Victorian advanced metering infrastructure roll-out AMI budgets 2009-11 and charges 2010-11

1. Victorian advanced metering infrastructure roll-out AMI budgets 2009-11 and charges 2010-11 AER draft determination Public forum Melbourne 21 August 2009

2. Presentation outline • Introduction • AMI budgets • Order in Council tests and AER processes • areas of initial concern to the AER and its draft determination • AMI charges • Order in Council requirements • AER considerations and indicative prices resulting from draft determination for each DNSP • Process from here • Opportunity for comments/ discussion

3. Introduction • 2006 Victorian government decision to roll-out AMI to all Victorian electricity customers • ESC/AER’s role set out in an August 2007 Order in Council (OIC) and subsequent revisions • OIC provides for a pass-through of expenditures, AER determines expenditure budgets • Metering charges set in relation to building block calculation, includes budgeted and actual expenditures • Metering charges regulated under separate process from general distribution charges

4. Introduction • January 2009 – AER framework and approach paper • February 2009 – DNSPs submitted budget applications • June 2009 – DNSPs submitted charges applications • July 2009 – AER issued draft determination on charges to inform further consultation • AER final determination on budgets and charges due 31 October 2009

5. AMI budgets

6. Order in Council tests • OIC sets out tests for the expenditure: • scope test • prudent tests • competitive tender test • expenditure incurred test • commercial standard test • For costs to be rejected, AER must establish costs are outside scope or not prudent • Costs associated with ‘above scope’ activities can be accepted if net benefits determined

7. Order in Council tests

8. AER approach to assessment • Review of: • DNSPs’ proposals to AER and ESCV (2008) • RFP/RFT documents, procurement strategy documents, signed contracts • internal business case documents • DNSP presentations to AER staff • further information on specific areas requested by AER • AER engaged Energeia to provide advice on technical aspects and application of OIC tests • Comparison of costs across expenditure categories to focus review on material areas

9. Scope test • OIC contains lists of activities for each DNSP that are inside and outside scope • In-scope activities very broad • AER established that SP AusNet’s direct load control costs are outside scope – all other activities were found to be in-scope

10. Prudent tests • Contract costs - Competitive tender test • procurement strategy documents, RFTs, contracts • Framework and approach sets out elements considered by the AER • contract costs = 38% of all proposed costs • AER did not receive contract information relating to $16.3 million of SP AusNet’s proposed contract costs – assessed as non contract costs

11. Prudent tests • Non-contract costs – Expenditure incurred test • implications for DNSPs of not incurring costs • CitiPower, Powercor and SP AusNet proposed costs for customer response trials – AER established unlikely to be incurred • United Energy Distribution’s (UED) self insurance and equity raising costs unlikely to be incurred • Non-contract costs – Commercial standard test • categories of expenditure proposed • circumstances of DNSP, as compared to reasonable commercial business in the circumstances • AER unable to establish any proposed costs reflected substantial departure from the commercial standard that a reasonable business would exercise in the circumstances

12. AER initial areas of concern- AMI budget applications

13. 2-element meters • Proposed by SP AusNet and Powercor • above OIC minimum specifications • AER’s Framework and approach – out of scope activities need to be justified on net benefit grounds • time of use pricing – only available when AMI communications operational (est. 2012) • tariff reassignments – high transitional costs • short-term net benefit demonstrated – however may not be necessary in second budget period once AMI communications are fully operational

14. WiMAX • SP AusNet communications solution, very large bandwidth • Potential to support unregulated services, which are outside scope • further information showed lower ongoing opex costs than alternative mesh radio solution • Energeia considered WiMAX a reasonable choice, given AMI requirements and SP AusNet’s circumstances • Using only bandwidth required to meet AMI functionality • AER unable to establish that SP AusNet is using WiMAX to provide communications services beyond AMI, therefore inside scope

