Transcript Slide 1

Draft decision
2011-16 Access Arrangements for
Envestra (SA)
Andrew Reeves
Chairman, AER
2 March 2011
Public forum
Housekeeping matters
• Please sign the attendance sheet
• A record of this meeting will be made
2
Purpose of the forum
• Present the main features of the AER’s
draft decision on the access arrangement
proposal submitted by Envestra
• inform parties intending to make
submissions on the AER’s draft decision
3
Submissions
• Submissions on the AER’s draft decision can
be sent to [email protected], until 21
April
• The AER’s access arrangement guideline
provides guidance on making submissions
– available at www.AER.gov.au
• Timeframes under the NGL and NGR limit
the AER’s ability to accept late submissions
4
Revenues & Prices
• The AER has determined lower revenues &
prices than those proposed by Envestra.
• The main reductions are to the proposed WACC,
forecast capex, forecast opex and the opening
capital base as at 1 July 2011.
• Tariffs for haulage services are expected to rise
in real terms by about 5.5 per cent per annum
(on average) over the AA period.
• The tariffs for ancillary services were revised
and will increase each year only by the rate of
change in CPI.
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Haulage Tariffs
Real price index starts at $1 in 2005-06
$1.80
$1.70
$1.60
Envestra SA - Actual
$1.50
Envestra SA - Proposed
$1.40
Envestra SA - AER DD
$1.30
$1.20
$1.10
$1.00
6
20
15
-1
6
20
14
-1
5
20
13
-1
4
20
12
-1
3
20
11
-1
2
20
01
011
20
09
-1
0
20
08
-0
9
20
07
-0
8
20
06
-0
7
$0.90
20
06
-0
7
20
07
-0
8
20
08
-0
9
20
09
-1
0
20
10
-1
1
20
11
-1
2
20
12
-1
3
20
13
-1
4
20
14
-1
5
20
15
-1
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$m (2010-11)
Total revenues (including ancillary services)
200
180
160
140
120
100
80
60
40
20
0
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Key drivers of results
• Key drivers are:
– Return on capital (asset base * cost of capital)
– Return of capital (depreciation)
– Capital expenditure forecasts
– Operating expenditure forecasts
– Demand forecasts - for converting revenues
to prices.
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Breakdown of revenues (2011-16)
Other
11%
Opex
29%
Return on
capital
60%
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Cost of capital (WACC)
• The nominal cost of capital has increased
significantly (see following table)
• Debt risk premium, more than tripled since
the earlier AA period.
• The cost of equity has decreased, due
mostly to a reduction in the equity beta.
• The AER has set the market risk premium
to its pre-GFC level of 6%.
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WACC parameters
Earlier AA period
Envestra proposal
AER draft
decision
Nominal risk free rate
5.8
5.3
5.7
Inflation forecast
3.2
2.6
2.5
Cost of equity
11.2
13.0
10.5
0.8-1.0
0.8-1.1
0.8
6
6.5-8.0
6
Cost of debt
6.9
8.7
9.6
Debt risk premium
1.1
3.4
3.9
Gearing (Debt/Equity)
60
55
60
Nominal cost of capital
8.6
10.6
10.0
Parameters (%)
Equity beta
Market risk premium
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Revenues under different WACCs
250.0
$m (nominal)
200.0
150.0
100.0
Envestra SA - Proposed
Envestra SA - AER DD
50.0
Envestra SA - Earlier AA
0.0
2011-12
2012-13
2013-14
12
2014-15
2015-16
20
05
-0
6
20
06
-0
7
20
07
-0
8
20
08
-0
9
20
09
-1
0
20
10
-1
1
20
11
-1
2
20
12
-1
3
20
13
-1
4
20
14
-1
5
20
15
-1
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As at 30 June ($m, nominal)
Regulatory asset base
1800
1600
1400
1200
1000
800
Proposed
600
AER approved
400
200
0
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Capital expenditure
• Envestra proposed a 157% real increase in
capex compare to the earlier AA period.
