Envestra proposed its actual expenditure for 2011 be used to forecast its opex for the 2013–17 access arrangement period, subject to the following adjustments:
remove movements in provisions (Victoria only)
add payments made from provisions (Albury only)
remove licence fees
Envestra adopted the AER's draft decision to not remove network development expenditure and to remove licence fees from its base year opex. However, Envestra did not adopt the AER's draft decision on the treatment of movements in provisions.
The AER approves Envestra's revised proposal to forecast opex based on actual expenditure in 2011 and to remove licence fees from base year expenditure for the reasons set out in its draft decision.651
The AER also approves Envestra's treatment of movement in provisions for both Envestra Victoria and Envestra Albury in its revised proposal for the reasons set out below.
Movement in provisions (Victoria)
The AER approves Envestra's revised proposal to not remove movements in provisions from actual expenditure in 2011 to determine base opex.
In its revised proposal, Envestra agreed with the principle that movements in provisions should not be included in the base year for the purposes of forecasting opex. However it noted that an adjustment to the 2011 base year for the Victorian network was not required because movements in provisions are not disclosed as opex in the audited regulatory accounts. Instead movements in provisions are disclosed as depreciation/impairment in its income statement in its regulatory accounts.652
The AER agrees that because Envestra Victoria's base year opex does not include movements in provisions no adjustment is required.
Payments in provisions (Albury)
The AER approves Envestra's revised proposal to remove payments in provisions from actual expenditure in 2011 to determine base opex.
For Envestra Albury movements in provisions are disclosed as opex in its regulatory accounts. The reason for the difference between the Victorian and Albury networks is due to the ownership status of the assets to which the provisions relate. Envestra Victoria is required under relevant accounting standards to disclose the movement in provisions against the cost of the asset (that is, as 'depreciation/impairment') because it owns the assets. However, Envestra does not own the Albury assets that relate to the provisions. Consequently, the movement in provision for restoration costs is disclosed as opex (and disclosed as a separate operating cost category).653
In its draft decision the AER removed movements in provisions from Envestra's actual opex when it calculated Envestra Albury's incentive mechanism carryover. It also removed movements in provisions from base opex to ensure Envestra Albury not be penalised twice for the increase in liabilities paid from provisions in 2011. It noted that had it determined the negative carryover accrued by Envestra Albury in the 2008–12 access arrangement period should not be applied, it would not have adjusted its base year expenditure to include liabilities paid from provisions since these liabilities do not represent recurrent expenditure.654
In this final decision, the AER has determined that the Gas Code does not allow for negative carryovers and the negative carryover accrued by Envestra Albury in the current access arrangement period should be set to zero (attachment 8). Accordingly, Envestra Albury would not be unfairly penalised if liabilities paid from provisions were removed from base opex. Given the liabilities paid from provisions in 2011 relate to specific liabilities that are not expected to be incurred in the 2013–17 access arrangement period they should be removed from base opex.
Interaction with the incentive mechanism
Forecast opex and efficiency carryovers work together to provide Envestra an efficient opex forecast and its share of efficiency gains and losses. For example, if Envestra made an efficiency loss in the base year this would suggest base year expenditure was inefficient. Consequently, using base year expenditure to forecast opex, without making any adjustments to base opex to remove inefficient costs, would produce an opex forecast greater than the efficient amount. However, this is appropriate if Envestra also incurs a negative carryover from the incentive mechanism since the two revenue streams together provide an efficient opex forecast plus Envestra's share of efficiency losses.
For the reasons outlined in attachment 8, the negative efficiency carryovers accrued in the 2008–12 access arrangement period will not be applied to Envestra. Consequently, to produce an efficient opex forecast, base opex should be scrutinised and any inefficient opex removed. Despite accruing a negative opex carryover in the current access arrangement period, Envestra did not identify any opex inefficiencies in its base opex. In the absence of evidence identifying specific inefficiencies in base opex, the opex forecasts determined in this decision represent the best forecasts possible in the circumstances.655 However, because inefficient opex has not been removed from base opex, and the negative carryovers accrued will not be paid, these opex forecasts will be upwardly biased. This ensures Envestra will be provided a reasonable opportunity to recover at least its efficient costs.656 The AER notes that the opex incentive mechanism to apply to Envestra in the 2013–17 access arrangement period does allow for negative carryovers (see attachment 8).
Network growth
The AER's final decision is to accept Envestra's network growth methodology, and to update Envestra's opex forecast to reflect the AER's decision on demand discussed in attachment 10.
In its draft decision the AER approved Envestra's benchmark rate of $19.90 ($2011) to forecast the incremental cost associated with new customer connections. However the AER did not consider Envestra's proposed customer number forecasts were arrived at on a reasonable basis and did not represent the best forecasts possible in the circumstances. Consequently, the AER adjusted Envestra's opex for network growth to reflect its draft decision on customer numbers.657
As part of its revised proposal Envestra submitted new customer numbers. The AER considers the customer numbers in Envestra's revised proposal have been arrived at on a reasonable basis and represents the best forecasts possible in the circumstances (see attachment 10). The AER has updated its network growth forecast to reflect Envestra's updated customer number forecasts since its revised proposal for its Victorian network.
