Access Arrangement & Technical Rules

1. Access Arrangement &Technical Rules Public Information Forum 27 June 2007

2. PRESENTATION OBJECTIVES To provide an overview of: • WP regulated business • Approved Access Arrangement – features of interest • Approved Technical Rules • Other things to note

3. BUSINESS OVERVIEW

4. YOUR ELECTRICITY BILL ONE UNIT OF ELECTRICITY … 14 cents/kWh Retailer – 1 cent Western Power – 4 cents Generation – 9 cents

5. WESTERN POWER GENERATOR GENERATOR NETWORK ACCESS CONTRACTS ENERGY CONTRACTS ENERGY CONTRACTS GENERATOR GENERATOR RETAILER RETAILER RETAIL SALES CONTRACTS ELECTRICITY CONSUMERS THE ELECTRICITY MARKET Arrows show money flow

6. State Government Parliament Economic Regulation Authority (ERA) Treasury Minister for Energy Office of Energy Other Codes & legislation Access Arrangement Operating Licences Access Code Western Power REGULATORY FRAMEWORK (ECONOMIC)

7. PRICE SERVICE STANDARDS RISK REGULATORY OUTCOMES • Price • Business entitled to a level of income and profit to be viable and sustainable to do its stuff efficiently • Service standards • Declared customer service standards must be met • Network & connections must perform per Technical Rules • Risk • Access contracts & capital contributions now structured to share financial risk between customers and WP • Regulation provides “balance” • Proxy for competition

8. TOTAL REGULATED REVENUE ENTITLEMENT ~$600m p.a. EXPENDITURE Capex ~$500M p.a. Return on Assets ~$230M p.a. ASSET CREATION Rate of Return WACC ~7% Existing Assets ~$3B Total Assets Depreciation ~3% average Depreciation of Assets ~$120M p.a. Maintenance ~$125M p.a. MAINTENANCE & OPERATIONS Forecasts O&M Costs ~$250M p.a. Other ~$125M p.a. HOW REGULATED REVENUE IS CALCULATED

9. SOURCES OF INCOME TOTAL REVENUE ENTITLEMENT ACTUAL INCOME Tariff Income (Access Charges) ~$440M p.a. ~$600M p.a. Capital Contributions ~$150M p.a. Minor Services ~$10M p.a.

10. $60M $70M $250M $115M $105M HOW WE USE OUR MONEY • WP is a self funded corporation (no subsidies from Govt) and uses its annual income as follows: (indicative)

11. ACCESS ARRANGEMENT • The “Access Arrangement” is simply the formal agreed “business rules” for how WP goes about providing network services to the market • Includes (amongst lots of other stuff): • Tariffs • Customer service standards • Capital contributions policy • Standard access contract • Asset values, forecast expenditures, rate of return, etc • Detailed financial models • Approved by the ERA after public consultation and applies for 3 years

12. ACCESS ARRANGEMENT OVERVIEW

13. REGULATORY SUBMISSION • Two and a half years from inception to approval • Originally submitted to ERA on 24 August 2005 • Took further two revised submissions and 200+ detailed amendments to achieve approval on 26 April 2007 • Submission comprised: • Access Arrangement doc • Access Arrangement Information doc • Technical Rules • Now published in full on both the ERA and WP web sites

14. ACCESS ARRANGEMENT (1) The AA document is a relatively concise quasi-legal document comprising the following key matters: • Description of Reference Services • Service standard benchmarks • Form of price control • Investment adjustment mechanism • Service standard adjustment mechanism • Cost of capital • Trigger events • Pricing methods and prices • Policy on prudent discounts • 8 Appendices (see over)

15. ACCESS ARRANGEMENT (2) Appendices: • Applications & queuing policy • Transfer & relocation policy • Capital contributions policy • Standard access contract • Price list (tariffs) • Price list information • Reference services • Explanatory notes on price control

16. ACCESS ARRANGEMENT INFORMATION (1) The AAI document provides all the detailed supporting information for the AA, including: • Description of key business drivers • Recent performance and benchmark data • Justification for proposed service standards • Supporting narrative on revenue “building blocks”: • Demand & energy forecasts • Forecast Opex & Capex • Value of WACC • Depreciation rates • Asset values (ODV) • Detailed price methodology • Appendices – detailed reports

17. ACCESS ARRANGEMENT INFORMATION (2) Appendices: • Network benchmarking reports (2) • WACC reports (3) • Expenditures report, including capital project listing • Asset valuation report • Revenue model (spreadsheet) • Demonstration of Code compliance for contract & policies

