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Client Update: Reforming the NWIS

21 October 2016

In brief: Recently, the Western Australian Government released a report on the Pilbara's electricity infrastructure. The report considers the future regulatory landscape and best practice development of the North West Interconnected System and proposes new rules governing access to the system to promote availability, security and cost of supply. Partner Jodi Reinmuth (view CV) and Lawyer Alexander Ninkov look at what the report recommends.  

Background

The responsibility for transmission, distribution and retailing of electricity in the formalised North West Interconnected System (the NWIS)  resides with Horizon Power (Horizon). However, Horizon alone does not have sufficient generation capacity to meet the demand of its customers and, as a result, procures power from other parties to the NWIS, including Alinta Energy and ATCO Australia. The NWIS covers a vast area from Port Hedland to Karratha and this is the area in which Horizon now operates its transmission and distribution network.

The NWIS is as unique as is its setting in the Pilbara of Western Australia. Over 50 years ago, the first iron ore developments opened up the region on a significant scale. Those developments could not have occurred without safe, reliable and efficient supplies of electricity, which formed part of proponents' integrated pit-to-port operations. This necessitated the construction of power assets (generation, transmission and distribution) by private operators for the specific purpose of servicing their projects. To this day, there continues to be a number of power systems which service standalone projects and which are either not connected, or are loosely connected to but do not form part of, the NWIS.

The nature of the development of the region means there is currently no formal governance framework for the administration of the NWIS and this is the focus of the report. The report does not currently contemplate the expansion of the NWIS beyond its current footprint or participants.

Elements of reform

The report, titled Pilbara Electricity Infrastructure – Stage One Report, was prepared by the WA Department of Finance – Public Utilities Office, specifically recommends:

  • separate and divested ownership of the electricity network assets in the NWIS which are currently owned by Horizon;
  • a 'light-handed' regulatory regime to govern NWIS access, providing protections to users of the networks while facilitating a platform to encourage investment in the expansion of the network; and
  • an independent NWIS system operator be established to improve the efficiency of the system's operation.

The report suggests that it may be possible for an appropriate access regime to be implemented within six to 12 months and the divestment of Horizon and establishment of an independent system operator being achieved within two years.

The report envisages that the three initiatives proposed would be implemented as a package, with their purpose being to establish the governance framework required to support the development of a more integrated electricity network. The report also indicates that this governance framework should operate consistently with those principles that have been developed to apply to other electricity networks with a more formal governance framework, although with less complexity given the nature of the NWIS.  

Divestment of State-owned electricity network assets

The report indicates that the integrated development of the NWIS is difficult where a State-owned entity remains as the network service provider. The report argues that a commercial, privately-owned holder of network assets has a greater incentive to provide cost-effective solutions to energy supply and expansions of the network to secure new development projects. As such, the report states, 'Divestment of State ownership of the electricity networks in the Pilbara region is considered a pre-requisite for the success of the other reform measures'.

Development of a 'light-handed' regulatory regime

In late 2014, Alinta Energy and Horizon both made applications for access to each other's NWIS networks under the Electricity Access Code 2004. The report indicates that this 'was a primary driver for the decision to investigate the feasibility of a new NWIS governance model'. Both entities subsequently withdrew their applications, with the report noting that this action was taken 'in preference of a more flexible alternative access approach being developed'. In order to address this commercial imperative directly, the report states that 'The proposed regulatory framework is intended to allow for lower cost access to existing network infrastructure, as well as providing for additional investment over time'.

The report also recognises that generators and electricity users require a formal network access regime to ensure access to network services on fair and reasonable terms. As such, the report specifically indicates that the regulation which applies in the South West Interconnected System may not be appropriate for the NWIS. Rather, they recommend a 'light regulation model' similar to that applied under the National Gas Law and National Gas Rules. Under this approach, there is no price oversight or regulation; rather price and regulation depends on the transparency of information and the imposition of timelines for negotiation, with timely commercial arbitration in the event of a dispute. This approach would require the once-off deeming of certain assets (proposed to be those currently owned by Horizon and Alinta) to be covered by the access regime.

Establishing an independent system operator for the Pilbara

The report also recognises that the NWIS does not have a single, final and agreed set of technical requirements for electricity generation and network operations. Further, there is no one party responsible for system operation with authority to coordinate system recovery following disruption to power flows. To rectify these issues, the report proposes that an independent Pilbara System Operator (PSO) 'be established with formal powers and responsibilities to undertake core system operation functions, with provision for other market-related responsibilities to be undertaken over time'.

The report puts forward two options for the development of a PSO: either a separate entity owned cooperatively by the market participants, or appoint the major network operator (assuming this is no longer Horizon) to have these powers and functions. The first option involves establishing the PSO as a separate entity from the network businesses, via a cooperative approach involving market participants. The PSO would be 'owned' by the NWIS stakeholders but operate independently of them and in accordance with formalised protocols. This option would require a high level of agreement and coordination among market participants that have a diverse range of commercial interests.

The other option confers the role of PSO on the majority network owner. It seems from the report that if the reforms were implemented prior to privatisation, this would entail Horizon continuing in its de facto role as system operator, but on a formalised, legislative basis rather than the informal arrangements which currently exist. Alternatively, on the basis that Horizon's network assets are sold, the incoming owner of the network would be the first responsible operator. The report concludes:

Divestment of Horizon Power's network assets would enable the system operator role to be the responsibility for the new major network owner in the NWIS. This is the recommended approach as the State would have a high level of control over implementation and would also enable the establishment of the system operator to be progressed in line with the divestment process.

 

Indicative timeline

The report indicates that the reforms proposed could be progressively implemented over a two-year period. An access regime could be developed and implemented within six to 12 months, and divestment to an independent network owner and an independent PSO within two years. However, it appears that these timeframes are dependent upon a willingness to divest the Horizon assets and the amenability of the proponents engaging cooperatively in implementing regulatory reform in the NWIS (and the policies of the relevant parties in connection with progressing reform in the period leading up to a State election).

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