The AER is required to make a decision on Envestra's proposed capital base roll forward. As a part of this, the AER must make decisions on specific inputs to the roll forward process. Specifically, the AER must determine:
the opening capital base at 1 January 2008—this is the base from which the AER rolls forward the capital base to reflect actual capex and forecast depreciation for the 2008–12 access arrangement period. The AER has increased Envestra's revised proposal on the capital bases at 1 January 2008 due to a transitional indexation adjustment by:
Victoria—$7.7 million ($ 2012) or 0.8 per cent
Albury—$0.3 million ($2012) or 0.8 per cent.
the opening capital base at 1 January 2013—this is the capital base at the end of the 2008–12 access arrangement period. This in turn will be used for determining the return on capital and depreciation building blocks over the 2013–17 access arrangement period
the projected capital base at 31 December 2017— this is the forecast of the closing capital base for the 2013–17 access arrangement period, based on forecast capex and depreciation. The AER has reduced Envestra Victoria's revised proposal on the projected capital base as at 31 December 2017 by $135.4 million ($nominal) or 8.4 per cent, due to the AER's final decisions on forecast capex and forecast depreciation. The AER has also reduced Envestra Albury's projected capital base at 31 December 2017 by $0.3 million ($nominal) or 0.8 per cent.
the depreciation approach used to roll forward the capital base from 2013–17 at the next access arrangement review.
Opening capital bases at 1 January 2008
The AER does not approve Envestra's revised proposal on the opening capital base at 1 January 2008. In its revised proposal, Envestra proposed to adopt the requirements in the AER's draft decision. However, the AER has considered further information that supports the need to apply an additional 6 months of indexation to Envestra's opening capital bases at 1 January 2008 as part of transitioning to the AER's modelling framework. The result is that the AER has approved higher opening capital bases than those proposed by Envestra. The AER's reasons for this decision are set out below.
Having made this adjustment, the AER has determined Envestra's opening capital bases at 1 January 2008 of:
Envestra Victoria—$992.2 million ($2012)
Envestra Albury—$35.5 million ($2012).
Transitional indexation adjustment
The AER has adjusted Envestra's revised proposal on the opening capital base at 1 January 2008 to account for an additional 6 months indexation to determine the opening capital bases as at 1 January 2013. The adjustment is necessary because Envestra's capital bases were valued in 1 July dollars under the ESC's regulatory modelling. The AER's regulatory modelling requires the capital bases to be valued in 31 December dollars when rolling forward the capital base from year to year. Accordingly, for this access arrangement review, the AER has made an additional 6 months of indexation adjustment to Envestra's capital bases to transition from the ESC's regulatory modelling to the AER's regulatory modelling. This adjustment increases Envestra's opening capital bases at 1 January 2008 for its Victorian and Albury businesses by 0.8 per cent each.
In the draft decision, the AER did not accept Envestra's proposal to index its closing capital bases by an additional six months as part of the roll forward for the 2008–12 access arrangement period.60 Envestra's revised proposal adopted the AER's draft decision.61 However, SP AusNet provided further information in support of this adjustment in its revised proposal. Having considered this additional information, the AER accepts that the transitional indexation adjustment is necessary. The need for this additional indexation also applies to Envestra's capital bases. The AER has therefore indexed the closing capital bases using the same CPI applying to SP AusNet. This means that the capital bases are indexed forward using six months of inflation from the CPI at 30 June 2006 to the CPI at 31 December 2006. The AER consulted with Envestra on the proposed method to determine the additional 6 months indexation. Envestra confirmed the appropriateness of the proposed method.62
Opening capital bases at 1 January 2013
The AER does not accept Envestra's proposed opening capital base at 1 January 2013. In its revised proposal, Envestra adopted the AER's draft decision, including the capex and depreciation for determining the opening capital bases as at 1 January 2013. However, the transitional indexation adjustment to the opening capital bases at 1 January 2008 flows through in the capital base roll forward to determine the opening capital bases at 1 January 2013. As a result of this adjustment, the AER determines Envestra's opening capital bases as at 1 January 2013 of:
Envestra Victoria—$1117.4 million ($nominal)
Envestra Albury—$34.8 million ($nominal).
