Transcript Slide 1

AEMC Public Forum 23.11.11
PROPOSED AER & EUC RULE CHANGES
Hugh Gleeson
CEO United Energy & Multinet Gas
ENA 23/11/2011
Today’s presentation
High level view
> Multiple drivers for rising prices
> How have the rules performed to date
> The regulatory framework we need
Proposed changes to the
> Opex and Capex methodology
> Capex incentives
> Cost of capital
The United Energy & Multinet Gas perspective
ENA 23/11/2011
High Level Perspective
> Current rules put in place 5 years ago to give confidence for badly needed 40
year investments
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35 more years before those investors get their return - and more new investment is needed
Stability and predictability is essential
Significant change to the rules would need very strong justification – which we have not seen
Energy prices are rising
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Customers are understandably concerned
But no evidence to suggest that flaws in the rules are the cause
Some of the drivers of energy price increases
• Replacing aging assets
• Growing peak demand
• Increased funding costs (GFC)
• Higher cost generation sources (and green subsidies)
• Returning to long term investment (and price) levels after a low investment period
> We want to ensure there is confidence in the price setting process
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Electricity as a % of weekly earnings
> Prices returning to
the levels they have
been at twice before
> Prices have moved in
cycles
Note: Whilst this graph uses Qld data, the trends are similar nationally
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Capital investment coming out of a trough
> Historically peaks
and troughs in
investment
> Significant increase
in asset utilisation
in 1990s allowed
low spend – but
this can only be
temporary.
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Growing peak demand a driver of costs
Source: AEMO, Statement of Opportunities, 2011
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How have the rules performed to date?
> Capex and Opex submissions – assessments and allowances
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Businesses have been required to provide high levels of verification / sign off for proposals
• AER has received very large volumes of RIN information from NSP – no asymmetry
AER level of disallowance similar to previous regulators (higher for Opex, lower for Capex)
AER has been able to use benchmarking
AER has generally work well within the discretion allowed to it in the rules
• Appeal findings do not show AER pushing boundaries of their Capex/Opex discretion
• AER has not used the range of incentive mechanisms allowed/intended in the rules
> Cost of Capital has been contentious. Not surprising given:
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Return on capital is typically >40% of prices
Gives 100% of average return to shareholders
There has been a GFC
AER has been found to have made multiple errors
> No evidence to show material problems with the rules
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But acknowledge DRP has been problematic during GFC
The issue has been in bedding down regulatory practice, not the terms of the rules
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The regulatory framework we need
> The regulatory structure which separates the rule maker from the
rule enforcer is an important design feature
> We are very concerned about a lack of confidence in the price
setting process – and make these proposals to address:
1. Drive for information symmetry:
– Ensure that the AER has the capability to review/assess pricing submissions
and understand the large volume of information they obtain through the RIN
– Ensure consumer advocates are strong - resourced/funded
2. Ensure incentive based regulation (– as always intended)
– Ensure that the Rules give incentives for efficiency
– Ensure that the Rules give incentives for accurate (balanced) forecasting
– We support the AER using robust benchmarking to support their assessment of
efficiency/inefficiency
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Comments on specific rule changes
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Opex and Capex Process
> No case for change
– We disagree with AER assertions that it is overly constrained
– The rules were designed to incentivise efficiency, and incentivise accurate forecasting
• We believe the rules can achieve that
• The AER has successfully used many of they discretions they seek, and had
these assessments upheld in appeals
– However, we are open to fine tuning of rules to ensure the intent can be achieved
> The NSP’s plan and forecast must be the start point
– The NSP is responsible for managing the network and delivering the service.
• It must develop & own the plan that underpins the forecasts.
– If the NSP’s plan is ignored – the AER will be taking over responsibility
– NSPs need planning certainty (predictability) to manage the business.
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Capex Incentive mechanisms
> We support capex incentives
> We note that the electricity distribution rules allow the AER to
develop a capex incentive mechanism
– But it has not chosen to take up this option
> We do not believe that mechanism proposed by the AER in their
rule change meets the NEO and Pricing Principles
– Not symmetrical
– Likely to create other anomalies
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Cost of Capital
> AER has not presented case for change
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Their arguments appear mostly to relate to administrative ease
The existence of 3 different WACC processes does not mean 2 are wrong
The MCE/AEMC built the 3 sets of rules at the same time – recognising the importance
consistency over time for investors in the 3 sectors
> If the AEMC accepts the case for change – we put forward:
– A WACC without merits review cannot be relied on to deliver efficient outcomes
=> would not meet the NEO and NGO
> If the AEMC accepts the case for a 5 yearly review – we put forward:
The process must:
– Deliver against overarching principles – to give a market return at each NSP price
revenue/ determination – in order to support ongoing investment
– Be able to cater for changes in market conditions – inc. a GFC
– Include a level of prescription in the rules sufficient to ensure predictability and stability for
investors and customers
> We acknowledge the problems with the current approach to cost of debt
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Open to looking at alternative solutions
United Energy and Multinet Gas
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Specific issues for our businesses
> Capex needs new debt and new equity – need stability & predictability
> Multinet has not yet been through a review under current rules:
– Yet the rules are being deemed a failure, and
– The AER rule change would take away Multinet’s access to merits review
Thinking that causes us great concern:
- Thinking where the AER:
1. Believes it doesn’t have the NSP understanding to assess our plan/forecast
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due to information asymmetry
2. Believes the rules give NSPs an incentive to inflate their forecasts
3. Therefore assumes that the NSPs do inflate their forecasts (without testing them)
4. Wishes to use new discretion to remove the premium that they assume.
Concerned about the risk of:
Broad discretion + Asymmetry (Lack of understanding) = Unstable outcomes
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