Draft Regulatory Principles Forum ACCC Seminar The Merchant Investors’ Perspective –

1. Draft Regulatory Principles Forum ACCC Seminar The Merchant Investors’ Perspective – Ben Skinner, Manager NEM Policy Friday 2 April 2004

2. The Challenge of Regulating Transmission Networks Stakeholders with legitimate but conflicting needs • Owners: • Investment Certainty & fair return • Planning straightforward • Non-intrusive & light-handed regulation • Merchant users: • Competitive neutrality • Confidence in independence of major augmentation planning • Customers: • Efficient investments • Effective regulators Our suggestions attempt to balance all needs Not ideal for any single stakeholder-but best overall

3. Comfort for merchant investors • Merchant investment in the NEM will never sit easily with regulated transmission • Regulated Transmission facilitates AND strands merchant investments!!! • If anyone thinks the risk of regulated transmission asset optimisation is scary….just try owning a gas fired generator is South Australia!!! • But that is the reality and we must try to live together: “Bad” augmentations put “good” merchant investments at risk. • Let’s try to ensure that the investment that gets up-merchant or regulated-is the “good” one, and at the “RIGHT” time • And most importantly-lets ensure that the “good” investment is not scared away by the threat of the “bad” one. • (As an aside: TXU believes the best solution is an independent national transmission planner for major augmentations with consistent national transmission standards • Don’t hold your breath for anything more than an ANTS-sized stride • Without it, the faith of the merchant community continues to ride on the independence of the Regulatory Test.)

4. Materiality • In reality, the majority of TNSP augmentation activities actually don’t materially disturb the merchant investment playing field • E.g. Reinforcing a radial line to a group of customers • In these cases the tension is only between owners and customers • These should be regulated in the same way as best-practice distribution regulation: • Non-intrusive incentive-based regulation • 5 year annual capex provision, underspend shared with customers over time • Planning by the TNSP, runs own reg-test without ex-ante external review • Detailed scrutiny should be only upon the augmentations that are likely to disturb the NEM: How to define? • In our opinion: The augmentations that materially re-arrange the deck-chairs of the NEM are always going to be >$20m. • When the project > $20m, different mechanisms kick in • This is simple to assess, and, surprisingly, not as easy to game as you would think. Most big projects are indivisible if they are to deliver reg test benefits • We strongly reject any “intra/inter” divisions • For goodness sakes: What does the “N” in NEM stand for??? • And this really is hard to define and gameable

5. “Material” Augmentations: Ex-ante independent assurance, not ex-post optimisation • After an asset is built, it is built…. • Disturbance to merchants caused by a “bad” asset will remain, even if optimised out of RAB • The lingering harm to the merchant investment playing field will probably exceed any of the benefits of the TUOS reduction from optimisation • And going the extreme step of optimisation is pretty hard to imagine for these sorts of projects anyway, so its not really a threat. • To give merchants confidence that “bad” assets are not being built, we need ex-ante independent review • The TNSP to submit their regulatory test to the ACCC who audit it in detail with technical expertise and genuine independence • Transparent consultation allows parties will bring important information to the table • In return for this independent review, the TNSP’s get: • If the reg test survives the scrutiny, the asset is built and added to the RAB. • No ex-post reviews, no risk of optimisation • A planning framework that is quicker and less dependent on legal appeal avenues to ensure merchant confidence

6. In Conclusion • <$20m investments are self-tested and planned and incentive-based regulated • >$20m investments subject to independent ex-ante reg-test audit and locked in to RAB • Our model has something for everyone….. • TNSP’s get: • light-handed non-intrusive regulation on the majority of their capex (i.e. <$20m projects) • Long-term certainty and less appeals on the big projects (i.e. >$20m projects) • Merchant investors get • confidence that the big projects will be submitted to a fair and independent regulatory test • Customers benefit as • TNSP’s incentivised to underspend capex and share benefit over time • Cost of detailed regulation focussed only where the returns are (i.e. >$20m projects) • Merchant barrier to entry (i.e. Merchant “WACC”) reduced as confidence in planning decisions are restored • Flows through in lower electricity prices to customers