Transcript Capex Regulation in Australia

Capex Regulation
in Australian NEM
NZ Commerce Commission workshop – March 2010
Australian NEM Regulatory framework
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Main ex–ante capex allowance (one bucket)
 with separate arrangement for contingent projects
Incentive based - keep (lose) return on, and of, capex below (above) main
ex ante allowance during the regulatory period (RCP)
ACTUAL capex spent is “rolled into” Regulatory Asset Base (RAB) at end of
regulatory period
Return on capital – determined from capex “as incurred” at the WACC rate
Return of capital – determined from capitalisations (via depreciation) based
on agreed life by asset class
Objectives of Incentive Regulation
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Incentives
 Outperform pre-established benchmarks (eg.
capex/opex)
 Keep efficiencies for a certain number of years
 To reveal ‘true costs’ over time
Desired Outcomes
 Undertake necessary investment at efficient cost
 Reasonable price outcomes
 Maintain or improve service quality
 Ongoing efficiency improvements
Inevitable information asymmetry between business and
regulator
 Incentives aim to keep business focussed on efficiency
improvements.
Transmission Capex Framework
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Ex-ante capex allowance (cap)
 covers most/all expected investment
 Due to main investment drivers (eg. demand)
 $ included in cap up-front
 No second chances
 Forecasts are generally scenario based
 No expectation for all projects to be “approved” before
start of RCP
Contingent projects
 uncertainty about timing and $
 rely on a pre-defined trigger to occur
 $ not included in ex-ante cap up-front
How does the AER determine the cap?
Structured process
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Check governance frameworks
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Check all the inputs are robust and appropriate - probabilistic planning,
demand forecasts and network planning criteria, replacement triggers, etc
Test application against an AER selected sample of projects from each area and
$ range
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there is a genuine forecast need for the project
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the scope, timing and estimated costs are efficient
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Regulatory Test assessment/business case for projects underway (approved)
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Reasonable forecasts and estimates for projects further out (unapproved)
Check cost accumulation process including inputs
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Overall and by project type – that capex policies and procedures facilitate
efficient investment outcomes
Incidence of expenditure, cost escalators, risk premiums, etc
Check the overall capex program is deliverable.
Practically – how does it work?
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Business provides information for each step
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5 year regulatory period
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Powerlink’s next revenue period 1 July 2012 to 30 June 2017
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balance between overhead of a revenue determination and
forecast accuracy to set allowances
No expectation that all projects in Powerlink’s proposal are
required to be approved
As incurred capex means forecast includes projects being
completed 2019 or 2021 for easements
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Not all are approved at time of revenue proposal
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Determination made by AER – then “set and forget” until next time
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Annual reporting by TNSP
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No ex post prudency review at next determination
Types of projects
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Project types are based on drivers for investment – not $
 Load driven – augmentations, connections, easements
 Non load driven – replacements, security, EMS, etc
 Support the business – IT, buildings, fleet, etc
Reason - Governance frameworks are based on drivers
Different levels of scrutiny based on $ - regulator and business
Augmentations must satisfy Regulatory Test and associated consultation
process
 Small investments >$5 million – lesser process
 Large investments >$25 million
 <$5 million – not applicable
 Some assessments complete, some not, at time of Revenue Proposal
Substitution OK amongst all categories
 Is actually expected under incentive arrangements
 Re-prioritise other categories if something unforeseen occurs
 Depending on circumstances – may be in next proposal
Ex ante capex cap – a genuine bucket
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“Notwithstanding that specific capital projects have been
proposed by Powerlink and a sample of these assessed by the
AER, this decision does not require Powerlink to undertake or
not undertake any particular investment. Under the ex ante
framework, Powerlink has full operational discretion to allocate
its expenditure allowances as it sees fit. It has an incentive to
seek more efficient ways of delivering its services in order to
maximise its profits while maintaining the service standards that
have been set in the decision. These arrangements should
provide benefits to users over the longer-term.”
Powerlink Final Decision, June 2007, p5.
Contingent projects
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Large >$10 million or 5% or 1st year MAR; AND
Uncertain – whether trigger will occur or cost.
Once trigger is activated
 Application made to AER – capex, opex and revenue
 Mini reset for contingent project
 Adjusts MAR within period
Powerlink’s 11 Contingent Projects
Project Name
Trigger
Indicative Cost
QNI Upgrade
Passes Reg Test
$100m
QR Missing Link Projects
QR electrify track
$70m
Aug of Supply to SEQ
Early closure Swanbank B
$50m
Ebenezer 275/110kV Sub
Industrial development
$40m
Nebo-Moranbah 275kV Line
Coal mining development
$90m
Nudgee – Murarrie
Brisbane airport demand
$100m
Tugun Desal Plant
Trigger occurred
$73m
Gladstone Projects for Aldoga Industrial development
$170m
Undergrounding Costs
Undergrounding required
$233m
Further Desal Plants in SEQ
More desal plants
$37m
Signif change to SQ Gen
Generation closure in SQ
$420m
$1,383m
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Ex ante capex allowance included 478 projects
How did we get here?
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In Qld, vertical separation occurred 1995
 Revenue regulation commenced then
 First one year, then three years, now five years (or more)
NEM commenced 1998
 Powerlink regulated by ACCC since 2002, now AER
 Draft Statement of Regulatory Principles (SRP) in 1999
Capex framework – initially ex post with capex efficiencies
 Now ex ante (without ex post)
Major review of SRP during 2004 – change to ex ante
“Chapter 6A” review – 2006 & 07
 Ex ante confirmed – without ex post
 Arrangements are now in NER – effectively law