Access arrangement final decision Envestra Ltd 2013–17 Part 2: Attachments

Revisions

133. 
     The AER proposes the following revisions to make the revised access arrangement proposal acceptable:
     
134. 
     Revision 3.1: Make all necessary amendments to reflect the AER’s final decision on the roll forward of the opening capital bases for the 2008–12 access arrangement period, as set out in tables 3.1 and 3.2.
     
135. 
     Revision 3.2: Make all necessary amendments to reflect the AER’s final decision on the projected opening capital bases for the 2013–17 access arrangement period, as set out in tables 3.3 and 3.4.
     
136. 
     Revision 3.3: Make all necessary amendments to reflect the AER’s final decision on the use of forecast depreciation to roll forward the opening capital bases from 2013–17 at the next access arrangement review, as set out in section 3.4.4.
     

4Capital expenditure

This attachment outlines the AER's assessment of Envestra's proposed capital expenditure (capex) for 2007–11 and forecast capex for the 2013–17 access arrangement period.

15. Final decision

Victorian Network

137. 
     The AER approves capex of $277.9 million ($2011) for 2007–11 as conforming capex.⁶⁹
     
138. 
     The AER does not approve Envestra's revised capex forecast of $521.8 million ($2011, escalated direct costs, including NMF) for the 2013–17 access arrangement period as it is not satisfied that it is conforming capex⁷⁰ or that the forecast was arrived at on a reasonable basis and is the best forecast possible in the circumstances.⁷¹ The AER considers that a capex allowance of $393.6 million ($2011, escalated direct costs, including NMF) complies with the NGR requirements and proposes Multinet's access arrangement is revised accordingly.
     

Albury Network

139. 
     The AER approves capex of $6.1 million ($2011) for 2007–11 as conforming capex.⁷²
     
140. 
     The AER does not approve Envestra's revised capex forecast of $6.7 million ($2011, escalated direct costs, including NMF) for the 2013–17 access arrangement period as it is not satisfied that it is conforming capex⁷³ or that the forecast was arrived at on a reasonable basis and is the best forecast possible in the circumstances.⁷⁴ The AER considers that a capex allowance of $6.1 million ($2011, escalated direct costs, including NMF) complies with the NGR requirements and proposes Multinet's access arrangement is revised accordingly.
     

1. Conforming capital expenditure for 2007–11

Victorian Network

The AER's draft decision was to approve Envestra's proposed net capex of $277.9 million ($2011) for the 2007–11 period as conforming capex.⁷⁵ Envestra's revised proposal included the same net capex for this period and the AER received no further submission on this issue. As such, for the reasons set out in its draft decision the AER approves Envestra's proposed net capex of $277.9 million ($2011) for the 2007–11 period as conforming capex.⁷⁶

Albury Network

The AER's draft decision was to approve Envestra's proposed net capex of $6.1 million ($2011) for the 2007–11 period as conforming capex.⁷⁷ Envestra's revised proposal included the same net capex for this period and the AER received no further submission on this issue. As such, for the reasons set out in its draft decision the AER approves Envestra's proposed net capex of $6.1 million ($2011) for the 2007–11 period as conforming capex.⁷⁸

2. Conforming capital expenditure for the 2013–17 access arrangement period

Victorian Network

For the reasons set out below, the AER does not approve Envestra's proposed capex allowance of $521.8 million ($2011, escalated direct costs, including NMF) for the 2013–17 access arrangement period.⁷⁹ The AER considers $393.6 million ($2011, escalated direct costs, including NMF) net capex is conforming capex and proposes to revise Envestra's access arrangement accordingly.

The reasons for the AER's reductions are:

• 
  Mains—the volume of low pressure to high pressure mains replacement proposed by Envestra is greater than that which a prudent service operator would require to meet its safety and regulatory obligations. The AER considers that elements of Envestra's method for estimating unit rates are flawed, resulting in unit rates which are upwardly biased and not the best forecast in the circumstances and not prudent and efficient.
  
• 
  Residential Connections—a longer averaging period than proposed by Envestra is required to calculate the average historical unit rate.
  
• 
  Commercial Connections—a longer averaging period than proposed by Envestra is required to calculate the average historical unit rate. Further, the AER considers the forecast number of abolishments has not been arrived at on a reasonable basis.
  
