The AER proposes the following revisions to make the revised access arrangement proposal acceptable:
Revision 9.1: Make all necessary amendments to reflect the AER’s final decision on the corporate income tax allowances for the 2013–17 access arrangement period, as set out in Table 9 .68 and
Table 9 .69.
10Demand
This attachment sets out the AER's assessment of the demand forecasts proposed by Envestra for the 2013–17 access arrangement period. Demand is an important input into the derivation of Envestra's reference tariffs. It also affects opex and capex linked to network growth.
Final decision
The AER accepts Envestra's revised demand forecasts because it considers the proposed demand forecasts are arrived at on a reasonable basis and represent the best forecasts possible in the circumstances.834
The reasoning for the AER's final decision is set out below.
Revised proposal
Envestra did not adopt some elements of the AER's draft decision on its proposed demand forecasts.835Specifically, Envestra did not accept the draft decision adjustments in respect of the proposed network development program or extension of the network to Merrifield and one of the proposed new towns.836
Envestra also proposed an incremental demand forecast related to another extension project which was submitted after the revised proposal.837
Assessment approach
The AER's approach to assessing Envestra's proposed demand forecasts is set out in Attachment 9 of the AER's draft decision.838
The AER did not receive submissions on Envestra's revised demand forecasts but has considered a submission made by SP AusNet that is relevant to the choice of EDD inputs for Envestra's Victorian network.
Reasons for decision
The AER considers that Envestra's revised demand forecasts are arrived at on a reasonable basis and represent the best forecasts possible in the circumstances.839 This section sets out the reasons for the AER's decision.
Normal Weather – the choice of EDD inputs (Victorian network)
In its access arrangement proposal of March 2012, Envestra proposed to generate the
weather–sensitive gas demand forecasts by applying a forecast of EDD for the years 2012 to 2017 sourced from a 2012 CSIRO report.840 This forecast is a brief update of an earlier forecast prepared by the CSIRO in a 2007 report.841 In its 2012 report, the CSIRO provided four scenarios of EDD trend between 2006 and 2017 from which Envestra selected the average greenhouse warming scenario to generate the proposed weather–sensitive gas demand forecasts.842
In its draft decision, the AER did not accept Envestra's choice of EDD inputs to forecast future ‘normal’ weather condition because its choice of EDD inputs resulted in weather–sensitive gas demand forecasts that do not represent the best estimate possible in the circumstances.843 The AER required Envestra to use the EDD forecasts published by AEMO (rather than the CSIRO forecasts) as inputs to generate its proposed weather–sensitive gas demand forecasts for the 2013-17 access arrangement.844
The AER's draft decision considered that the forecast of EDD used by Envestra is not the best estimate possible in the circumstances. This is because the CSIRO projected all its scenarios from a common base value of EDD in 2006 and it did not update this base value in its 2012 report.845 In other words, in its 2012 report, the CSIRO did not re-estimate the baseline EDD using actual EDD between 2007 and 2011. It simply extrapolated the scenarios from the 2006 baseline EDD as in the 2007 report.846
The AEMO's EDD projection referred to in the AER draft decision was based on fitting a regression line to actual data from 1970 to 2011 and establishing a baseline EDD of 1309 in 2012.847 Similarly, the CSIRO EDD projection was based on fitting a regression line to data from 1950 to 2011, of which data points from 2007 are a projection.848 The CSIRO's projection of average greenhouse warming scenario, which Envestra selected, establishes a baseline EDD of 1278 in 2012 (31 EDD lower than AEMO's baseline for 2012). This outcome shows that by choosing to use the baseline EDD projected by the CSIRO to generate the proposed weather–sensitive gas demand forecasts, Envestra implicitly introduced a downward bias in the resulting forecasts. On this basis, the AER draft decision considered that the proposed demand forecasts did not represent the best estimates possible in the circumstances.
In its revised proposal, Envestra adopted the AER's draft decision in regard to the choice of EDD inputs. Envestra stated that it is required to use the revised forecasts set out in the AER draft decision that incorporate the AEMO weather normalisation approach.849In making this final decision, the AER also considered information submitted by SP AusNet as part of its revised proposal regarding the CSIRO EDD forecasts.850 Like Envestra, SP AusNet used the CSIRO's EDD projection as inputs to generate its proposed weather–sensitive gas demand forecasts for the 2013–17 access arrangement period.
SP AusNet submitted that the AER's draft decision and the AER’s consultant report from ACIL Tasman appear to reflect a misunderstanding about how the CSIRO EDD forecast was utilised in demand forecasting.851 It added that both the draft decision and the ACIL Tasman's report seem to indicate that the AER and ACIL Tasman believe that the ‘weather normalisation’ conducted by SP AusNet's consultant (CIE) used CSIRO’s forecast EDD for 2005 to 2010 rather than the actual EDDs for those years.852
The AER agrees with SP AusNet that the use of a forecast of future ‘normal’ weather conditions measured in terms of EDD is not to be confused with the analysis of historical gas consumption and weather conditions to determine the effects of the weather on gas consumption (weather normalization). The AER's understanding of how Envestra used the CSIRO's forecast of EDD to generate weather–sensitive gas demand forecasts is outlined in the above section. This reasoning is consistent with the analysis in ACIL Tasman's report to the AER.853 ACIL Tasman's report presents a comparison of CSIRO EDD projection and AEMO EDD trended values.854
The AER has reviewed Envestra's revised demand forecasts for the Victorian distribution network and is satisfied that the revised demand forecasts comply with the requirements of the NGR.855
Normal Weather – the choice of HDD inputs (Albury network)
The AER draft decision did not accept Envestra's proposed demand forecasts for the Albury network because the proposed forecasts did not represent the best forecasts possible in the circumstances.856 The AER accepted the choice of HDD instead of EDD as inputs to generate the proposed
weather–sensitive gas demand forecasts for the Albury network. However, the AER considered that Envestra should adjust its proposed demand forecasts to account for the HDD data in 2011. The reasons for the AER decision are set out in Attachment 9 of the draft decision.857
Envestra adopted the AER's draft decision in its revised proposal.858 The AER reviewed Envestra's revised demand forecasts for the Albury distribution network and is satisfied that the revised demand forecasts comply with the requirements of the NGR.859
Envestra did not adopt the AER's draft decision regarding network development and certain network extensions. Envestra resubmitted its capex for network extensions to Merrifield and another extension project.860 It also proposed a new capex item for another proposed extension.861 The AER's final decision is to approve these extensions (Attachment 4 of this final decision). Further, Envestra also resubmitted its network development program to address the decline in gas usage.862 The AER's final decision is to approve the payment of incentive payments for the connection of new gas appliances (Attachment 4 of this final decision). The AER accepts the inclusion of the incremental demand arising from these projects into Envestra's demand forecasts because the AER accepted the proposed extensions and network development plan.
Conclusion
For the above reasons, the AER accepts that Envestra's revised demand forecasts are arrived at on a reasonable basis and represent the best forecasts possible in the circumstances.863 Table 10 .76 and Table 10 .77 set out the AER's final decision on Envestra's demand forecasts for the 2013–17 access arrangement period.
Table 10.76 AER final decision for Envestra's demand forecasts 2013–17 (Victorian Network)
