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Housekeeping matters

Draft decision 2011-16 Access Arrangements for Envestra (SA) Andrew Reeves Chairman, AER 2 March 2011 Public forum. Housekeeping matters. Please sign the attendance sheet A record of this meeting will be made. 2. Purpose of the forum.

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Housekeeping matters

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  1. Draft decision2011-16 Access Arrangements for Envestra (SA) Andrew ReevesChairman, AER2 March 2011Public forum

  2. Housekeeping matters • Please sign the attendance sheet • A record of this meeting will be made 2

  3. Purpose of the forum • Present the main features of the AER’s draft decision on the access arrangement proposal submitted by Envestra • inform parties intending to make submissions on the AER’s draft decision 3

  4. Submissions • Submissions on the AER’s draft decision can be sent toQLDSAgas@aer.gov.au, until 21 April • The AER’s access arrangement guideline provides guidance on making submissions • available at www.AER.gov.au • Timeframes under the NGL and NGR limit the AER’s ability to accept late submissions 4

  5. Revenues & Prices • The AER has determined lower revenues & prices than those proposed by Envestra. • The main reductions are to the proposed WACC, forecast capex, forecast opex and the opening capital base as at 1 July 2011. • Tariffs for haulage services are expected to rise in real terms by about 5.5 per cent per annum (on average) over the AA period. • The tariffs for ancillary services were revised and will increase each year only by the rate of change in CPI. 5

  6. Haulage TariffsReal priceindex starts at $1 in 2005-06 6

  7. Total revenues (including ancillary services) 7

  8. Key drivers of results • Key drivers are: • Return on capital (asset base * cost of capital) • Return of capital (depreciation) • Capital expenditure forecasts • Operating expenditure forecasts • Demand forecasts - for converting revenues to prices. 8

  9. Breakdown of revenues (2011-16) 9

  10. Cost of capital (WACC) • The nominal cost of capital has increased significantly (see following table) • Debt risk premium, more than tripled since the earlier AA period. • The cost of equity has decreased, due mostly to a reduction in the equity beta. • The AER has set the market risk premium to its pre-GFC level of 6%. 10

  11. WACC parameters 11

  12. Revenues under different WACCs 12

  13. Regulatory asset base 13

  14. Capital expenditure • Envestra proposed a 157% real increase in capex compare to the earlier AA period. • The largest component of Envestra’s forecast capex was for mains replacement. • The AER accepted most of the forecast capex. Adjustments for: • contingency allowances • overheads and • real cost escalators. • In addition, forecast capex for a number of specific projects has not been adequately justified. 14

  15. Total capex 15

  16. Capex by purpose 16

  17. Mains replacement capex 17

  18. Return of capital • Envestra proposed shorter asset lives than had been used previously. • The AER has accepted these asset lives • increased the rate of depreciation. • Return of capital has increased significantly. • The following graph shows the trend in regulatory depreciation. 18

  19. Regulatory depreciation 19

  20. Operating expenditure • Envestra proposed a 20% real increase in opex compare to the earlier AA period, principally due to: • expenditures not undertaken in earlier AA period due to financial pressures • increased UAG costs, and • one off costs & step changes compared to earlier AA period. • The AER amendments, including: • input cost escalation • reductions in network development • reductions in UAG expenditure and • amendments to several of the proposed step changes. • The AER’s draft decision results in a 9% real decrease in opex compared to the earlier AA period. 20

  21. Total opex 21

  22. Opex by purpose Earlier AA period Next AA period (as proposed) (actual) 22

  23. Demand forecasts • For the most part, the proposed demand forecasts are reasonable. • AER adjustments: • average gas usage for residential customers • economic outlook used for business demand forecasts was overly pessimistic. • The AER revised upward the demand forecasts based on historic trends and SA state treasury forecasts on the SA economy. 23

  24. Residential customer numbers forecast 24

  25. Residential average consumption forecast 25

  26. Volume customer consumption forecast 26

  27. Terms and conditions • Submissions: • overall terms and conditions were weighted too much in favour of Envestra. • The AER accepts most of proposed terms and conditions. • However, changes are required to provide a better balance between Envestra and customers 27

  28. Consultants • Cost of capital: Professor Kevin Davis • Opex and capex forecasts: Wilson Cook • Labour cost growth: Access Economics • Demand forecasts: ACIL Tasman 28

  29. Timeline 29

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