• The largest component of Envestra’s forecast
capex was for mains replacement.
• The AER accepted most of the forecast capex.
Adjustments for:
– contingency allowances
– overheads and
– real cost escalators.
• In addition, forecast capex for a number of
specific projects has not been adequately
justified.
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Total capex
Actual
Estimate
ESCOSA allow ance
Envestra forecast
AER Allow ance
100
Real $'m 2010
80
60
40
20
0
2006-07
2007-08
2008-09
2009-10
2010-11
15
2011-12
2012-13
2013-14
2014-15
2015-16
Capex by purpose
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Mains replacement capex
300
250
Actual
Mains replaced (km)
Approved
200
Forecast
150
100
50
0
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Year
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Return of capital
• Envestra proposed shorter asset lives than
had been used previously.
• The AER has accepted these asset lives
– increased the rate of depreciation.
• Return of capital has increased
significantly.
• The following graph shows the trend in
regulatory depreciation.
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-5.0
-10.0
19
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
$m (2010-11)
Regulatory depreciation
20.0
15.0
10.0
5.0
0.0
Operating expenditure
• Envestra proposed a 20% real increase in opex compare to
the earlier AA period, principally due to:
– expenditures not undertaken in earlier AA period due to financial
pressures
– increased UAG costs, and
– one off costs & step changes compared to earlier AA period.
• The AER amendments, including:
–
–
–
–
input cost escalation
reductions in network development
reductions in UAG expenditure and
amendments to several of the proposed step changes.
• The AER’s draft decision results in a 9% real decrease in
opex compared to the earlier AA period.
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Total opex
Envestra SA opex
Actual
Estimate
ESCOSA allowance
AER allowance
Envestra's forecast
80
70
Real $'m 2010-11
60
50
40
30
20
10
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
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Opex by purpose
Earlier AA period
Next AA period
(actual)
(as proposed)
Network
Marketing
8%
UAFG
18%
Network
Marketing
12%
FRC
5%
Operating and
Maintenance
(O&M)
56%
UAFG
19%
Admin &
General
14%
Admin &
General
13%
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Operating and
Maintenance
(O&M)
55%
Demand forecasts
• For the most part, the proposed demand
forecasts are reasonable.
• AER adjustments:
– average gas usage for residential customers
– economic outlook used for business demand
forecasts was overly pessimistic.
• The AER revised upward the demand forecasts
based on historic trends and SA state treasury
forecasts on the SA economy.
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Residential customer numbers forecast
Residential customer numbers
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2005-06
2006-07
2007-08
Actual
2008-09
2009-10
2010-11
Envestra proposal
24
2011-12
2012-13
2013-14
2014-15
AER draft decision
2015-16
Residential average consumption forecast
Average residential consumption (weather normalised) - GJ
30
25
GJ
20
15
10
5
0
199798
199899
199900
200001
200102
200203
Actual
200304
200405
200506
200607
200708
AER draft decsion
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200809
200910
201011
201112
201213
Envestra proposal
201314
201415
201516
Volume customer consumption forecast
Residential and small business consumption (weather normalised) - TJ
12,000
10,000
TJ
8,000
6,000
4,000
2,000
0
2006-07
2007-08
Actual
2008-09
2009-10
2010-11
ESCOSA approved
2011-12
2012-13
Envestra proposal
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2013-14
2014-15
2015-16
AER draft decision
Terms and conditions
• Submissions:
– overall terms and conditions were weighted
too much in favour of Envestra.
• The AER accepts most of proposed terms
and conditions.
• However, changes are required to provide
a better balance between Envestra and
customers
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Consultants
• Cost of capital: Professor Kevin Davis
• Opex and capex forecasts: Wilson Cook
• Labour cost growth: Access Economics
• Demand forecasts: ACIL Tasman
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Timeline
Release of draft decisions
17 February 2011
Public forum on draft decisions
2 March 2011
Revised proposals to be submitted
23 March 2011
Submissions on draft decisions due
21 April 2011
Release of final decisions
Late May 2011
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