Frontier (Australia) has been engaged by the Independent Pricing and Regulatory Tribunal of NSW (IPART) to recommend allowances for energy purchase costs and for retail costs and margins for inclusion in regulated retail electricity tariffs. A key consideration in developing these allowances was ensuring a consistent approach, so that retail tariffs are cost reflective.
In its recommendation for energy purchase costs, one of the perspectives used by Frontier was the market price of hedging products to meet the regulated load. This was estimated using STRIKE, Frontier's portfolio optimisation model. Importantly, under the market-price perspective, energy purchase costs depend on the contracting strategy adopted by a retailer: the riskier the contracting strategy, the lower the energy purchase costs. STRIKE provides the energy purchase costs associated with the full range of efficient contracting strategies, clearly highlighting the relationship between energy purchase costs and energy purchase risks.
In its recommendation for retail margin, Frontier, in conjunction with Strategic Finance Group Consulting, estimated the retail margin that ensures electricity retailers earn a normal return on an asset base of customers. The approach used the recommended energy costs and retail costs as inputs, thereby ensuring a consistent approach to the various components of regulated retail tariffs.
IPART have recently released two draft reports by Frontier: one setting out Frontier's recommendations in regard to energy costs and another setting out Frontier's recommendations in regard to retail costs and margins. Following public consultation, Frontier's final reports will be released by IPART in February 2007.