Access arrangement final decision Envestra Ltd 2013–17 Part 2: Attachments
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Access arrangement final decision Envestra Ltd 2013–17 Part 2: Attachments March 2013
Contents 3 Shortened forms 14 1Review framework 15 1 Overview of the service provider 15 1Overview of the service provider 15 1.1Regulation prior to 1 July 2008 16 2 The relevant requirements of the NGL and the NGR 16 2The relevant requirements of the NGL and the NGR 16 2.1Access arrangement proposal to be approved in its entirety or not at all 18 3 Access arrangement review process 18 3Access arrangement review process 18 3.1Revision of access arrangement proposal and commencement of public consultation following draft decision 19 3.2Final decision 20 3.3Further final decision 20 4 Time limits on AER decision making 20 4Time limits on AER decision making 20 5 Public consultation 21 5Public consultation 21 5.1Protected information submitted to the AER 22 2Pipeline services 23 6 Final decision 23 6Final decision 23 7 Revised proposal 23 7Revised proposal 23 8 Assessment approach 24 8Assessment approach 24 9 Reasons for decision 24 9Reasons for decision 24 3Capital base 28 10 Final decision 28 10Final decision 28 11 Revised proposal 30 11Revised proposal 30 12 Assessment approach 31 12Assessment approach 31 13 Reasons for decision 31 13Reasons for decision 31 13.1Opening capital bases at 1 January 2008 32 13.2Opening capital bases at 1 January 2013 32 13.3Projected capital bases at 31 December 2017 33 13.4Depreciation approach to capital base roll forward at the next access arrangement review 33 14 Revisions 35 14Revisions 35 4Capital expenditure 36 15 Final decision 36 15Final decision 36 15.1Conforming capital expenditure for 2007–11 36 15.2Conforming capital expenditure for the 2013–17 access arrangement period 37 16 Revised proposal 43 16Revised proposal 43 16.12013–17 access arrangement period 43 17 Assessment approach 45 17Assessment approach 45 18 Reasons for decision 45 18Reasons for decision 45 18.1Mains replacement 48 18.2Connections 75 .1 The contract price for undertaking each component of a connection in each contracting region. 82 .2 Any changes in the nature of connections work. This could include: 82
19 Adjustments to labour and material escalation 115 19Adjustments to labour and material escalation 115 20 Adjustments for Envestra's proposed network management fee 116 20Adjustments for Envestra's proposed network management fee 116 21 Equity raising costs 118 21Equity raising costs 118 21.1Benchmark equity raising costs 119 22 Revisions 122 22Revisions 122 5Rate of return 123 23 Final decision 123 23Final decision 123 23.1AER process 126 23.2Overview of reasons 127 24 Assessment approach 130 24Assessment approach 130 24.1Requirements of the national gas law and rules on the rate of return 131 24.2Selection of well accepted approach and model 133 24.3Selection of a well accepted approach and model 134 24.4Approach to the determination of specific parameters 134 24.5Reasonableness check on overall rate of return 135 24.6Promotion of regulatory certainty and consistency 135 25 Reasons for final decision 136 25Reasons for final decision 136 25.1The Capital Asset Pricing Model (CAPM) 136 25.2Risk free rate 137 25.3Market risk premium 144 25.4Equity beta 160 25.5Debt risk premium 161 25.6Forecast inflation 162 25.7Gearing ratio 162 25.8Reasonableness checks on overall rate of return 163 26 Revisions 164 26Revisions 164 6Depreciation 165 27 Final decision 165 27Final decision 165 28 Revised proposal 166 28Revised proposal 166 29 Assessment approach 167 29Assessment approach 167 30 Reasons for decision 167 30Reasons for decision 167 30.1Standard economic lives 167 30.2Remaining economic lives 168 31 Revisions 168 31Revisions 168 7Operating expenditure 170 32 Final decision 170 32Final decision 170 32.1Envestra Victoria 170 32.2Envestra Albury 170 33 Revised proposal 171 33Revised proposal 171 34 Assessment approach 172 34Assessment approach 172 35 Reasons for decision 172 35Reasons for decision 172 .1 First, increased demands for Envestra's outputs may require it to expand its network. It is reasonable that an efficient service provider will require more inputs, and thus greater opex, to deliver more output. It therefore is reasonable to assume it needs an allowance for network growth. 173 .2 Second, it is reasonable to assume that the cost of inputs for an efficient firm to produce the same level of output may not change at the same rate as CPI. Consequently it is reasonable to account for real cost changes in Envestra's inputs. However, to the extent the cost of inputs change, the input mix which minimises costs will also likely change. Thus, to apply input cost escalation while assuming a constant input mix will provide at least the efficient costs of a prudent service provider. 