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

Network Management Fee and ancillary reference services

804. 
     The AER's final decision adopts a forecast for the cost of the Network Management Fee (NMF) Envestra will incur in the 2013–17 access arrangement period and the cost of ancillary reference services.
     
805. 
     In its draft decision the AER accepted Envestra's approach to forecast these costs using a bottom-up forecasting approach.
     
806. 
     The NMF is a contractual payment Envestra makes to the APA Group as part of its outsourcing arrangement Envestra has assumed payments will be equal to 3 per cent of smoothed annual revenue. This is consistent with the payments that will be required under its contract with the APA Group. The NMF is then allocated equally to opex and capex.
     
807. 
     The AER proposes a lower forecast of Envestra's smoothed annual revenue requirement (see Part A) than Envestra. Therefore, the AER considers Envestra's NMF forecast is not the best estimate in the circumstances.⁷⁶⁵ The AER has re-forecast the allowance for the NMF based on its final decision on Envestra's smoothed annual revenue requirement.
     
808. 
     For ancillary reference services, Envestra adopted the AER's forecast in its revised proposal. The AER's final decision on opex reflects the forecast in Envestra's revised proposal.
     

7. Debt raising costs and liquidity costs

The AER outlined its established approach to calculating debt raising costs in its draft decision.⁷⁶⁶ Envestra’s revised proposal adopted the AER’s established approach and incorporated the benchmark debt raising cost allowance (as expressed in basis points per annum) determined by the AER in its draft decision.⁷⁶⁷ Envestra provided no additional information on debt raising costs—including no additional information on the method outlined in the Deloitte report, which was submitted with the initial proposal. Therefore, the AER agrees with Envestra’s revised proposal regarding the approach to determine Envestra’s debt raising cost allowance.

Benchmark debt raising costs

809. 
     As flagged in the AER’s draft decision, the AER has updated the benchmark allowance for Envestra’s final RAB and WACC values.⁷⁶⁸ The AER's benchmark allowance provides for three standard sized bond issues for Envestra Victoria and one standard sized bond issues for Envestra Albury. The unit costs and the benchmark debt raising cost are shown in Table 7 .62 for Envestra Victoria and in Table 7 .63 for Envestra Albury.
     

Table 7.62 AER’s final decision on debt raising costs for Envestra Victoria based on a nominal WACC of 7.39 per cent

Value	Explanation	1 issue	2 issues	3 issues
Opening RAB	The AER accepted opening RAB ($m, 2012)			1117.4
Total amount raised	Multiples of median MTN ($250m)	$250m	$500m	$750m
Gross underwriting fee	Median gross underwriting spread, upfront per issue, amortised	6.52	6.52	6.52
Legal and roadshow	$195 000 upfront per issue, amortised	1.13	1.13	1.13
Company credit rating	$55 000 per annum	2.20	1.10	0.73
Issue credit rating	4.5 basis points upfront per issue, amortised	0.65	0.65	0.65
Registry Fees (Startup)	$4 000 upfront per issue, amortised	0.02	0.02	0.02
Registry Fees (Ongoing)	$9 000 per issue per annum	0.36	0.36	0.36
Total	Basis points per annum	10.9	9.8	9.4

Source: AER analysis

Table 7.63 AER’s final decision on debt raising costs for Envestra Albury based on a nominal WACC of 7.39 per cent

Value	Explanation	1 issue	2 issues	3 issues
Opening RAB	The AER accepted opening RAB ($m, 2012)	34.8
Total amount raised	Multiples of median MTN ($250m)	$250m	$500m	$750m
Gross underwriting fee	Median gross underwriting spread, upfront per issue, amortised	6.25	6.25	6.25
Legal and roadshow	$195 000 upfront per issue, amortised	1.13	1.13	1.13
Company credit rating	$55 000 per annum	2.20	1.10	0.73
Issue credit rating	4.5 basis points upfront per issue, amortised	0.65	0.65	0.65
Registry Fees (Startup)	$4 000 upfront per issue, amortised	0.02	0.02	0.02
Registry Fees (Ongoing)	$9 000 per issue per annum	0.36	0.36	0.36
Total	Basis points per annum	10.9	9.8	9.4

Source: AER analysis

810. 
     Because of the economies of scale from spreading the costs of a company credit rating across multiple issuances, the debt raising cost benchmark for Envestra Victoria is 9.4 bppa of total debt raised and 10.9 bppa of total debt raised for Envestra Albury.
     
811. 
     This has resulted in the debt raising costs outlined in Table 7 .64 for Envestra Victoria and in Table 7 .65 for Envestra Albury.
     

Table 7.64 Debt raising costs for Envestra Victoria ($million, 2011)

	2013	2014	2015	2016	2017
Debt raising costs	0.60	0.63	0.65	0.67	0.69

Source: AER analysis

Table 7.65 Debt raising costs for Envestra Albury ($million, 2011)

	2013	2014	2015	2016	2017
Debt raising costs	0.02	0.02	0.02	0.02	0.02

Source: AER analysis

Liquidity costs

812. 
     In its initial proposal, Envestra proposed liquidity costs of $9.3 million (nominal) for Envestra Victoria and $0.09 million (nominal) for Envestra Albury over the 2012­–17 access arrangement period.⁷⁶⁹ Envestra stated:⁷⁷⁰
     

‘Liquidity risk is the risk that a business will have insufficient funds to meet its financial commitments in a timely manner. The two key elements of liquidity risk are short-term cash flow risk and long-term funding risk. The long-term funding risk includes the risk that loans may not be available when the business requires them or that such funds will not be available for the required term or at acceptable cost. All businesses need to manage liquidity risk to ensure that they remain solvent.’

813. 
     The AER did not provide an allowance for liquidity costs in its draft decision. The AER concluded that it already provides Envestra with an allowance for working capital to meet its short term liabilities and therefore, liquidity costs are not required. Further, if Envestra included its working capital allowance in its liquidity cost calculation, then using Envestra’s calculation method, an allowance for liquidity would not be required. This was the case notwithstanding the unrealistic assumptions in Envestra's calculation methodology.⁷⁷¹ The inclusion of both an implicit working capital allowance and explicit liquidity cost allowance would 'double count' the compensation required for liquidity risk. Allowing Envestra to double recover costs would not promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price.⁷⁷² Also, Envestra has been provided with a reasonable opportunity to recover at least the efficient costs.⁷⁷³
     
814. 
     Envestra did not repropose liquidity costs in its revised proposal. The AER agrees with Envestra’s revised proposal to not include liquidity costs in its access arrangement.
     

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