Asset management

1
Asset management Why the regulator is
interestedJohn Tamblyn, Chairperson, Essential
Services Commission Victoria
2
Introduction

• Commissions role
• Establishing a framework for good asset
  management
• Performance reporting
• Incentives approaches
• Conclusion

3
Essential Service Commission

• Established in 2002 under ESC Act
• Three person commission
• Independent from Government
• Primary objective - protect long term interest of
  consumers with regard price, quality and
  reliability
• Facilitating objectives financial viability,
  long term investment, efficiency
• Coverage water, electricity, gas, export grain
  handling, ports, freight rail, taxis tow
  trucks, TAC, WorkCover premiums

4
Water sector responsibilities

• The Commission became the economic regulator of
  the entire Victorian water sector on 1 January
  2004.
• 3 Metropolitan water retailers and Melbourne
  Water
• responsible for service regulation of retailers
  since 1995
• 15 regional water businesses
• 5 rural water businesses
• The Commission is responsible for decisions on
• customer service standards
• performance monitoring and reporting
• the approval of prices that are to apply from 1
  July 2005
• arrangements for supplying services between water
  businesses

5
Why is the regulator interested in asset
management?

• In performing this role, the Commission will aim
  to
• provide incentives for water businesses to
  deliver efficient, reliable, sustainable and
  affordable services
• ensure that water prices provide sufficient
  revenue to meet costs of efficient service
  delivery
• maintaining and augmenting infrastructure assets
• satisfying obligations imposed by other
  regulators (such as standards for effluent
  discharges and drinking water quality)
• meeting the service needs and expectations of
  customers
• Effective and efficient asset management is
  central to delivering efficient water services.

6
Commissions approach to asset management

• The Commission seeks to provide the incentive
  and financial capacity for water businesses to
• maintain service quality and supply reliability
  in line with the needs and preferences of
  customers
• to deliver services efficiently, so that
  customers pay no more than they need to
• The Commission does not seek to make decision
  about the day-to-day operation or management of
  assets.
• It does seek assurance that best practice asset
  planning and management strategies are in place

7
Framework - overview

• Commissions approach has been to
• incorporate generic requirements for good asset
  management into regulatory codes
• compliance evaluated by independent regulatory
  audits
• targeted audits in response to poor performance
• establish meaningful output performance
  standards/targets
• provide incentives (and sanctions) to encourage
  efficient service delivery, including
• public reporting on output performance of
  regulated businesses
• requiring compensation payments to customers who
  receive poor service (eg lengthy or frequent
  supply outages)
• Adjusting price price controls to reflect over or
  under performance against reliability targets
• taking enforcement action, as a last resort,
  where businesses fail to meet requirements of
  regulatory codes.

8
Asset management - code obligations

• As an example regulated electricity businesses
  are required to
• assess and record the nature, location, condition
  and performance of their distribution system
  assets
• develop and implement plans for the acquisition,
  creation, maintenance, operation, refurbishment,
  repair and disposal of its distribution system
  assets
• to comply with the laws and other performance
  obligations which apply to the provision of
  distribution services
• to minimise the risks associated with the failure
  or reduced performance of assets
• in a way which minimises costs to customers
• Undertake contingency planning

9
Establishing standards / target

• Commission normally sets service
  standards/targets as part of periodic pricing
  decisions
• unambiguous service performance requirements
• consultation with users on service expectations
• Clarify implications for capex and opex
• incorporated into 5 year price determination
• Provide financial incentives for meeting service
  targets
• Network standards are based on
• historic performance trends
• service preferences of customers their
  willingness to pay for improvements
• iterative process between regulator and business

10
Performance Monitoring

• ESC publishes annual performance reports covering
  quality, reliability, affordability customer
  service
• reports published for electricity and gas
  distributors and metropolitan water retailers
• Yardstick comparisons provide improvement
  incentives
• Time series data allows comparisons over time
• opportunity for businesses to comment/explain
• Reporting plays an important role in
• informing consumers about the level of service
• increasing transparency and accountability of
  regulated businesses
• ESC has seen substantial benefits from public
  reporting

11
Financial incentives

• Without financial incentives to maintain service,
  the cost imperative could result in erosion of
  quality
• X factor and S factor in price cap to balance
  cost and service efficiency incentives
• Financial incentives to meet service Standards
  include
• integration of quality of service regulation with
  price setting processes
• compensation to customers through guaranteed
  service levels
• statutory penalties for non-compliance with
  standards

12
Conclusion

• In combination, these incentives, comparative
  competition and code compliance measures have
• proved to be effective in the energy industry in
  encouraging regulated businesses to focus on
  efficient asset management and investment
  practices, which have
• delivered improvements in the quality and
  reliability of service to customers.
• Such arrangements in the water industry are
  expected to be effective in similar ways
• Commission considering appropriateness of these
  approaches to water

13
Further Information

• Essential Service Commission
• 2nd floor, 35 Spring St Melbourne Vic 3000
• Phone [phone] Fax [phone]
• Email reception_at_esc.vic.gov.au
• Website http//www.esc.vic.gov.au