Informed comment ? .... from a journalist who does not know his kilowatts from his megawatts

The Mercury: Looks like lights out for unregulated Hydro [02jul06]

Having forged ahead with risky Basslink, the debt-ridden energy provider is due for big changes. Simon Bevilacqua reportsWHEN Hydro Tasmania committed to enter the national electricity market it set sail for uncharted waters.
Australia's new interstate energy market is highly experimental.
The national model is a complex mix of unregulated and regulated players.
It is further complicated by state-owned businesses being pitted against private companies.

Unregulated players, known as Market Network Service Providers (MNSPs), make money trading in the wholesale electricity market.
They rely on spot price differences between interconnected regions, such as Victoria and Tasmania, or contracts.
Regulated players, known as Transmission Network Service Providers (TNSPs), have their revenue capped by the Australian Competition and Consumer Commission and are not as exposed to market variability.
Some economists have speculated that one perfect day all players will be unregulated MNSPs competing in a truly market-driven model.
Len Gill, of the renewable energy specialist Ecogen, told a 1998 Sydney seminar that "if the non-regulated interconnector concept proves successful in practice, it may ultimately do away with the need for regulated interconnections altogether".
At the time, Hydro Tasmania was embarking on the quest to become an unregulated player, via the yet-to-be-built Basslink interconnector.
The Hydro had an advantage over Victorian coal-fired power stations because it could "switch on" hydro power at a moment's notice to tap into brief but lucrative power price spikes.
These spikes, created when Victorians turn on air conditioners in the summer, can be worth $10,000 a kilowatt hour whereas the average is $30.
The theory was an aggressive Hydro on an unregulated Basslink would cash in on Victoria's inability to supply peaks because coal power stations need more time to get energy to market.
In 1981 a federal inquiry had found that an undersea cable joining Tasmania to a national power grid was technically feasible but not economically viable.
Victoria, NSW and South Australia became interconnected in 1990.
In 1991 Victoria and Tasmania commissioned a feasibility study.
By 1994 the world's most prestigious consultancies forecast very lucrative prices and the Basslink dream was vivid.
However, connecting Victorian and NSW markets had tended to flatten price spikes and the optimistic forecasts never fully materialised.
"In reducing Victorian volatility, the link with NSW made an entrepreneurial Basslink, always a questionable proposition, even more remote," said Institute of Public Affairs director Alan Moran in his 1999 paper The Challenge of a Deregulated Market.
But the Tasmanian Government was committed and had formed the Basslink Development Steering Committee, which said a $350 million to $400 million project was viable and an interconnection could be online by 2002.
The Hydro would compete for investment with regulated links whose revenues were capped and recovered through transmission charges, paid by consumers to retailers.
The impact of Basslink on the fledgling market was hard to judge -- uncertainties were huge. That risk deterred investment.
To help the unregulated MNSPs attract investors "safe harbour" provisions were built into the National Electricity Code in 1998.
These allow an MNSP to convert to a TNSP, and therefore reduce exposure to unexpected market flaws.
The provisions were intended to guard against market design deficiencies, not to shield the proponent from normal commercial risks, such as having over-judged the future demand.
MNSP's could apply to convert and the Australian Energy Regulator would assess the value upon which returns could be calculated.
To do so Basslink would need to pass a regulatory test based on market value and public benefit. Revenue would be capped and a less volatile trading arrangement devised.
The annual $92
million facility fee ($2.3
billion over 25 years) that Hydro would pay to use Basslink could then be split between Victorian and Tasmanian consumers, rather than being solely Hydro debt.
"MNSPs were given the right to convert because of the experimental nature of the concept of an unregulated interconnector," said Firecone Ventures energy consultants in a 2003 report.
"It was thought proponents of non-regulated interconnectors could face additional risks relating to market design deficiencies that might only become apparent once the first MNSPs were operational."
By 2000 Basslink's cost had risen to $500
million.
A report prepared in 2002 by PriceWaterhouse Coopers found Hydro's Basslink business case had "tightened".
"The potential for variability in Hydro's return to government has increased," the report said.
"While the revised business case suggests there is a positive cash-flow benefit from Basslink, it is worth noting that absolute revenues and cash-flow levels are lower in the latest business case."
Changes to the proposed Victorian transmission route and the need to include metallic return technology saw a blow-out in costs to $780 million -- twice the steering committee's estimate.
The Hydro had to renegotiate its contract with Basslink Pty Ltd, which is owned by National Grid Australia.
September 11 terrorist attacks impacted on availability and cost of insurance.
Electricity markets worldwide were volatile.
The California market was notorious for under investment and poor reliability.
Prices spiralled in the England and Wales pool.
And the New Zealand electricity retail sector was facing serious financial difficulty.
Players in Australia's experimental new national market were before the courts.
Competition between regulated and unregulated competitors was unstable.
In 2003 Firecone investigated the market's regulatory problems for state ministers.
"There are a number of problems with the current institutional and regulatory framework," its report stated. "However it is fair to say that compared to many other electricity markets around the world the NEM has performed well."
Basslink was to be one of three unregulated MNSPs, including Directlink, a 65km link between NSW and Queensland which started in 2000, and Murraylink, a 180km link between SA and Victoria, which began in 2002.
Both Directlink and Murraylink have since become regulated. Murraylink was sold in March and Directlink is currently for sale.
Murraylink was the first MNSP to use the "safe harbour" provisions to convert.
"MNSPs have to coexist with regulated networks. This leaves them at risk from regulated investments. They have difficulty assessing, pricing and managing this risk. This means continued dispute and litigation is likely," the Firecone report said.
"Australia has been pursuing an experimental model, at significant cost to investors, that has little theoretical support in the literature or practical support from approaches in other markets."
Firecone said the model was unsustainable.
Basslink was commissioned in April this year.
The Sunday Tasmanian in May reported the Hydro had asked the State Government for a $300 million equity injection.
Leaked internal Hydro documents revealed balance sheet horrors with capital expenditure vastly outweighing available cash.
The Government, however, refused the Hydro's request and in Budget estimates last week revealed it had asked the Hydro to investigate Basslink converting to a regulated link.
The ACCC has already regulated some aspects of the Hydro's trading, so it actually operates as an MNSP hybrid.
Depending on the outcome of a regulatory test, a complete conversion could allow some Basslink costs to be recouped directly from Tasmanian and Victorian consumers as transmission charges.