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

ACCC Public Forum 18 March 2004 18 March 2004 George Maltabarow Maltabarow George Acting Managing Director Acting Managing Director

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 2

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 3

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 4

ACCC Framework ACCC Framework � ACCC argues that new framework alleviates need ACCC argues that new framework alleviates need � to review “ “every nut and bolt every nut and bolt” ” to review � EA believes ACCC has abandoned notion of EA believes ACCC has abandoned notion of � economic incentives driving performance economic incentives driving performance outcomes outcomes � 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? � 5

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? 6

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 or 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 7

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 or 0.3 cents per week – 8

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 – � year incentive period is not supported � – 5 – 5- -year incentive period is not supported – Regime cannot be implemented properly under Code Regime cannot be implemented properly under Code – � � 9

ACCC Framework ACCC Framework � Re Re- -opener mechanism opener 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 – � through rules � – Replaces the pass Replaces the pass- -through rules – � Reduces flexibility of framework � – Reduces flexibility of framework – 10

So what have we achieved? So what have we achieved? Initial draft (April EA’s revised Supplementary 2004) submission draft (March 2005) Forecast capex $184m $283m $182m Total revenues $509m $517m $501m � � � Firm cap � � � Pass-through � � Code compliance ? 11

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) � 12

Capex cycle: replacing assets built in 1960s Replacement Cost $‘millions (2002) Capital Depreciation 191919241929 19341939194419491954195919641969197419791984198919941999 200420092014 5 Year Period Ending 30 June 13

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

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 15

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 opex – – rejection of past rejection of past capex capex – Step 1 - - Address outstanding issues Address outstanding issues Step 1 Step 2 - - Improve workability of excluded projects Improve workability of excluded projects Step 2 framework framework Step 3 - - Deliver final determination in time for Deliver final determination in time for Step 3 2005- -2006 prices 2006 prices 2005 16