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

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Access arrangement final decision

Envestra Ltd


Part 2: Attachments

March 2013

  1. © Commonwealth of Australia 2013

  2. This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be reproduced without permission of the Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should be addressed to the Director Publishing, Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT 2601.

  1. Contents

Contents 3

Shortened forms 14

1Review framework 15

1 Overview of the service provider 15

1Overview of the service provider 15

1.1Regulation prior to 1 July 2008 16

2 The relevant requirements of the NGL and the NGR 16

2The relevant requirements of the NGL and the NGR 16

2.1Access arrangement proposal to be approved in its entirety or not at all 18

3 Access arrangement review process 18

3Access arrangement review process 18

3.1Revision of access arrangement proposal and commencement of public consultation following draft decision 19

3.2Final decision 20

3.3Further final decision 20

4 Time limits on AER decision making 20

4Time limits on AER decision making 20

5 Public consultation 21

5Public consultation 21

5.1Protected information submitted to the AER 22

2Pipeline services 23

6 Final decision 23

6Final decision 23

7 Revised proposal 23

7Revised proposal 23

8 Assessment approach 24

8Assessment approach 24

9 Reasons for decision 24

9Reasons for decision 24

3Capital base 28

10 Final decision 28

10Final decision 28

11 Revised proposal 30

11Revised proposal 30

12 Assessment approach 31

12Assessment approach 31

13 Reasons for decision 31

13Reasons for decision 31

13.1Opening capital bases at 1 January 2008 32

13.2Opening capital bases at 1 January 2013 32

13.3Projected capital bases at 31 December 2017 33

13.4Depreciation approach to capital base roll forward at the next access arrangement review 33

14 Revisions 35

14Revisions 35

4Capital expenditure 36

15 Final decision 36

15Final decision 36

15.1Conforming capital expenditure for 2007–11 36

15.2Conforming capital expenditure for the 2013–17 access arrangement period 37

16 Revised proposal 43

16Revised proposal 43

16.12013–17 access arrangement period 43

17 Assessment approach 45

17Assessment approach 45

18 Reasons for decision 45

18Reasons for decision 45

18.1Mains replacement 48

18.2Connections 75

.1 The contract price for undertaking each component of a connection in each contracting region. 82

.2 Any changes in the nature of connections work. This could include: 82

18.3Meter replacement 88

18.4Augmentation 94

18.5Information Technology (IT) 97

18.6SCADA 101

18.7Other non-demand 103

18.8Extensions 111

18.9Overheads 112

18.10Government and customer contributions 114

19 Adjustments to labour and material escalation 115

19Adjustments to labour and material escalation 115

20 Adjustments for Envestra's proposed network management fee 116

20Adjustments for Envestra's proposed network management fee 116

21 Equity raising costs 118

21Equity raising costs 118

21.1Benchmark equity raising costs 119

22 Revisions 122

22Revisions 122

5Rate of return 123

23 Final decision 123

23Final decision 123

23.1AER process 126

23.2Overview of reasons 127

24 Assessment approach 130

24Assessment approach 130

24.1Requirements of the national gas law and rules on the rate of return 131

24.2Selection of well accepted approach and model 133

24.3Selection of a well accepted approach and model 134

24.4Approach to the determination of specific parameters 134

24.5Reasonableness check on overall rate of return 135

24.6Promotion of regulatory certainty and consistency 135

25 Reasons for final decision 136

25Reasons for final decision 136

25.1The Capital Asset Pricing Model (CAPM) 136

25.2Risk free rate 137

25.3Market risk premium 144

25.4Equity beta 160

25.5Debt risk premium 161

25.6Forecast inflation 162

25.7Gearing ratio 162

25.8Reasonableness checks on overall rate of return 163

26 Revisions 164

26Revisions 164

6Depreciation 165

27 Final decision 165

27Final decision 165

28 Revised proposal 166

28Revised proposal 166

29 Assessment approach 167

29Assessment approach 167

30 Reasons for decision 167

30Reasons for decision 167

30.1Standard economic lives 167

30.2Remaining economic lives 168

31 Revisions 168

31Revisions 168

7Operating expenditure 170

32 Final decision 170

32Final decision 170

32.1Envestra Victoria 170

32.2Envestra Albury 170

33 Revised proposal 171

33Revised proposal 171

34 Assessment approach 172

34Assessment approach 172

35 Reasons for decision 172

35Reasons for decision 172

.1 First, increased demands for Envestra's outputs may require it to expand its network. It is reasonable that an efficient service provider will require more inputs, and thus greater opex, to deliver more output. It therefore is reasonable to assume it needs an allowance for network growth. 173