Projected capital bases at 31 December 2017
The AER does not approve Envestra's projected capital base as at 31 December 2017 for its Victoria or Albury networks. The AER’s forecasts of Envestra's projected capital bases as at 31 December 2017 are:
Envestra Victoria—$1473.4 million ($nominal), a reduction of $135.4 million or 8.4 per cent from Envestra's proposal.
Envestra Albury—$38.0 million ($nominal), a reduction of $0.3 million or 0.8 per cent from Envestra's proposal.
This is because of the AER's final decisions on the inputs to the determination of the projected capital base. In particular, while the AER accepts the closing value for Envestra's Albury Network, the AER does not accept Envestra's proposed inputs to the projected roll forward. For example, the AER determined a higher opening capital base at 1 January 2013 and reduced Envestra's capex allowance. The AER has amended the following inputs:
Increased Envestra's proposed opening capital bases as at 1 January 2013 to reflect the changes required in this attachment.
Envestra Victoria—$0.4 million ($nominal) or 0.4 per cent.
Envestra Albury—$0.1 million ($nominal) or 1.5 per cent.64
The AER also does not approve Envestra's proposal to use actual depreciation rather than forecast depreciation to establish its opening capital bases as at 1 January 2018 at the next access arrangement review. This issue is discussed further below.
Depreciation approach to capital base roll forward at the next access arrangement review
The AER proposes to roll forward Envestra's capital bases from 2013–17 at the next access arrangement review using forecast depreciation.65 The AER does not approve Envestra's proposal to change to an actual depreciation approach from the current approach of using forecast depreciation. This is consistent with the AER's draft decision.
The AER's final decision on the depreciation approach in the capital base roll forward is a full discretion provision in the NGR.66 The AER may, therefore, withhold approval of Envestra's proposed approach if it considers a preferable alternative satisfies the requirements of the NGL.
The AER considers that the forecast depreciation approach is a preferable alternative to Envestra's proposed actual depreciation approach in the circumstances of this decision. Further, the forecast depreciation approach will promote the national gas objective and the revenue and pricing principles better than the actual depreciation approach.67 The AER is applying the approach that was previously applied to Envestra by the ESC. The forecast depreciation approach is also consistent with access arrangements applying to Envestra's other gas networks, and with other regulated pipelines.
The AER has reached this view because:
The AER considers that the forecast depreciation approach will allow Envestra to recover at least its efficient costs of investment in its network. This is because the AER will deduct from the capital base exactly the depreciation forecast that Envestra recovers through tariffs. This means that Envestra will recover through depreciation precisely the value it invests in the network over the life of its assets.
Under an actual depreciation approach, Envestra will achieve greater financial benefits compared to the forecast depreciation approach if it underspends its capex allowance or overstates its capex forecast. This means that Envestra receives a greater financial benefit for the same investment in its network compared to the forecast depreciation approach. Envestra achieves these benefits because the forecast depreciation recovered through tariffs exceeds the depreciation that is subtracted from the capital base. These financial benefits arise whether these underspends are due to efficiency gains or due to inefficient deferrals of expenditure.
Under the current forecast depreciation approach, Envestra has underspent its forecast capex allowance from 2007–11 by approximately $133 million ($ June 2012), or 26 per cent.
As Envestra has already demonstrated scope to underspend relative to its forecast capex, the AER considers the additional financial benefit for underspending under the actual depreciation approach is unnecessary. The additional financial benefit may:
result in services being provided to Envestra's users at greater than efficient costs—In the capital base, assets depreciate only up to their full value. However, if Envestra systematically underspends it will consistently recover greater depreciation revenue than it will subtract of its capital base. This is because it will recover forecast depreciation through tariffs, but its capital base will only decrease by the lower actual depreciation amount. In turn, this means that it can recover more depreciation through revenue than the value of capex it invests over the life of the assets. This, in turn, suggests users will have to pay greater than efficient costs for services.
promote under-investment in Envestra's network by providing a financial benefit for deferring efficient capex.
Therefore, in this case, the AER considers that the actual depreciation approach will not promote the long-term interests of natural gas consumers.68
The above reasons are discussed in further detail in appendix D. The appendix also addresses:
