NSW Public Forum NSW DNSP Regulatory Proposals NSW DNSP Regulatory - - PowerPoint PPT Presentation

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NSW Public Forum

NSW DNSP Regulatory Proposals NSW DNSP Regulatory Proposals

10 JULY 2014

2013

Vince Graham, Chief Executive Officer ,

AGENDA

1. Who we are 2 Customer engagement

1

2. Customer engagement 3. What we are doing to minimise network price increases 4. Headline outcomes for NSW distribution businesses

4 2 3

4. Headline outcomes for NSW distribution businesses 5. Tariff reform

4 5

Distribution Transmission Generation Networks NSW

2

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Section 1 Who we are

Who we are

1

Comprises Ausgrid, Endeavour Energy and Essential Energy (‘poles and wires in NSW”) and wires in NSW )

• remain separate companies
• joint Board

j

• common CEO and senior management team

Why was it established? y Networks NSW was formed by the NSW Government on 1 July 2012 to:

• put downward pressure on electricity prices and

NETWORKS NSW (Umbrella Agreement)

• save $400M over 4 years, to help fund electricity rebates for low

income households

NETWORKS NSW (Umbrella Agreement)

AUSGRID ENDEAVOUR ESSENTIAL Networks NSW

4

Our purpose and objective p p j

T b f i t iti b ffi i tl di t ib ti l t i it To be of service to our communities by efficiently distributing electricity to our customers in a way that is safe, reliable and sustainable.

• Continuously improve safety performance

Safety Safety

• Strive to contain our share of customers’

Aff d bilit

electricity bills to CPI or less

Affordability

• Ongoing reliability security sustainability of
• Ongoing reliability, security, sustainability of

the network

Reliability

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Network Reform Program

1

g

• The centrepiece of the reforms has been the Network Reform
• The centrepiece of the reforms has been the Network Reform

Program.

• The Network Reform Program commenced in 2011/12 and will

The Network Reform Program commenced in 2011/12 and will deliver ongoing cost reductions over a period of 5 years.

• The first 3 years of this program has delivered $2.67 billion of

savings, including $2.26 billion of capital savings.

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The Impact of Potential Change of Ownership

1

p g p

• On 10 June 2014 the NSW Premier Mike Baird announced that the
• On 10 June 2014, the NSW Premier Mike Baird announced that the

Government at the March 2015 election would seek a mandate to undertake a long term lease of 49% of the ‘poles and wires’ t k b i network businesses.

• Essential Energy would be excluded.
• A scoping study is being undertaken to assess the structure of any

sale and is due for completion by November 2014 .

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S i 2 Section 2 Customer engagement

Customer Engagement

2

g g

• A key focus for us is to enhance engagement with our customers
• A key focus for us is to enhance engagement with our customers
• We’ve commenced a detailed engagement program with customers,

welfare groups, retailers and other stakeholders that will be ongoing.

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Customer Engagement

2

g g

Customer research

Customer priorities

1 Pricing & affordability

research Face-to-

• 1. Pricing & affordability
• 2. Reliability
• 3. Safety

face meetings

• 4. Implementing energy efficiency programs
• 5. Reliability

Use of i ti innovative channels (incl. social media)

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What customers told us

2

• No more price shocks

want affordable stable prices

Affordability

• No more price shocks – want affordable, stable prices
• Satisfied with reliability of network

Affordability Reliability

don’t want to pay more for better reliability or less for reduced reliability

• Improve customer value without affecting reliability

Value y

p g y

• Ensure safety of network

Safety

• Better communications channels: mobile apps, online

Communications

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Section 3 Section 3 What we are doing to What we are doing to minimise network price p increases

Prioritising Capital Investment

3

g p

• The overall investment portfolio was ranked using a risk prioritisation

model model.

• Resulted in significant capex deferral for the 2014-19 period of close to

$2 billion compared to initial planning estimates. Forecast capex for 2014 19 i $6 billi l h h AER’ d f 2009 14 2014-19 is $6 billion lower than the AER’s approved capex for 2009-14.

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Productivity

3

In addition to cost savings arising from capex reductions, we have also:

• Placed pressure on our operating expenditures to reduce costs

in all areas

• Cost saving initiatives
• Cost saving initiatives
• Strategic procurement
• Rationalising organisational structures & road fleets

g g

• Removing TSA dis-synergy costs
• Eliminating stranded labour costs
• Customer aligned enterprise agreements

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Outcomes for customers

3

$5.4 billion in savings from Network Reform are resulting in:

• Lower costs from a lower Regulatory Asset Base (RAB) arising

from lower than capex forecast in 2009-14

• Distribution price increases below inflation for the entire

2014-19 period (that is, real price reductions)

• Maintained reliability and improved safety performance

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Section 4 Section 4 Headlines for NSW DNSPs

Household Network Bill Increases

4

Ausgrid Endeavour Energy Essential Energy

1 0% 17.5% 20.0% 22.5% 15 0% 17.5% 20.0% 22.5% 25.0% 30.0% 5.0% 7.5% 10.0% 12.5% 15.0% 5.0% 7.5% 10.0% 12.5% 15.0%

