ACCC Public Forum 18 March 2004 18 March 2004 George Maltabarow - - PowerPoint PPT Presentation

ACCC Public Forum

18 March 2004 18 March 2004

George George Maltabarow Maltabarow

Acting Managing Director Acting Managing Director

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Issues Issues

• 1. ACCC process
• 1. ACCC process
• 2. ACCC Regulatory Framework
• 2. ACCC Regulatory Framework
• 3. Response to Supplementary Draft
• 3. Response to Supplementary Draft

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ACCC process ACCC process

Initial application - September 2003 Draft Determination - April 2004 Supplementary Draft - March 2005 9 months into the regulatory period we have: – no final determination in place

derogation in place for pricing purposes

– continued framework uncertainty – questions over code compliance of supplementary draft determination

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ACCC Framework ACCC Framework

• Initially ACCC proposed

Initially ACCC proposed “ “firm firm” ” cap cap

• EA supports move away from firm cap

EA supports move away from firm cap

• However, EA believes

However, EA believes “ “modified cap modified cap” ”is designed is designed to limit capital investment to limit capital investment

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ACCC Framework ACCC Framework

• ACCC argues that new framework alleviates need

ACCC argues that new framework alleviates need to review to review “ “every nut and bolt every nut and bolt” ”

• EA believes ACCC has abandoned notion of

EA believes ACCC has abandoned notion of economic incentives driving performance economic incentives driving performance

• utcomes
• utcomes
• Instead,

Instead, ACCC ACCC’ ’s s strategy is to second strategy is to second-

• guess

guess management and technical expertise of utilities management and technical expertise of utilities

• Regulation has become intrusive and regulates

Regulation has become intrusive and regulates behaviour rather than performance behaviour rather than performance

• Is this what

Is this what Hilmer Hilmer had in mind? had in mind?

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ACCC Framework ACCC Framework

• ACCC now makes project by project decisions

ACCC now makes project by project decisions

• ACCC puts itself in the shoes of the utility, the

ACCC puts itself in the shoes of the utility, the management & the Board management & the Board

• BUT where is

BUT where is ACCC ACCC’ ’s s accountability when things accountability when things go wrong? go wrong?

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Price impact Price impact

• ACCC rejected $100m

ACCC rejected $100m capex capex for EA for EA

• Price impact of including full

Price impact of including full capex capex ($283m) is: ($283m) is:

– – $0.82 per year on average end user $0.82 per year on average end user’ ’s bill s bill – – or 1.6 cents per week

• r 1.6 cents per week
• Very concerning that ACCC risks network failure

Very concerning that ACCC risks network failure for such a marginal benefit to consumers for such a marginal benefit to consumers

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Case study: Ourimbah STS Case study: Ourimbah STS

• EA proposed replacement due to aged equipment

EA proposed replacement due to aged equipment and loading and loading

• ACCC recommended that Ourimbah be deferred

ACCC recommended that Ourimbah be deferred

• Consequences are significant for Central Coast

Consequences are significant for Central Coast residents if substation fails residents if substation fails

• 49,000 customers could face blackouts

49,000 customers could face blackouts

• Impact could be avoided for extra:

Impact could be avoided for extra:

– – 15 cents per year on final bills 15 cents per year on final bills – – or 0.3 cents per week

• r 0.3 cents per week

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ACCC Framework ACCC Framework

• Main cap allowance

Main cap allowance

– – ACCC has moved away from FIRM cap ACCC has moved away from FIRM cap

• Excluded projects

Excluded projects

– – ACCC trying to cater for uncertain capital ACCC trying to cater for uncertain capital

• –

– regime itself uncertain regime itself uncertain

• –

– 5 5-

• year incentive period is not supported

year incentive period is not supported

• –

– Regime cannot be implemented properly under Code Regime cannot be implemented properly under Code

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ACCC Framework ACCC Framework

• Re

Re-

• opener mechanism
• pener mechanism

– – Not subject to consultation Not subject to consultation

• –

– Not consistent with current Code Not consistent with current Code

• –

– Cannot be implemented without Code change Cannot be implemented without Code change

• –

– Replaces the pass Replaces the pass-

• through rules

through rules

• –

– Reduces flexibility of framework Reduces flexibility of framework

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So what have we achieved? So what have we achieved?

Initial draft (April 2004) EA’s revised submission Supplementary draft (March 2005) Forecast capex $184m $283m $182m Total revenues $509m $517m $501m Firm cap

• Pass-through
• Code compliance
• ?

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The Supplementary Draft The Supplementary Draft

• $65m cut to replacement program

$65m cut to replacement program

• Represents 40% of what we sought

Represents 40% of what we sought

• Cuts are not sustainable in long term

Cuts are not sustainable in long term

• $35m project excluded (but not funded)

$35m project excluded (but not funded)

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191919241929 19341939194419491954195919641969197419791984198919941999 200420092014 5 Year Period Ending 30 June

Replacement Cost $‘millions (2002)

Capital Depreciation

Capex cycle: replacing assets built in 1960s

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Age profile of EA Transmission network

M$ 0 M$ 50 M$ 100 M$ 150 M$ 200 M$ 250 M$ 300 M$ 350 M$ 400 Pre-1934 (70+) 1940 - 1944 (60 - 64) 1950 - 1954 (50 - 54) 1960 - 1964 (40 - 44) 1970 - 1974 (30 - 34) 1980 - 1984 (20 - 24) 1990 - 1994 (10 - 14) 2000 - 2004 (0 - 4) Year installed (age now) Replacement cost Substations Pow er Transformers 132kV underground 132kV ov erhead 66kV overhead (M$ 2004 real) Assets currently reaching end-of-life

SKM report on replacement

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Capex reduction Capex reduction

• $65m rejected through PB desk top review

$65m rejected through PB desk top review

– – EA brought SKM in to verify the replacement strategy EA brought SKM in to verify the replacement strategy – – SKM proposed higher levels of replacement than put by EA SKM proposed higher levels of replacement than put by EA

• replacement strategy represents justified middle ground

replacement strategy represents justified middle ground

• Replacement of critical elements denied by ACCC

Replacement of critical elements denied by ACCC – – aging transformers & switchgear aging transformers & switchgear denied denied – – 70 year old OH line 70 year old OH line denied denied – – Ourimbah STS Ourimbah STS denied denied

• unacceptable level of safety and reliability risks

unacceptable level of safety and reliability risks

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Next steps Next steps

• EA responded to

EA responded to ACCC ACCC’ ’s s initial draft in July 04 initial draft in July 04

• ACCC has not addressed

ACCC has not addressed EA EA’ ’s s response to: response to:

– – cuts to cuts to opex

• pex

– – rejection of past rejection of past capex capex

Step 1 Step 1 -

• Address outstanding issues

Address outstanding issues Step 2 Step 2 -

• Improve workability of excluded projects

Improve workability of excluded projects framework framework Step 3 Step 3 -

• Deliver final determination in time for

Deliver final determination in time for 2005 2005-

• 2006 prices

2006 prices