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

Assessment approach

The AER's approach to assessing Envestra's proposed capex is set out in its draft decision. See Attachment 3 of the AER's draft decision for a detailed explanation of the assessment approach.⁸²

The AER also took into account Envestra's responses to information requests, the report from the AER's engineering consultant Zincara and submissions received in relation to its draft decision in forming its final decision on Envestra's proposed capex. The AER received submissions relevant to its capex assessment from:

• 
  Hon. Michael O'Brien MP — Minister for Energy and Resources
  
• 
  Energy Users Coalition of Victoria
  
• 
  Origin Energy (Vic) Pty Limited
  

18. Reasons for decision

The numbers in Section 18 are escalated by applying Envestra's labour and material escalation and do not include the Network Management Fee (NMF). This is to allow comparison between Envestra's proposal and the AER's methodological changes and other adjustments. As such, these numbers are different to those presented in section 15, which applies the AER's decision on labour and material escalation and includes the NMF. For the final AER proposed amounts which include these adjustments see Table 4 .3 and Table 4 .5. The AER's assessment of labour and material cost escalation is in appendix A.

The AER applied its assessment approach and concluded that for both the Victorian network and the Albury network, Envestra's forecast capex for 2013–17 is not conforming capex⁸³ and the forecast was not arrived at on a reasonable basis or the best forecast possible.⁸⁴ The AER's reasons for reaching this conclusion are set out in detail in the sub sections below. Accordingly, the AER proposes to replace Envestra's Victorian network capex allowance with $384.4 million ($2011, escalated direct costs) net capex for the 2013–17 access arrangement period. The AER proposes to replace Envestra's Albury network capex allowance with $5.6 million ($2011, escalated direct costs) net capex for the 2013–17 access arrangement period.

Table 4 .8 shows the AER's final decision on the approved capex for the Victorian network in the 2013–17 access arrangement period.

Table 4.8 Victorian network - AER final approved capital expenditure by category over the 2013–17 access arrangement period ($million 2011, escalated direct costs)

Category	2013	2014	2015	2016	2017	Total
Mains replacement^(a)	24.9	24.0	24.6	22.3	18.9	114.7
Residential connections	21.0	21.0	21.1	20.9	21.6	105.5
Commercial/industrial connections	3.3	6.2	6.3	5.4	6.6	27.8
Residential meter replacement	2.4	4.8	3.2	7.9	2.5	20.9
Commercial/industrial meter replacement	1.0	1.3	1.7	1.5	1.4	6.8
Augmentation	4.1	7.8	2.1	11.3	1.7	27.0
IT	3.7	7.4	3.0	0.2	0.7	15.0
SCADA	0.2	0.2	0.2	0.2	0.2	1.0
Other	4.1	5.3	4.4	2.6	2.3	18.7
Gas Extensions - Other	12.3	0.0	0.0	0.0	0.0	12.3
Gas Extensions - Energy for the Regions	0.0	5.7	0.0	0.0	0.0	5.7
Overheads	9.1	9.8	8.9	10.2	8.3	46.4
GROSS TOTAL CAPITAL EXPENDITURE	86.2	93.5	75.5	82.5	64.2	401.8
Customer contributions	3.3	1.6	1.6	1.6	1.6	9.5
Government contributions	0.0	7.5	0.0	0.0	0.0	7.5
NET TOTAL CAPITAL EXPENDITURE	82.9	84.4	73.9	80.9	62.6	384.8

Source: AER analysis.

Note: This table includes Envestra's proposed labour and material escalators and does not include the NMF.

(a) Includes incentive fee.

143. 
     Table 4 .9 shows the AER's final decision on its proposed capex for Albury network in the 2013–17 access arrangement period.
     

Table 4.9 Albury network - AER final approved capital expenditure by category over the 2013–17 access arrangement period ($million 2011, escalated direct costs)

Category	2013	2014	2015	2016	2017	Total
Mains replacement	0.01	0.01	0.01	0.01	0.01	0.04
Residential connections	0.45	0.53	0.54	0.55	0.57	2.64
Commercial/industrial connections	0.11	0.11	0.11	0.11	0.11	0.54
Residential meter replacement	0.07	0.06	0.09	0.05	0.04	0.32
Commercial/industrial meter replacement	0.03	0.03	0.03	0.02	0.02	0.12
Augmentation	0.01	0.00	0.00	0.00	0.44	0.45
IT	0.13	0.26	0.10	0.00	0.02	0.53
SCADA	0.02	0.02	0.02	0.02	0.02	0.09
Other	0.00	0.00	0.00	0.00	0.00	0.01
Gas Extensions-NGEP						0.00
Gas Extensions-Other						0.00
Overheads	0.18	0.22	0.20	0.19	0.23	1.02
GROSS TOTAL EXPENDITURE	0.99	1.23	1.10	0.96	1.47	5.77
Customer contributions
Government contributions
NET TOTAL EXPENDITURE	0.99	1.23	1.10	0.96	1.47	5.77

Source: AER analysis.

Note: This table includes Envestra's proposed labour and material escalators and does not include the NMF.

144. 
     The AER's detailed consideration of each capex category is outlined below.
     

1.