The AER's final decision is to not approve Envestra's proposed capex of $36.7 million ($2011, unescalated direct costs, excluding overheads). The AER does not approve the $10.8 million ($2011, unescalated direct costs, excluding overheads) of capex proposed for augmentation of the Dandenong to Crib Point transmission pipeline. The proposed capex is not prudent and efficient303 and is not justifiable304 for the following reasons:
modelled pressures in the network area is at or marginally above the minimum system pressure for the duration of the 2013–17 access arrangement period, and
Envestra's forecasts of customer numbers and demand growth in the network area are overstated compared with the expected growth in the network area.
Envestra adopted the AER's draft decision for the remaining 20 projects and a provision for small augmentations worth $25.9 million ($2011, unescalated direct costs, excluding overheads) of capex.305 The AER received no further information addressing these particular individual augmentation projects and the allowance for minor projects in Envestra's revised proposal. The AER therefore considers the remaining projects in Envestra's revised proposal are justifiable306 and prudent and efficient307 for the following reasons:
the proposed augmentation projects are necessary to maintain or improve the safety and integrity of services
the proposed solutions are reasonable in light of forecast connections growth to address a decline in gas pressure along the constrained network areas
the input costs of the proposed augmentation projects are within industry standard ranges and reflect that of a prudent and efficient service provider.308
The AER considers that no capex allowance is required for the Dandenong to Crib Point transmission pipeline. The AER considers that $25.9 million ($2011, unescalated direct costs, excluding overheads) of augmentation expenditure for Envestra's Victorian network is conforming capex under the NGR309 (see Table 4 .21).
Table 4.21 Final decision Victoria network - Augmentation(a) ($million, 2011)
2013
2014
2015
2016
2017
Total
Envestra initial proposal
4.1
24.3
2.4
12.5
2.6
45.8
AER draft decision
4.1
7.6
2.0
10.7
1.6
25.9
Envestra revised proposal
4.1
7.6
2.0
12.5
10.6
36.7
AER final decision
4.1
7.6
2.0
10.7
1.6
25.9
Source: AER analysis.
Note: (a) Unescalated direct costs, excluding overheads.
Envestra initially proposed augmentation capex of $45.8 million ($2011, unescalated direct costs, excluding overheads) for the Victorian network for the 2013–17 access arrangement period.310
The AER was satisfied that the majority of Envestra's augmentation expenditure was justifiable311 as it is necessary to maintain or improve the safety and integrity of services or meet regulated minimum pressure requirements. The AER's draft decision:
accepted $25.9 million (($2011, unescalated direct costs, excluding overheads) of Envestra's proposed augmentation capex for the Victorian network, approving 18 of the 21 projects proposed and the provision for small augmentations
did not accept capex for three of Envestra's proposed augmentation projects for its Victorian network as it considered the augmentation was not justifiable.312 This was because the demand forecasts approved by the AER for the relevant areas did not indicate that system pressures were likely to fall below the minimum system pressure. Therefore the AER considered proposed augmentation was not required during the 2013–17 access arrangement period
did not accept the proposed provision for small augmentations (HP unspecified) as the AER considered the proposed expenditure was not prudent and efficient313 or justifiable314.Envestra forecast an exponential increase in the provision which was not justified.315
In its submission to the AER, the EUCV stated that AEMO's 2012 Gas Statement of Opportunities indicated that the amount of gas likely to be used in the 2013–17 access arrangement period is considerably less than was used in the 2008–12 access arrangement period. The EUCV considered this top-down analysis indicated that there is no need to augment the distribution networks to accommodate gas usage growth. Further, the EUCV considered augmentation needs in the 2013–17 access arrangement period would be quite modest and only needed in areas of expansion of the distribution networks to accommodate new gas users.316
The AER accepts the EUCV's observation that system-wide demand is not forecast to increase in the 2013–17 access arrangement period. However, this does not necessarily mean there is no need to augment the distribution networks because augmentation capex may be required to:
reinforce sections of distribution networks that are supply constrained
ensure the distribution networks are capable of continuing to satisfy demand for services, particularly in areas of high growth.
In its revised proposal Envestra adopted the AER's draft decision for the Victorian network, except for one augmentation project (Dandenong to Crib Point Transmission Augmentation)317. Envestra resubmitted the Dandenong to Crib Point Transmission Augmentation project (business case V78) with a revised forecast growth of 1.6 per cent per annum for the period 2013–17.
In assessing this reproposed project the AER considered the timing of the proposed works, the capacity benefit which results from the augmentation solution and the input costs of the project. In undertaking this assessment the AER sought input from Zincara, examined the business cases and requested further information from Envestra.
Envestra provided growth forecasts for the suburbs which depend upon the Dandenong to Crib Point Transmission Pipeline and modelled pressure forecasts for the 2013-17 access arrangement period.318
Information from the local council and the Victorian Department of Planning and Community Development (DPCD) indicates that the annual growth rate in the area is lower than the growth forecasts used by Envestra to forecast system pressures.319 For 2011 to 2016 the DPCD project average annual growth of 1.3 per cent for the fastest growing portion of the Mornington Peninsula320. Forecast.id project annual growth to decline from 1.3 per cent in 2013 to 0.9 per cent in 2018.321 On the basis of advice provided by the Zincara the AER considers the proposed augmentation is not required during the 2013–17 access arrangement period for the following reasons:
the pressures in 2018 at the two regulators are above or only marginally below the regulated minimum pressures
the forecast growth for 2013–18 is most likely to be less than Envestra’s forecast, therefore the pressures in 2018 are likely to be lower than those modelled by Envestra.322
Albury network
The AER's final decision is to approve Envestra's proposed capex of $0.4 million ($2011, unescalated direct costs, excluding overheads) (see Table 4 .22).
Envestra initially proposed augmentation capex of $0.4 ($2011, unescalated direct costs, excluding overheads) for the Albury network for the 2013–17 access arrangement period.323
Envestra adopted the AER's draft decision for $0.4 million ($2011, unescalated direct costs, excluding overheads) of augmentation capex.324 The AER received no further information addressing Envestra's revised proposal. For the reasons in the draft decision,325 the AER therefore considers Envestra's revised proposal is justifiable326and prudent and efficient.327 The proposed augmentation project is necessary to maintain or improve the safety and integrity of services and the input costs of the proposed augmentation projects are within industry standard ranges.328
Table 4.22 Final decision Albury network - Augmentation(a) ($million, 2011)
2013
2014
2015
2016
2017
Total
Envestra initial proposal
0.008
–
–
–
0.413
0.421
AER draft decision
0.008
–
–
–
0.413
0.421
Envestra revised proposal
0.008
–
–
–
0.413
0.421
AER final decision
0.008
–
–
–
0.413
0.421
Source: AER analysis.
Note: (a) Unescalated direct costs, excluding overheads.