18. REVENUE CAPS  • ERA has essentially approved what WP asked for: • Asset valuation • Depreciation rates • Rate of return (WACC) – 6.76% – high end of “reasonable range” • Expenditure forecasts - minor changes   

19. APPROVED EXPENDITURES (1)

20. APPROVED EXPENDITURES (2)

21. TARIFF EQUALIZATION CONTRIBUTION (TEC) • Govt policy of uniform network tariffs has always subsidized unprofitable Regional areas • Loss previously absorbed by Western Power integrated business • Now a direct cost recovered through SWIS network tariffs (distribution customers only) • Explicit in Legislation & Code • ~$70M each year (goes to Horizon)

22. REVENUE & PRICE CONTROL • Annual “revenue cap” • Code provides for revenue adjustments in subsequent regulatory period due to: • Force majeure events • Changes in Technical Rules • Investment & Capital Contributions adjustment mechanisms • Tariff setting: • Limit of CPI+5% on tariff variations (+/-) in years 2 & 3

23. REFERENCE SERVICES (1) 11 reference services at network exit points Anytime Energy (Residential) Exit Service A1 Anytime Energy (Business) Exit Service A2 Time of Use Energy (Small) Exit Service A3 Time of Use Energy (Large) Exit Service A4 High Voltage Metered Demand Exit Service A5 Low Voltage Metered Demand Exit Service A6 High Voltage Contract Maximum Demand Exit Service A7 Low Voltage Contract Maximum Demand Exit Service A8 Street lighting Exit Service A9 Un-Metered Supplies Exit Service A10 Transmission Exit Service A11

24. REFERENCE SERVICES (2) 2 reference services at network entry points Distribution Entry Service B1 Transmission Entry Service B2

25. REFERENCE SERVICE EXAMPLE (1)

26. REFERENCE SERVICE EXAMPLE (2)

27. PRICING STRUCTURE Current pricing structure is maintained: • Cost reflective tariffs for: • transmission connected customers (nodal) • distribution connected customers >1MVA (zonal) • “Bundled” transmission/distribution tariffs for distribution connected customers • “Uniform” (non-locational) tariffs for all customers <1MVA throughout the SWIN • No change to tariff design

28. PRICE OUTCOMES (1) • Unprecedented expenditure levels (both capex & opex) are driving up revenues and tariffs • Note: capex forecasts deliberately understated • Expected annual tariff increase ~CPI+3% average for several years • AA only “becomes effective” on 1 July 07 – change from 2005/06 to 2007/08 tariffs on this date • 2006/07 tariffs approved by ERA (in AA approval) but never applied in practice

29. PRICE OUTCOMES (2) • 2006/07 to 2007/08 price movements limited to CPI+5% (per AA) • Effective price changes on 1 July are larger - relative to current (2005/06) prices • Both relative movements detailed in 07/08 Price List Information • NOTE: WP intends to maintain current “transition tariffs” only until 30 June 2009

30. PRICE LIST INFORMATION • Required by the Code to explain cost allocation and price setting principles • Incorporates much of the general information from old “pricing and charges papers” • Sections 9 & 10 detail price movements • Appendix describes method of determining UOS prices for new transmission nodes where historical data is not available • http://www.westernpower.com.au/documents/AccessArrangement/prices0708/200708PriceListInformation.pdf

31. “NON-REFERENCE” SERVICES • Essentially “miscellaneous” services, including: • Requested relocation of assets • Planning studies • High load movements • Disconnection/reconnection of services • Insulate & make safe aerial conductors • etc, etc … • Prices not regulated under AA - but don’t affect profitability (refer Slide 9)

32. DISTRIBUTION SERVICE STANDARDS (1) • WP originally proposed single service standard – SAIDI – for feeder categories • Urban (metro + Geraldton, Bunbury, Albany & Kalgoorlie) • Rural (all other areas) • ERA insisted on SAIDI & SAIFI for feeder categories CBD, Urban, Rural Short & Rural Long • Definitions per national reporting guidelines (IEEE 1366 & SCNRRR standards) • Target performance based on 25% improvement from June 2004 (existing corporate targets)

33. DISTRIBUTION SERVICE STANDARDS (2) Targets:

34. STREETLIGHTING SERVICE STANDARDS • Repair times per Customer Charter:

35. TRANSMISSION SERVICE STANDARDS (1) WP proposed, & ERA approved • 3 service standards • Circuit availability (primary circuits only, excludes zone substations) • System minutes interrupted (meshed network only, teed lines excluded) • System minutes interrupted (radial network only, teed lines excluded) • Target performance is status quo - current performance levels considered OK • WP must develop measures that include teed circuits “next time”