• 
  Residential Meters—The AER does not approve Envestra's amendment to its revised proposed unit rates as the AER accepted Envestra's initial proposal.
  
• 
  Industrial and Commercial Meters—The AER does not approve Envestra's amendment to its revised proposed unit rates.
  
• 
  Augmentation—Envestra did not provide evidence that the Dandenong to Crib Point augmentation is required in the 2013–17 access arrangement period.
  
• 
  IT—the knowledge management program is not justified as Envestra did not provide evidence of a specific change in a safety or regulatory obligation and was unable to quantify the net benefits of the program.
  
• 
  Other non-demand—two projects are not conforming capex:⁸⁰
  

• 
  Technical training—the geographical spread of Envestra's employees is not significant enough for a prudent and efficient service provider to prioritise mobilisation of training facilities
  
• 
  Flow correctors—Envestra did not provide evidence to support replacement of all existing flow correctors.
  

Figure 4.2 Victorian network - Comparison of Envestra's historical, proposed and approved capex ($million, 2011)

141. 
     
     

Source: AER analysis

Table 4 .2 compares the AER's final decision against Envestra's proposals and the AER's draft decision by capex category.

Table 4.2 Victorian network - Envestra proposed and AER approved capital expenditure for the 2013–17 access arrangement period ($million 2011, escalated direct costs, including NMF)

Category	Envestra initial proposal	AER draft decision	Envestra revised proposal	AER final decision
Mains replacement	328.6	73.9	183.7	117.0
Residential connections	141.7	95.6	113.6	107.6
Commercial/industrial connections	25.6	14.9	57.1	28.4
Residential meter replacement	28.1	21.6	26.4	21.4
Commercial/industrial meter replacement	7.7	7.1	9.3	7.0
Augmentation	52.0	27.6	39.7	27.5
IT	19.3	15.5	17.3	15.4
SCADA	1.1	1.0	1.0	1.0
Other	53.2	18.5	20.7	19.2
Gas Extensions - Other	9.3	0.0	12.9	12.6
Gas Extensions - Energy for the Regions	10.4	0.0	4.6	5.8
Overheads	97.5	46.2	47.4	47.8
GROSS TOTAL CAPITAL EXPENDITURE	774.4	321.9	533.6	410.6
Customer contributions	9.5	6.5	11.8	9.5
Government contributions	0.0	0.0	0.0	7.5
NET TOTAL CAPITAL EXPENDITURE	764.9	315.4	521.8	393.6

Source: AER analysis.

Note: This table incorporates the effects of the AER's decision on cost escalation and the NMF.

Table 4.3 Victorian network - AER approved capital expenditure by driver category over the 2013–17 access arrangement period ($million, 2011)

Category	2013	2014	2015	2016	2017	Total
Mains replacement	25.5	24.5	25.2	22.6	19.3	117.0
Residential connections	21.6	21.4	21.5	21.2	22.0	107.6
Commercial/industrial connections	3.3	6.4	6.4	5.5	6.8	28.4
Residential meter replacement	2.5	4.9	3.3	8.1	2.6	21.4
Commercial/industrial meter replacement	1.0	1.3	1.8	1.5	1.4	7.0
Augmentation	4.2	7.9	2.1	11.4	1.8	27.5
IT	3.8	7.6	3.1	0.2	0.7	15.4
SCADA	0.2	0.2	0.2	0.2	0.2	1.0
Other	4.2	5.4	4.5	2.7	2.4	19.2
Gas Extensions - Other	12.6	-	-	-	-	12.6
Gas Extensions - Energy for the Regions	-	5.8	-	-	-	5.8
Overheads	9.4	10.0	9.2	10.5	8.7	47.8
GROSS TOTAL CAPITAL EXPENDITURE	88.3	95.4	77.3	83.8	65.8	410.6
Customer contributions	3.3	1.6	1.6	1.6	1.6	9.5
Government contributions	-	7.5	-	-	-	7.5
NET TOTAL CAPITAL EXPENDITURE	85.0	86.3	75.7	82.3	64.2	393.6

Source: AER analysis.

Notes: This table incorporates the effects of the AER's decision on cost escalation and the NMF.