15. Direct load control • SP AusNet proposed a utility managed load control relay in all meters • outside scope – AER requested net benefit assessment in accordance with Framework and Approach • SP AusNet stated concern that minimum functionality specifications are not detailed enough to ensure its load control plans • technology provided for in the minimum functionality specifications is cheaper than SP AusNet’s proposal, and provides more customer choice • no net benefit was established for the proposal • AER established proposed costs are outside scope

16. Other areas under scope test • Number of other items of proposed AMI technology above AMI minimum specifications • most recommended by independent technical experts • AER and Energeia considered these are reasonably required to enable the DNSPs to meet required AMI functionalities

17. Related party margins • CitiPower, Powercor, Jemena and United Energy engaged related parties to manage AMI roll-outs • not competitively tendered (non-contract costs) • no efficient cost review permitted in OIC • AER unable to establish costs were not prudent under OIC tests • draft decision indicated AER will examine related party margins as part of next reset, results may inform second budget period determination

18. Self insurance, equity raising costs • Self insurance • United Energy proposed $0.4m over 2009-11 • vendor insurance requirements built into AMI contracts • self insurance also provided in ESCV’s EDPR • Equity raising costs • United Energy proposed $7.1m over 2009-11 • effective double recovery of capital raising costs for 43% of proposed capex • substantial departure from recent AER benchmark rates • AER considered United Energy likely to fund capital using less expensive capital raising methods • AER established costs unlikely to be incurred

19. Customer response trials • CitiPower, Powercor and SP AusNet proposed a total of $4 million for customer response trials • DPI advised that the trials are unlikely to go ahead in 2009 nor 2010 • AER rejected costs under the expenditure incurred test

20. AER draft decision - budgets

21. AMI charges

22. OIC requirements • OIC sets out calculation of building block revenue requirements and how these are translated into metering charges • The DNSPs’ AMI charges for 2010 and 2011 recover • AMI opex and capex budgets for 2009-11; and • IMRO and AMI related costs incurred from 1 January to 2006 to 31 December 2008 • Charges will be updated annually when budgeted costs are substituted with actual expenditures

23. Building block revenue requirement Building blocks include: • Return on capital (some WACC parameters based on AER WACC review) • Depreciation • Operation & Maintenance costs • Corporate tax allowance • Costs incurred over 2006-08: • IMRO costs • AMI net revenue or costs from 2006-08 • DUoS tax liability • Efficiency carryover • Costs relating to AMI trials, IT systems integration, project management, exchange and interest rate hedging expenditure

24. Charges adjustments • Annual “true up” of charges to reflect actual costs incurred and revenue received • Actual costs to be reported in regulatory accounts • Future charges also reflect budget revisions • Actual expenditure can vary by 120% of initial budget; will drive future charges • OIC permits DNSP’s to propose charges that result in under-recovery of revenues in early years, to minimise price shock • AER flagged this in F&A • Where DNSP proposed 2010 charges over recovered draft determination revenues, the AER reduced 2010 charges to ensure NPV neutrality with draft determination revenue requirement • Where DNSP proposed 2011 charges over recovered draft determination revenues, the AER reduced 2011 charges to ensure NPV neutrality with draft determination revenue requirement

25. AER initial areas of concern- charges applications

26. Regulatory accounts • Issues with all DNSPs charges applications • Reported actual costs (2006-08) that departed from audited regulatory accounts, which the AER did not accept under the requirements of the revised Order • AER did not accept allocations of costs by the DNSPs which affected the size of benefits under the efficiency carryover mechanism in their favour

27. WACC – Debt Risk Premium • DNSPs jointly proposed measurement of debt risk premium from Tabcorp bond • Issued four months after OIC required averaging period • Maturity of 5 years, OIC requires 10 years • variable rate bond, OIC requires fixed coupon Commonwealth Government bonds • DNSPs proposed adjustments to reflect inconsistencies with OIC requirements • DNSP proposal considered to be inconsistent with OIC • AER re-examined Bloomberg data, finding it appropriate • DNSPs’ proposed AMI WACC of 10.01 per cent vs draft determination AMI WACC at 8.96 per cent