36. TRANSMISSION SERVICE STANDARDS (2) Targets:

37. SERVICE STANDARD ADJUSTMENT MECHANISM • Potentially provides financial penalty (reward) for actual performance significantly worse (better) than targets • ERA did not approve this approach for first AA • “Normal” performance defined as [targets +/-10%] • WP must explain performance outside normal range • Financial incentives may apply “next time”

38. CAPITAL CONTRIBUTIONS POLICY (1) • Fundamental principles: • Calculation by “Economic test” i.e. Capcon $ = Capital cost $ - Forecast future access revenue $ • Capcons can only apply to investments that do not meet the “New Facilities Investment Test” (details later) • Exceptions to 1 & 2 covered in “Extension & Expansion Policy” (details later)

39. CAPITAL CONTRIBUTIONS POLICY (2) • New features of approved policy: • Customer can elect to make time payments if capcon >$30K • WP & customer may negotiate rebate scheme if capcon >$100K • WP can request security from customer for capcons >$50K

40. EXTENSION & EXPANSION POLICY • Essentially preserves WP’s existing “100% contribution” supply extension policies • Subdivisions, UMS, etc. • Required by Electricity Industry Act & approved by Coordinator of Energy (OOE) • Can be varied from time to time • Practical instrument to implement Govt policy • Sits outside AA but essential component of the AA’s capcon policy (by reference)

41. NEW FACILITIES INVESTMENT TEST • In practice, the “test” is ultimately convincing the ERA that each & every project satisfies the NFIT criteria (prudency & benefits) • WP building this “test” transparently into business cases & investment approval processes • ERA is currently developing “NFIT guidelines”

42. ALTERNATIVE OPTIONS TEST • Equivalent to NFIT but applies to OPEX capacity solutions e.g. local generation • Must pass same tests i.e.: • Prudency • Provide either a revenue, general or safety/reliability benefit

43. REGULATORY TEST (1) • To assess efficiency of large (individual) projects: • Tx projects >$15M • Dx projects >$5M • WP must submit “major augmentation proposal” to ERA for approval • Demonstration that network enhancement is the best economic outcome compared with alternatives such as local generation, demand management, etc • Always additional to NFIT • Hefty penalties apply for non-compliance

44. REGULATORY TEST (2) • Code provides for streamlined approval (or waiving) where alternatives clearly don’t exist e.g. new generator connection • Market Rules provide process for IMO to call for public proposals on alternatives • In practice, expect: • customer driven projects and most major reinforcements to be routinely approved (or the test waived) • full Reg Test process to apply to incrementally large investments e.g. Geraldton 330, distribution edge-of-grid • Does not apply to projects “committed” before 1 July 2007

45. REGULATORY TEST (3) • WP building this “test” transparently into business cases & investment approval processes • Geraldton 330kV proposal will be first application of Reg Test • “Guidelines” currently being developed by ERA

46. STANDARD ACCESS CONTRACT (1) • “Electricity Transfer Access Contract” (ETAC) • Developed from model access contract in Code • Used for access and connection • Standard ETAC applies to each reference service • Approved ETAC to WP’s satisfaction with 1 exception: • Customer has the right to contract for any capacity, whether used or not • WP argued this could be “gamed” and lead to over investment in new capacity – ERA didn’t agree

47. STANDARD ACCESS CONTRACT (2) • Main differences between the ETAC and Access Agreements (current): • All references to Access Arrangement, not old Regulations - obvious • Some flexibility in security arrangements • Liabilities no longer “strict” – now only for negligence & default • Liabilities are determined in accordance with number of connection points and voltage levels and reset annually • Note: Interconnection Works Contract for network reinforcements not part of the Access Arrangement

48. APPLICATIONS & QUEUING POLICY (1) • Aim of policy is to manage connection applications and development of access contracts in a timely and equitable manner • It covers the process for: • Making applications • Management of the application queue • Amendment or withdrawal of applications • Processing applications & making access offers • Developing new or modified access contracts

49. APPLICATIONS & QUEUING POLICY (2) • “First come, first served” principle continues to apply • Covers applications for both transfer & connection applications • Access offer now in a form that becomes the access contract (ETAC) when signed • Bypass test can be applied to stalled or dormant connection applications • Priority rules for both amended applications and applications associated with tenders

50. APPLICATIONS PROCESS IMPROVEMENTS • Time taken is perennial cause of customer dissatisfaction • WP will respond to “enquiry” (pre-application) within 20 business days • WP has undertaken major process review • Still a complex process • Key parts undergoing further detailed re-design • Time expectations for access offer for major projects still ~6 -12 months