Albury Network

For the reasons set out below, the AER does not approve Envestra's proposed capex allowance of $6.7 million ($2011, escalated direct costs, including NMF) for the 2013–17 access arrangement period.⁸¹ The AER considers $6.1 million ($2011, escalated direct costs, including NMF) net capex is conforming capex and proposes to revise Envestra's access arrangement accordingly.

The reasons for the AER's reductions are:

• 
  Residential Connections—a longer averaging period than proposed by Envestra is required to calculate the average historical unit rate.
  
• 
  Commercial Connections—a longer averaging period than proposed by Envestra is required to calculate the average historical unit rate. Further, the AER considers the forecast number of abolishments has not been arrived at on a reasonable basis.
  
• 
  Residential Meters—Envestra is not permitted to revise it proposed unit rates.
  
• 
  Industrial and Commercial Meters—Envestra is not permitted to revise it proposed unit rates.
  
• 
  IT—the knowledge management program is not justified as Envestra did not provide evidence of a change in safety or regulatory obligation and was unable to quantify the net benefits of the program.
  

Figure 4.3 Albury network - Comparison of Envestra's historical, proposed and approved capex ($million, 2011)

142. 
     
     

Source: AER analysis

Table 4 .4 compares the AER's final decision against Envestra's proposals and the AER's draft decision by capex category.

Table 4.4 Albury network - Envestra proposed and AER approved capital expenditure for the 2013–17 access arrangement period ($million 2011, escalated direct costs, including NMF)

Category	Envestra initial proposal	AER draft decision	Envestra revised proposal	AER final decision
Mains replacement	0.0	0.0	0.0	0.0
Residential connections	3.9	2.7	3.1	2.8
Commercial/industrial connections	0.2	0.1	0.6	0.6
Residential meter replacement	0.4	0.3	0.3	0.3
Commercial/industrial meter replacement	0.1	0.1	0.3	0.1
Augmentation	0.5	0.5	0.5	0.5
IT	0.7	0.6	0.6	0.6
SCADA	0.1	0.1	0.1	0.1
Other	0.8	0.0	0.0	0.0
Gas Extensions - Other	0.0	0.0	0.0	0.0
Gas Extensions - Energy for the Regions	0.0	0.0	0.0	0.0
Overheads	1.4	1.1	1.1	1.1
GROSS TOTAL EXPENDITURE	8.2	5.6	6.7	6.1
Customer contributions	0.0	0.0	0.0	0.0
Government contributions	0.0	0.0	0.0	0.0
NET TOTAL EXPENDITURE	8.2	5.6	6.7	6.1

Source: AER analysis.

Note: This table incorporates the effects of the AER's decision on cost escalation and the NMF.

Table 4.5 Albury network - AER approved capital expenditure by driver category over the 2013–17 access arrangement period ($million, 2011)

Category	2013	2014	2015	2016	2017	Total
Mains replacement	0.01	0.01	0.01	0.01	0.01	0.04
Residential connections	0.48	0.56	0.58	0.60	0.59	2.82
Commercial/industrial connections	0.11	0.11	0.11	0.12	0.11	0.57
Residential meter replacement	0.07	0.06	0.10	0.06	0.05	0.34
Commercial/industrial meter replacement	0.03	0.03	0.03	0.02	0.02	0.13
Augmentation	0.01	-	-	-	0.46	0.47
IT	0.14	0.28	0.11	0.00	0.03	0.56
SCADA	0.02	0.02	0.02	0.02	0.02	0.10
Other	0.00	0.00	0.00	0.00	0.00	0.01
Gas Extensions - Other	-	-	-	-	-	-
Gas Extensions - Energy for the Regions	-	-	-	-	-	-
Overheads	0.20	0.23	0.21	0.21	0.25	1.09
GROSS TOTAL EXPENDITURE	1.07	1.31	1.18	1.04	1.54	6.14
Customer contributions	-	-	-	-	-	-
Government contributions	-	-	-	-	-	-
NET TOTAL EXPENDITURE	1.07	1.31	1.18	1.04	1.54	6.14

Source: AER analysis.

Notes: This table incorporates the effects of the AER's decision on cost escalation and the NMF.

16.