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Request for Network Regulation Rule Change: Presentation to AEMC Public Forum

This presentation outlines Jemena's proposal for rule changes in network regulation, discussing key points, the gas market and pipeline industry, current arrangements, and the AER's proposed changes.

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Request for Network Regulation Rule Change: Presentation to AEMC Public Forum

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  1. Presentation toAEMC public forum – Network Regulation Rule Change Requests 23 November 2011Sandra Gamble Jemena AER/EUAA rule change proposal

  2. Outline • Key points • Jemena • Profile of gas market and the pipeline/network industry • How the current arrangements work in practice • Initial view of AER rule changes

  3. 1. Key points 3

  4. Key points • There is an opportunity for a better conversation between the AER, industry and stakeholders about: • what is driving prices in electricity • how the current rules are operating • whether there is evidence of major problems • Debt and equity providers are already nervous about the potential for substantial undue risks being introduced to the regulatory framework • There may be some justification for incremental improvements: • cost of debt • capex incentives • the regulatory process, especially stakeholder engagement. • There may be solutions better than the AER & EUAA have proposed. 4

  5. 2. Introduction to Jemena 5

  6. Jemena portfolio of network businesses Jemena owns 50% of ActewAGL that distributes gas and electricity in the ACT Jemena Pipelines transports gas through: • Eastern Gas Pipeline (EGP) • Queensland Gas Pipeline (QGP) • Colongra Lateral Pipeline (CLP) • VicHub Jemena owns 34% of UED that distributes electricity to north eastern Melbourne AquaNet distributes and retails recycled water to industrial customers in western Sydney Proportions of Jemena’s portfolio asset value Jemena Gas Networks (NSW) distributes gas to Sydney, Newcastle, Wollongong and 26 regional centres in NSW Jemena Electricity Networks (Vic) distributes electricity to north western Melbourne Jemena’s gas and electricity investments more than A$8B 6

  7. 3. Profile of gas market and the pipeline/network industry 7

  8. Hydro generation Coal-fired generation Wholesale electricity pool Electricity distribution Electricity transmission Renewable generation Gas transmission Gas distribution Gas-fired generation LNG export terminal Local generation Natural gas production The energy supply chain CUSTOMERS Residential, commercial and industrial Large industrial Gas market is inherently more competitive, risky and entrepreneurial 8

  9. Now Projected in 2016-17 To Export Gladstone LNG Terminal Brisbane Brisbane Sydney Sydney Melbourne Melbourne Existing gas reserve are depleting CSG the main source of gas supply Major Load CSG Reserve Gas Reserve 9

  10. 10

  11. Competition More Less Uncovered pipelines Light regulation Covered pipelines VARYING LEVELS OF REGULATION Reference services Revenue & pricing INTEGRATED ACCESS ARRANGEMENT PACKAGE FIRM SPECIFIC RATE OF RETURN ON CAPITAL • Prevailing conditions in market for funds • Risks involved in providing the reference services • A “well accepted approach” to rate of return (e.g. WACC) • A “well accepted model” to determine cost of equity Pipeline business’s proposal That’s why gas law and rules allow for: 11

  12. 4. How the current arrangements work in practice 12

  13. JEN: Victorian AMI ($10M to $35M per year for 3 years) JGN: Revised gas access arrangement (~$420M per year for 5 years) Lodged AA proposal Lodged revised AA proposal To lodge revised AMI charges application Merits review (gamma) submissions and hearings Merits review submissions and hearings Merits review (DRP) submissions and hearings Lodged AMI budget application Lodged AMI budget & charges application Lodge next AMI charges application ACT interim decision AER draft decision AER final decision Initiated merits review Lodged AMI charges application ACT merits review & decision ACT final decision Renegotiated AMI OIC AER final decision AER final decision AER draft decision AER final decision AER draft decision AER draft decision New prices take effect New prices take effect New prices take effect JEN: Victorian electricity distribution pricing review (~$220M per year for 5 years) Merits review submissions and hearings Initiated merits review Lodged regulatory proposal Lodged pricing proposal AER final decision (price) AER final decision (rev) Lodged revised reg proposal Jemena deliverable ACT final decision AER draft decision AER/ACT deliverable New prices take effect Jemena’s recent regulatory reviews Now 2011 2012 2008 2009 2010 Jemena has experience of both the new gas and electricity rules 13