.2 Second, it is reasonable to assume that the cost of inputs for an efficient firm to produce the same level of output may not change at the same rate as CPI. Consequently it is reasonable to account for real cost changes in Envestra's inputs. However, to the extent the cost of inputs change, the input mix which minimises costs will also likely change. Thus, to apply input cost escalation while assuming a constant input mix will provide at least the efficient costs of a prudent service provider. 173

.3 Third, there may be other reasons beyond Envestra's control that will increase or decrease its costs. For example, regulatory obligations may change requiring Envestra to increase expenditure to meet those new obligations. For this reason the AER allows for other incremental increases above base year opex (often referred to as step changes). Generally step changes should only be provided for cost increases beyond the service provider's control. Otherwise the step change would represent an increase in costs to produce the same level of output and thus a loss in efficiency. 173

35.1Forecasting base year 175

.1 remove movements in provisions (Victoria only) 175

.2 add payments made from provisions (Albury only) 175

.3 remove licence fees 175

35.2Network growth 177

35.3Escalation of base year opex 177

35.4Step changes 178

.1 regional SCADA 178

.2 IT–road map initiative 178

.3 extensions to new towns 178

.4 knowledge management 178

.1 pipeline integrity remediation works 179

.2 pipeline signage replacement 179

.3 holes in meter boxes 179

.4 pipe saddle support repairs 179

.5 gas pipes in drains 179

.6 easement vegetation management 179

.1 cost of carbon 179

.2 network monitoring and control 179

.3 interval meter data management 179

.4 graphical information system analyst 179

.5 increased maintenance rates 179

.6 increase in insurance costs 179

.7 change in regulatory policy—reactive mains replacement 179

.8 National Energy Customer Framework (NECF) 179

.9 technical training 180

.10 meter station charges 180

.11 network development 180

.1 regulatory change 181

.2 non-recurrent expenditure 181

.3 discretionary expenditure 181

35.5Assessment of proposed step changes 184

.1 Based on recent capital costs of installing Traralgon CTM station, it considered APA GasNet's quotes to be reasonable. 196

.2 Historical capital costs for CTM stations are no longer relevant due to real cost increases. 196

.3 It considered it would not be reasonable or efficient to incur considerable expense in questioning APA GasNet's quotes at this stage, because they are budget estimates only, and detailed costs will be reviewed as the project advances. Envestra considered its approach to obtaining initial quotes and then obtaining final quotes at a later stage just before implementation is consistent with good industry practice when planning capital works. 196

.4 Because the construction of CTMs is core business for APA GasNet, Envestra considered that APA GasNet's quotes provide the best forecast of CTM capital costs. 197

.5 Previous AER regulatory reviews would confirm that GasNet is a prudent and efficient service provider. Envestra also believed that such costs would also benchmark well against other similar projects approved by the AER in previous review processes and against any further engineering analysis that the AER might consider appropriate. 197

.1 The Traralgon CTM station is significantly different to the new stations proposed by Envestra. The AER notes that the transmission pipeline service for the Traralgon station is thirteen times longer than those estimated for the new Pakenham, Wollert and Clyde North stations. As a result, the AER considers the capital cost for the new Traralgon station is not comparable to the forecast capital cost for Pakenham, Wollert and Clyde North stations. 197

.2 The AER considers that recent real cost increases do not explain such a large increase in APA GasNet's underlying costs. Meter installations are composed of labour costs and materials costs. Based on the wage price index, labour costs associated with the gas industry have only increased by 4.2 per cent in real terms since 2007. The AER notes that the real cost of some materials associated with the gas pipeline industry fell in real terms over the period 2009–2012. The AER also notes that APA GasNet did not propose materials real cost escalation for the 2013–17 access arrangement period. If APA GasNet considered that materials were rising faster than the consumer price index, then it is reasonable to assume APA GasNet would have proposed materials real cost escalation in its recent access arrangement proposal. The increase, or lack thereof, in real labour and materials costs for transmission pipelines indicate that real cost increases do not account in APA GasNet's forecast increase in the costs to install or upgrade a meter station. 197

.3 The AER recognises that quotes are refined closer to the date the project is implemented, and, and as a result, the actual cost of projects often differ from the forecast cost. However, this is true of any forecast. The AER must be satisfied that the forecast was arrived at on a reasonable basis and is the best estimate in the circumstance. The AER considers that a prudent service provider would question such large increase in the price that it receives from a supplier, even if were an initial quote. Accepting such a large increase in costs without question, regardless of the competencies of the supplier, is not a forecast arrived at on a reasonable basis, is not the best estimate possible in the circumstances, and would not be consistent with good industry practice. 197

.4 For similar reasons as set out in point 3 above, the AER considers that a prudent service provider would not accept such a large increase in price on the basis that the nature of APA GasNet's core business is construction. 198

