TRANSMISSION INVESTMENT ( or - Living on the Reliability knife-edge)

1. TRANSMISSION INVESTMENT (or - Living on the Reliability knife-edge) Gordon Jardine 2 April 2004

2. It’s about RELIABILITY “the (UK) regulator’s concern to reduce costs to consumers should now be tempered by a greater emphasis on ensuring that electricity network owners have the financial resources to secure a viable, long term electricity supply” UK House of Commons Committee 2004

3. And so says a major user “I would like to acknowledge and congratulate Powerlink for your commitment to ensuring more reliable and quality electricity supply throughout South-East Queensland” “If the Refinery experiences power failure, even for a short period, we experience an unplanned shutdown which can affect the plant for a considerable period of time” “investment in energy infrastructure … has helped ensure reliable electricity supply to business customers including Caltex” Caltex Refinery Manager - 5 March 2004

4. Overview • How the existing capex framework delivers very good outcomes for customers • How the proposed framework - as written - creates a serious threat to reliability • Is it possible to create a light-handed, capped framework which delivers better outcomes than the present framework?

5. Some background • PQ capex allowance $1040M = replacement life of 45 years and load growth 3.5% p.a. • BUT…..load growth so far is 6.6% p.a., and now forecast at 6% for next 3 years • Material difference - now MUST accelerate network development (and capex spend) in the face of accelerated load growth in order to maintain reliability • To deliver mandated reliability, actual capex spend MUST exceed original allowance

6. Good outcome for customers • Reliability can be maintained … “Just in time” • TUOS price path in Qld is flat in real terms • Get no customer complaints about TUOS (only 8% of total delivered cost) • DO get customer concerns about reliability, and requests about assuring future reliability (major customers to government)

7. Ex-post review by ACCC • PQ confident it can justify extra capex spend … load growth : around 6% p.a.vs allowance based on 3.5% p.a. • Peak demand for 2003/04 summer: - 10% POE forecast was 7380MW (at time of reset) - actual 7934MW • Well documented Regulatory tests: - 9 major ($23M to $71M); plus 9 small, so far • Regulatory tests included capex cost sensitivity; no majorblow-outs

8. Ex-post review by ACCC • Regulatory tests supported by retailer/distributor which pays the TUOS from its capped retail price - very compelling • Grid is very heavily loaded and high load growth - thus negligible optimisation risk • Review should not be traumatic for ACCC or PQ

9. “Just in time” Reliability • 2 major augmentations in SEQ commissioned on13 December 2003 • First new record demand on 23 December 2003 • New network elements were needed to ensure reliability of supply - only 10 days to spare! • In a high load growth environment, no time for “regulatory roadblocks” • Or for dispute provisions which allow “nimbies” and vexatious parties to delay

10. Litmus test for new framework • Benchmark - outcomes vs. existing framework • Can reliability be maintained if load growth accelerates? • For accelerated load growth: Action needed - immediately accelerate network development (capex spend) Offered - STOP (“off ramp”) for a regulatory review • New framework FAILS the reliability litmus test !

11. “Regulatory Roadblocks” • ACCC document contains various proposals for the regulator to “pull over” sets of projects during the period - eg large, uncertain, new load growth, etc….. • These roadblocks don’t add value, but do cause delays and reliability risk • They convert “just in time” to “way too late”

12. Apparent policy shift ? • FROM: “ensure reliability, with some risk to TUOS price” • TO: “ price is sacrosanct, reliability is sacrificeable” • NOTE: Reliability is NOT discretionary

13. This is NOT the UK UKQld Load growth p.a. 1.8% ~6.0% Grid standard N - 2 N - 1 or less Grid topology Meshed Long, thin

14. Capital Expenditure Profile 350 300 Regulated capex allowance 250 200 150 100 50 Regulatory Period 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 Year AREA OF HIGH RISK EXPOSURE

15. Is there a better way ? • Possible to design a light-handed, capped capex framework which: - enables reliability to be maintained- minimises the risk of regulator-induced reliability failures- avoids windfall gains • Requires a “paradigm shift” in thinking, away from UK/low load growth experience with its presumptions of predictability and stability

16. A formularised capex cap for reliability capex • Cap for reliability/load growth capex = f (actual load growth in regulatory period) • Thus, cap automatically adjusts each year in response to load growth • No delays to development if load accelerates - no need for “regulatory roadblocks” or “off ramps” • No need for regulator to estimate capex/load growth - a low estimate could threaten reliability

17. A formularised capex cap for reliability capex • Eliminates windfall gains due to load forecasting error (over-estimate) • Retain Regulatory test (in simplified form) • Could use hybrid approach - list of projects for year 1 (where there is a high degree of certainty); then formula for years 2 through 5 • End-of-life replacement capex ( predictable, but variable period-to-period) can be readily added in.

18. Other matters • Non-reliability augmentations e.g interconnectors / intra-connectors : exclude from cap, handle on an individual project basis as they arise, using full-blown Regulatory test , with ACCC as final arbiter • Disputes - no “nimby” disputes on any projects - and, for reliability projects, only those paying material extra TUOS can dispute