28. CitiPower issues • AER did not accept regulatory accounts data for 2006-08 • AER reduced CitiPower revenues by $4.4m for 2009-11 • CitiPower chose to under recover revenue in 2010 – requires compensating increase in 2011 charges • Consistent with revised OIC approach • AER did not smooth 2011 price, as not permitted to compel a DNSP to under recover in any one year • AER therefore reduced proposed 2011 charges (-12.3%) • to align with draft determination revenues in NPV terms

29. CitiPower metering charges proposed vs draft decision

30. CitiPower metering chargesindicative price change from 1 January Note: Under AMI, peak and off-peak now become single phase.

31. Jemena issues • Jemena provided letters to corroborate data but these were inconsistent with regulatory accounts, therefore not accepted • 2008 costs data not consistent with regulatory accounts • Jemena cost allocation for efficiency carryover not substantiated, large revenue impact- $22m reduction • Jemena proposed under recovery of $6.6m in 2010 and 2011 • Consistent with revised OIC approach • AER reduced Jemena’s proposed revenue requirements by $27.9m over 2009–11 • AER therefore reduced 2010 proposed charges (-49.6%) and 2011 charges (-4.5%) • to align with draft determination revenues in NPV terms

32. Jemena metering charges proposed vs draft decision

33. Jemena metering chargesindicative price change from 1 January Single phase single element and single phase single element with contactor replace single phase non off peak and single phase off peak.

34. Powercor issues • AER did not accept Powercor 2006, 2007 data, as not consistent with regulatory accounts • Powercor requested changes to 2006 regulatory accounts via letters – not accepted by AER • Powercor under recovered revenues by $18.5m in 2010. This delivered higher charges for 2011 • Consistent with revised OIC approach • AER reduced Powercor’s revenues by $8.5m over the 2009–11 • The AER therefore reduced proposed 2011 charges (-10.9%) • to align with draft determination revenues in NPV terms

35. Powercor metering chargesproposed vs draft decision

36. Powercor metering chargesindicative price change from 1 January Note: Under AMI, peak and off-peak now become single phase.

37. SP AusNet issues • Minor issues with provisions • Adjustment to efficiency carryover amount for customer service costs • SP AusNet chose to under recover revenues by $7.1m in 2010. Results in higher 2011 charges • Consistent with revised OIC approach • AER reduced SP AusNet’s revenues by $11.1m over the 2009–11 • AER reduced proposed charges in 2010 (-1.4%) and 2011 (-14.5%) to align with draft determination revenues in NPV terms

38. SP AusNet metering chargesproposed vs draft decision

39. SP AusNet metering chargesindicative price change from 1 January Note: single phase 1 element and 2 element replace single phase non off peak and single phase off peak.

40. United Energy issues • Minor adjustment to efficiency carryover amount – for customer service costs • UED proposed revenue neutrality for both 2010 and 2011 charges • Consistent with revised OIC approach • AER reduced UED revenues by $12.7m over the 2009–11 • AER therefore reduced 2010 charges to align with draft determination revenues in NPV terms • AER reduced proposed charges in 2010 (-18.8%) and 2011 (-3.2%) to align with draft determination revenues in NPV terms

41. United Energy metering chargesproposed vs draft decision

42. United Energy metering chargesindicative price change 1 January Note: single phase single element, and single phase single element with contactor replace single phase non off peak and single phase off peak.

43. Price impacts summary • Across all DNSPs, 2010 charges represent an average increase of $53 on 2009 metering charges[1], with a further $25 increase in 2011 • [1] Based on single phase single element non off-peak meter, read quarterly in 2009, approved by the ESCV

44. Process from here • DNSPs must submit amended Submitted budgets for AER approval by 28 August (AER will publish) • Stakeholders’ submissions due 11 September • AER final determination on budgets and charges due 31 October 2009 • New metering charges apply from 1 January 2010

45. Questions, comments?