The Australian Energy Regulator

1. The Australian Energy Regulator Public Forum NSW electricity distribution & transmission revenue proposals 2015-19 10 July 2014

2. 9.00 – 9.30 Registration and tea/ coffee • 9.30 – 9.45 AER introduction – Andrew Reeves, Chairman AER • 9.45 – 10.15 Networks NSW presentation & questions – Vince Graham, CEO Ausgrid, Endeavour & Essential Energy • 10.15 – 10.30 Ausgrid presentation – • 10.30 – 10.45 Endeavour Energy presentation – • 10.45 – 11.00 Essential Energy presentation – • 11.00 –11.20 Consumer Challenge Panel (CCP) presentation • 11.20 –12.15 Q & A • 12.15 –12.30 AER wrap-up – Jim Cox, Board Member, AER Agenda

3. AEMC approved the AER’s rule change proposal on 29 Nov 12 and deferred full regulatory determination process for the services providers next regulatory control period (2014–19) • AER published stage 1 F&A on 25 Mar 13 and stage 2 F&A on 31 Jan 14 • As part of the transitional arrangements, AER determined a placeholder revenue allowance for a transitional regulatory control period (1 Jul 14 to 30 Jun15) in April 2014 • Followed from AEMC rules changes, AER published a series of guidelines under Better Regulation Program in Nov and Dec 13 which set out our approach to regulation under the new rules • AER's Better Regulation program aimed to deliver an improved regulatory framework focused on promoting the long term interests of electricity consumers. • After receipt of revenue proposals from NSW NSPs on 30 Jun and 2 Jul , the full determination process has commenced. Where we come from

4. Capex • Proposed capex levels significantly lower than their capex allowances for the 2009–14 regulatory control period – reduced augex but increased repex • Each of the distributors significantly underspent its capex allowance for the 2009–14 regulatory control period. • The distributors proposed their capex requirements are substantially influenced by the need to maintain high levels of network reliability and to replace ageing assets. • They also proposed that some capex will be required to respond to demand growth across their networks Are the distributors' capex proposals appropriate, particularly in light of recent capex spending? • Opex • Rate of return • Return on equity • Return on debt Key issues

5. On a like for like basis, each of the distributors has forecast increases in opex compared to its actual standard control services opex incurred during the 2009–14 regulatory control period • The distributors identified a number of drivers affecting forecast opex. A summary of the main drivers each distributor has identified is outlined below: • Labour cost escalation • Cost base restructure • Impact of cessation of TSA • Demand management • Inspection of private mains • Leaseback of head office Question is are the distributors' opex proposals justified? Please identify any specific areas you consider are not justified? • Opex • Rate of return • Return on equity • Return on debt Key issues - Opex

6. Overall WACC 8.83% • Return on equity 10.11% • Return on Debt 7.98% • Each of the distributors has estimated a benchmark efficient cost of equity using a broader range of models • The distributors agree that the SLCAPM can be used as a base model to estimate the allowed return on equity • The distributors' proposed return on debt approach is consistent with the approach in our guideline, except each distributor has proposed immediate transition Question is do you consider any of the distributors' proposed approaches to determining the rate of return better achieve the rate of return objective than our rate of return guideline? Key issues – Rate of return

7. Key points • Each DNSPs has proposed avg annual price increase of around 2% • Factors such as less capex, reduced demand, amended planning standards, efficient supply of services & less uncertain investment could be reducing pressure on the required revenues and on prices. • we ask whether the distributors' proposed prices adequately reflect current circumstances • We are interested to hear consumers' views on the balance among these factors. Price impact

8. On 1 July 2013, the AER established the Consumer Challenge Panel (CCP) as part of our Better Regulation reforms. The CCP sits within the AER and will provide advice to us on energy network businesses’ spending proposals • The main roles of the CCP are to advise the AER on: • whether network businesses’ proposals are justified in the services to be delivered to customers, acceptable and valuable to customers and in the long term interests of consumers; and • the effectiveness of network businesses’ engagement activities with their customers and how this engagement has informed, and been reflected in, the development of their proposals. Role of CCP

10. We are primarily interested in receiving submissions on the distributors' proposed approaches to customer engagement, opex, capex and the expected rate of return • It is useful to keep in mind that we must comply with the NEL and NER. It is important that your submission is supported by evidence and analysis. General statements made about a regulatory proposal are not particularly useful for our assessment • You should also state what further information you consider the distributor should provide to justify that aspect of its proposal • Submissions will be published on our website • Submitters must provide both a public and (where applicable) confidential version of their submissions. How to make submissions

11. Next steps *Note: Dates are indicative only and will be confirmed as process progresses.