.5 APA GasNet's CTM facilities are not regulated by the AER. It is Envestra's CTM charges which the AER is regulating. Therefore the most relevant information that the AER has access to about CTM capital costs is the information that Envestra has provided to the AER about the capital costs of installing and upgrading CTM facilities. Given the quotes APA GasNet provided to Envestra are significantly above the historical costs of installing or upgrading CTMs, the AER considers APA GasNet's forecasts do not benchmark well compared to the historical costs of providing similar services. 198

35.6Network Management Fee and ancillary reference services 202

35.7Debt raising costs and liquidity costs 203

36 Revisions 206

36Revisions 206

36.1Envestra Victoria 206

36.2Envestra Albury 206

8Incentive mechanism 207

37 Final decision 207

37Final decision 207

37.1Carryover from the 2008–12 access arrangement period 207

37.2Incentive mechanism for the 2013–17 access arrangement period 207

38 Revised proposal 208

38Revised proposal 208

38.1Carryovers accrued in the 2008–12 access arrangement period 208

38.2Proposed incentive mechanism for the 2013–17 access arrangement period 208

39 Assessment approach 208

39Assessment approach 208

40 Reasons for decision 209

40Reasons for decision 209

40.1Carryover from the 2008–12 access arrangement period 209

40.2Incentive mechanism to apply in the 2013–17 access arrangement period 210

41 Revisions 212

41Revisions 212

41.1Envestra Victoria 212

41.2Envestra Albury 213

9Corporate income tax 214

42 Final decision 214

42Final decision 214

43 Revised proposal 216

43Revised proposal 216

44 Assessment approach 217

44Assessment approach 217

45 Reasons for decision 217

45Reasons for decision 217

45.1Opening tax asset base as at 1 January 2013 217

45.2Tax depreciation approaches 218

45.3Standard tax asset lives 219

45.4Remaining tax asset lives 220

45.5Utilisation of imputation credits (gamma) 221

46 Revisions 221

46Revisions 221

10Demand 222

47 Final decision 222

47Final decision 222

48 Revised proposal 222

48Revised proposal 222

49 Assessment approach 222

49Assessment approach 222

50 Reasons for decision 222

50Reasons for decision 222

50.1Normal Weather – the choice of EDD inputs (Victorian network) 222

50.2Normal Weather – the choice of HDD inputs (Albury network) 224

50.3Other issues 225

50.4Conclusion 225

51 Revisions 226

51Revisions 226

11Tariff setting 227

52 Final decision 227

52Final decision 227

53 Revised proposal 227

53Revised proposal 227

54 Assessment approach 227

54Assessment approach 227

55 Reasons for decision 227

55Reasons for decision 227

56 Revisions 228

56Revisions 228

12Tariff variation mechanism 229

57 Final decision 229

57Final decision 229

58 Revised proposal 230

58Revised proposal 230

59 Assessment approach 230

59Assessment approach 230

60 Reasons for decision 231

60Reasons for decision 231

60.1Annual tariff variation mechanism 231

60.2Costs pass through mechanism 236

.1 The first amendment applies the insurance cap event to not only costs beyond the relevant policy limit (as in the AER's draft decision) but also to losses (amendment to factor (b)). 236

.2 The second amendment applies the insurance cap event not only to reference services (as in the AER's draft decision) but also to non-reference services (amendment to factor (c)). 237

60.3Procedure for oversight and approval of tariff variation 245

61 Revisions 249

61Revisions 249

13Non-tariff components 260

62 Final decision 260

62Final decision 260

63 Terms and conditions 260

63Terms and conditions 260

63.1Final decision 260

63.2Revised proposal 261

63.3Assessment approach 261

63.4Reasons for decision 261

64 Capacity trading requirements 294

64Capacity trading requirements 294

64.1Final decision 294

64.2Revised proposal 294

64.3Assessment approach 294

64.4Reasons for decision 294

65 Queuing arrangements 294

65Queuing arrangements 294

65.1Final decision 294

65.2Revised proposal 294

65.3Assessment approach 294

65.4Reasons for decision 294

66 Extension and expansion requirements 295

66Extension and expansion requirements 295

66.1Final decision 295

66.2Revised proposal 295

66.3Assessment approach 295

66.4Reasons for decision 295

67 Terms and conditions for changing receipt or delivery points 296

67Terms and conditions for changing receipt or delivery points 296

67.1Final decision 296

67.2Revised proposal 297

67.3Assessment approach 297

67.4Reasons for decision 297

68 Review dates 297

68Review dates 297

68.1Final decision 297

68.2Revised proposal 297

68.3Assessment approach 297

68.4Reasons for decision 297

69 Amendments 298

69Amendments 298

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