  14. How have WACC rules worked in gas? • For its 2010 AA review, Jemena Gas Networks proposed: • the WACC approach • A cost of debt method same as that prescribed in electricity rules • Australian benchmark corporate bond rate to estimate DRP • A well-accepted model for cost of equity, not the CAPM • Fama French Three factor model • The AER exercised its full discretion and contested both: • Accepted Australian benchmark corporate bond rate approach • Applied it in a differently manner to JGN • Rejected Fama French Three factor model and applied CAPM • JGN sought merits review on debt risk premium • Tribunal found the AER has made an error. Successfully continued precedents in the previous Gas Code

  15. How have WACC rules worked in electricity? • For its 2010 price review, Jemena Electricity Networks proposed: • the WACC approach • A cost of debt method prescribed in electricity rules • Australian benchmark corporate bond rate to estimate DRP • A cost of equity model prescribed in electricity rules • Capital asset pricing model with SORI parameters • The AER exercised its full discretion: • Accepted Australian benchmark corporate bond rate approach: • Applied it in a differently manner to JEN (APA bond, averaging period) • Did not annualise Bloomberg data • JGN sought merits review on debt risk premium • Tribunal decision pending. The JEN review revealed issues with DRP rules

  16. How have other current arrangements worked? • The AER has exercised a wide discretion to amend JGN’s and JEN’s capex and opex forecasts – no suggestion cuts could have been larger • Process: • Limited ability for customers to effectively engage • Submissions and consultation out of sequence • New AER data, approach and expert reports • Issues with confidentialinformation • Difficulties with framework and approach paper The gas and electricity reviews road-tested the processes set in the rules

  17. JGN access arrangement 17

  18. JEN electricity distribution price review 18

  19. In reality… JEN DUOS charges remain low 19

  20. 5. Initial view of rule change proposals 20

  21. The AER’s proposed solutionOur initial views • 5-yearly WACC review for gas, electricity distribution and transmission • Discretion for forecast capex and opex • Capex incentive scheme • Regulatory review processes • Access to merits review The need for change is not well established 21

  22. The merits of merits review The potential for merit review is important both for safeguarding the rights of those regulated and for ensuring regulators follow due process in making their decisions. In the words of the Administrative Review Council: The principal objective of merits review is to ensure that those administrative decisions in relation to which review is provided are correct and preferable: Correct – in the sense that they are made according to law; and Preferable – in the sense that, if there is a range of decisions that are correct in law, the decision settled upon is the best that could have been made on the basis of the relevant facts. This objective is directed to ensuring fair treatment of all persons affected by a decision. Merits review also has a broader, long-term objective of improving the quality and consistency of the decisions of primary decision-makers. Further, merits review ensures that the openness and accountability of decisions made by government are enhanced. Given appeals are likely to be expensive and time consuming, there should be benefits from ensuring a relatively simple, straightforward appeal process. It is also important that the appeal body is independent from the regulator and, also, preferably from government. This is especially the case where the government owns water utilities. Productivity Commission 2011, Australia’s Urban Water Sector, Report No. 55, Final Inquiry Report

  23. Summary of merits review grounds and results Jemena’s merits review are clarifying the rules on several fronts 23

  24. Appendix – Gas distribution and transmission pipelines 24

  25. Gas distribution pipelines (networks) 25

  26. Gas transmission pipelines - east 26

  27. Gas transmission pipelines - west Source: 2010 ACCC, State of the Energy Market 27

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