173 .3 Third, there may be other reasons beyond Envestra's control that will increase or decrease its costs. For example, regulatory obligations may change requiring Envestra to increase expenditure to meet those new obligations. For this reason the AER allows for other incremental increases above base year opex (often referred to as step changes). Generally step changes should only be provided for cost increases beyond the service provider's control. Otherwise the step change would represent an increase in costs to produce the same level of output and thus a loss in efficiency. 173 35.1Forecasting base year 175 .1 remove movements in provisions (Victoria only) 175 .2 add payments made from provisions (Albury only) 175 .3 remove licence fees 175 35.2Network growth 177 35.3Escalation of base year opex 177 35.4Step changes 178 .1 regional SCADA 178 .2 IT–road map initiative 178 .3 extensions to new towns 178 .4 knowledge management 178 .1 pipeline integrity remediation works 179 .2 pipeline signage replacement 179 .3 holes in meter boxes 179 .4 pipe saddle support repairs 179 .5 gas pipes in drains 179 .6 easement vegetation management 179 .1 cost of carbon 179 .2 network monitoring and control 179 .3 interval meter data management 179 .4 graphical information system analyst 179 .5 increased maintenance rates 179 .6 increase in insurance costs 179 .7 change in regulatory policy—reactive mains replacement 179 .8 National Energy Customer Framework (NECF) 179 .9 technical training 180 .10 meter station charges 180 .11 network development 180 .1 regulatory change 181 .2 non-recurrent expenditure 181 .3 discretionary expenditure 181
.1 Based on recent capital costs of installing Traralgon CTM station, it considered APA GasNet's quotes to be reasonable. 196 .2 Historical capital costs for CTM stations are no longer relevant due to real cost increases. 196 .3 It considered it would not be reasonable or efficient to incur considerable expense in questioning APA GasNet's quotes at this stage, because they are budget estimates only, and detailed costs will be reviewed as the project advances. Envestra considered its approach to obtaining initial quotes and then obtaining final quotes at a later stage just before implementation is consistent with good industry practice when planning capital works. 196 .4 Because the construction of CTMs is core business for APA GasNet, Envestra considered that APA GasNet's quotes provide the best forecast of CTM capital costs. 197 .5 Previous AER regulatory reviews would confirm that GasNet is a prudent and efficient service provider. Envestra also believed that such costs would also benchmark well against other similar projects approved by the AER in previous review processes and against any further engineering analysis that the AER might consider appropriate. 197 .1 The Traralgon CTM station is significantly different to the new stations proposed by Envestra. The AER notes that the transmission pipeline service for the Traralgon station is thirteen times longer than those estimated for the new Pakenham, Wollert and Clyde North stations. As a result, the AER considers the capital cost for the new Traralgon station is not comparable to the forecast capital cost for Pakenham, Wollert and Clyde North stations. 197 .2 The AER considers that recent real cost increases do not explain such a large increase in APA GasNet's underlying costs. Meter installations are composed of labour costs and materials costs. Based on the wage price index, labour costs associated with the gas industry have only increased by 4.2 per cent in real terms since 2007. The AER notes that the real cost of some materials associated with the gas pipeline industry fell in real terms over the period 2009–2012. The AER also notes that APA GasNet did not propose materials real cost escalation for the 2013–17 access arrangement period. If APA GasNet considered that materials were rising faster than the consumer price index, then it is reasonable to assume APA GasNet would have proposed materials real cost escalation in its recent access arrangement proposal. The increase, or lack thereof, in real labour and materials costs for transmission pipelines indicate that real cost increases do not account in APA GasNet's forecast increase in the costs to install or upgrade a meter station. 197 .3 The AER recognises that quotes are refined closer to the date the project is implemented, and, and as a result, the actual cost of projects often differ from the forecast cost. However, this is true of any forecast. The AER must be satisfied that the forecast was arrived at on a reasonable basis and is the best estimate in the circumstance. The AER considers that a prudent service provider would question such large increase in the price that it receives from a supplier, even if were an initial quote. Accepting such a large increase in costs without question, regardless of the competencies of the supplier, is not a forecast arrived at on a reasonable basis, is not the best estimate possible in the circumstances, and would not be consistent with good industry practice. 