P_13072000_energy2000 53

A simple net system load profiling solution has the potential to afford residential and small commercial & industrial customers the opportunity to share in the benefits of full retail competition.

Implementation must be carefully managed recognising the key customer and retailer impacts.

The single largest risk is that the load profiling solution is “over engineered” to the point where the industry loses sight of the primary objective (ie to facilitate FRC).

In considering the optimal solution for preserving the “load shifting” and energy conservation incentives, we believe there is limited value in refining the profiling solution.

The benchmark against which any such refinements should be measured is the cost of interval metering.

A profile can never be made to “behave like an interval meter”.

Conclusions9

load profiling for the nsw gas mass market

Business

operational readiness