197 .4 For similar reasons as set out in point 3 above, the AER considers that a prudent service provider would not accept such a large increase in price on the basis that the nature of APA GasNet's core business is construction. 198 .5 APA GasNet's CTM facilities are not regulated by the AER. It is Envestra's CTM charges which the AER is regulating. Therefore the most relevant information that the AER has access to about CTM capital costs is the information that Envestra has provided to the AER about the capital costs of installing and upgrading CTM facilities. Given the quotes APA GasNet provided to Envestra are significantly above the historical costs of installing or upgrading CTMs, the AER considers APA GasNet's forecasts do not benchmark well compared to the historical costs of providing similar services. 198
36 Revisions 206 36Revisions 206 36.1Envestra Victoria 206 36.2Envestra Albury 206 8Incentive mechanism 207 37 Final decision 207 37Final decision 207 37.1Carryover from the 2008–12 access arrangement period 207 37.2Incentive mechanism for the 2013–17 access arrangement period 207 38 Revised proposal 208 38Revised proposal 208 38.1Carryovers accrued in the 2008–12 access arrangement period 208 38.2Proposed incentive mechanism for the 2013–17 access arrangement period 208 39 Assessment approach 208 39Assessment approach 208 40 Reasons for decision 209 40Reasons for decision 209 40.1Carryover from the 2008–12 access arrangement period 209 40.2Incentive mechanism to apply in the 2013–17 access arrangement period 210 41 Revisions 212 41Revisions 212 41.1Envestra Victoria 212 41.2Envestra Albury 213 9Corporate income tax 214 42 Final decision 214 42Final decision 214 43 Revised proposal 216 43Revised proposal 216 44 Assessment approach 217 44Assessment approach 217 45 Reasons for decision 217 45Reasons for decision 217 45.1Opening tax asset base as at 1 January 2013 217 45.2Tax depreciation approaches 218 45.3Standard tax asset lives 219 45.4Remaining tax asset lives 220 45.5Utilisation of imputation credits (gamma) 221 46 Revisions 221 46Revisions 221 10Demand 222 47 Final decision 222 47Final decision 222 48 Revised proposal 222 48Revised proposal 222 49 Assessment approach 222 49Assessment approach 222 50 Reasons for decision 222 50Reasons for decision 222 50.1Normal Weather – the choice of EDD inputs (Victorian network) 222 50.2Normal Weather – the choice of HDD inputs (Albury network) 224 50.3Other issues 225 50.4Conclusion 225 51 Revisions 226 51Revisions 226 11Tariff setting 227 52 Final decision 227 52Final decision 227 53 Revised proposal 227 53Revised proposal 227 54 Assessment approach 227 54Assessment approach 227 55 Reasons for decision 227 55Reasons for decision 227 56 Revisions 228 56Revisions 228 12Tariff variation mechanism 229 57 Final decision 229 57Final decision 229 58 Revised proposal 230 58Revised proposal 230 59 Assessment approach 230 59Assessment approach 230 60 Reasons for decision 231 60Reasons for decision 231 60.1Annual tariff variation mechanism 231 60.2Costs pass through mechanism 236 .1 The first amendment applies the insurance cap event to not only costs beyond the relevant policy limit (as in the AER's draft decision) but also to losses (amendment to factor (b)). 236 .2 The second amendment applies the insurance cap event not only to reference services (as in the AER's draft decision) but also to non-reference services (amendment to factor (c)). 237
61 Revisions 249 61Revisions 249 13Non-tariff components 260 62 Final decision 260 62Final decision 260 63 Terms and conditions 260 63Terms and conditions 260 63.1Final decision 260 63.2Revised proposal 261 63.3Assessment approach 261 63.4Reasons for decision 261 64 Capacity trading requirements 294 64Capacity trading requirements 294 64.1Final decision 294 64.2Revised proposal 294 64.3Assessment approach 294 64.4Reasons for decision 294 65 Queuing arrangements 294 65Queuing arrangements 294 65.1Final decision 294 65.2Revised proposal 294 65.3Assessment approach 294 65.4Reasons for decision 294 66 Extension and expansion requirements 295 66Extension and expansion requirements 295 66.1Final decision 295 66.2Revised proposal 295 66.3Assessment approach 295 66.4Reasons for decision 295 67 Terms and conditions for changing receipt or delivery points 296 67Terms and conditions for changing receipt or delivery points 296 67.1Final decision 296 67.2Revised proposal 297 67.3Assessment approach 297 67.4Reasons for decision 297 68 Review dates 297 68Review dates 297 68.1Final decision 297 68.2Revised proposal 297 68.3Assessment approach 297 68.4Reasons for decision 297 69 Amendments 298 69Amendments 298
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