CPI

10.0% 15.0% 20.0%

CPI 1.2% 2.3%

Ave 2.4%

• 2.5%

0.0% 2.5% 5 0% 9-10 0-11 1-12 2-13 3-14 4-15 5-16 6-17 7-18 8-19

• 2.5%

0.0% 2.5% 9-10 0-11 1-12 2-13 3-14 4-15 5-16 6-17 7-18 8-19

CPI

0.0% 5.0% 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19

CPI CPI

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20 20 20 20 20 20 20 20 20 20

• Network charges make up about 50% of a household’s electricity bill (Distribution 40%,

Transmission 10%)

• Our share of electricity bill increases will be held at or below CPI for the next 5 years
• Our share of customers’ electricity bills will fall in real terms

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• Greater stability to help households and small businesses manage their budgets

Annual Smoothed Revenues

4

Ausgrid, Endeavour Energy and Essential Energy have collectively proposed smoothed annual revenues of $24 2 billion for standard control services smoothed annual revenues of $24.2 billion for standard control services (SCS) for the five year regulatory period commencing 1 July 2014

NSW DNSPs’ proposed smoothed Standard Control Service revenues ($ million, nominal) Proposed 2014/15 Proposed 2015/16 Proposed 2016/17 Proposed 2017/18 Proposed 2018/19 Total 2014-19

Ausgrid $2 314 $2 372 $2 425 $2 499 $2 580 $12 189 Ausgrid $2,314 $2,372 $2,425 $2,499 $2,580 $12,189 Endeavour $1,022 $1,022 $1,046 $1,068 $1,101 $5,258 Essential $1,353 $1,352 $1,348 $1,347 $1,357 $6,757 TOTAL $4,688 $4,746 $4,819 $4,914 $5,038 $24,205

^ Includes metering and ancillary network services

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Capex – Significant reductions

4

Proposed consolidated capex during 2014-19 is 45% below the forecast rate

• f inflation over the 5 year period

p g

• f inflation over the 5 year period.

Real reduction in it l

NNSW Capex from FY10 to FY19 ($m 2013-14)

capital program

AUSGRID

3,500 4,000

NNSW Capex from FY10 to FY19 ($m, 2013-14)

A VOUR

2 000 2,500 3,000

Real 2013-14

ENDEAV L

1,000 1,500 2,000

$m, R

ESSENTIAL AER Determination (2009-14) Actual / Fcast (2009-14) Forecast (2014-19) FY14 Real

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( ) ( ) ( )

Drivers impacting opex

4

p g p

Productivity improvements that are delivering savings in opex, are being l l ff t b h i ti i t i i largely offset by changes in our operating environment requiring increased expenditure in some areas. 1. Increased vegetation costs for bushfire mitigation g g 2. Retail dis-synergy costs (Ausgrid) 3. Costs resulting from changes to regulatory obligations (i.e. private mains) 4. Costs of implementing network reforms (i.e. exit costs) 5 Real cost escalation 5. Real cost escalation

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Vegetation management

4

g g

C t t t ti i d i th t i d d t i d Costs to manage vegetation increased in the current period due to increased compliance obligations particularly with regard to bush fire and reliability risk. Allowance for this period was based on a lower cost structure from the 2004-09 regulatory period.

Real 13/14

100 150 200 250

$m, R

50 100 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19

Essential Energy Vegetation Management Opex ($million, 2013-14)

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Operating cost

4

Consolidated opex during 2014-19 is expected to be 4% above the forecast of inflation over the 5 year period.

Real change in ti

NNSW Opex from FY10 to FY19 ($m 2013 14)

• perating program

AUSGRID 1 500 1,600 1,700

4

NNSW Opex from FY10 to FY19 ($m, 2013-14)

A VOUR 1,200 1,300 1,400 1,500

real 2013-14

4%

ENDEAV AL 900 1,000 1,100

$m,

4%

ESSENTIA AER Determination (2009-14) Actual / Fcast (2009-14) FY14 (Real) Incl ACS

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Energy Forecasts – Decline

4

gy

Average consumption is expected to decline by 0.4% per annum on average across the three businesses during 2014-19. Current period consumption is g p p expected to be 4% below the AER’s determination.

Consolidated energy consumption from FY10 to FY19 (GWh)

56,000 58,000 60,000

.a.

50 000 52,000 54,000

GWh p

48,000 50,000

AER Determination (2009-14) Actual / Fcast (2009-14) Forecast (2014-19)

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WACC Summary

4

We have proposed a WACC of 8.83 per cent that we consider to be th l d f i di ti WACC Thi i i ifi tl

• n the low end of an indicative WACC range. This is significantly

below last period where the allowed WACC was 10.02 per cent.

Proposed WACC % Reasonable range of estimates - % Overall WACC 8.83% 8.83% - 9.44% Cost of equity 10.11% 10.11% - 11.50% Cost of debt 7.98% 7.98% - 8.06% Gearing 60% 60% Gamma 25% 25%

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WACC – Trailing average cost of debt

4 We have proposed a 10 year trailing average approach to setting the cost of debt – 7 98% to be annually updated 7.98% to be annually updated. In contrast, the AER’s proposed transition to the trailing average will penalise businesses who already issue debt using a benchmark efficient staggered portfolio businesses who already issue debt using a benchmark efficient staggered portfolio basis based on current rates continuing to the future:

10 Year trailing average v AER's transition cost of debt

7.50% 8.00% 8.50% 9.00%

t (%pa)

Under - compensation

5.50% 6.00% 6.50% 7.00%

Cost of deb

Under compensation

5.00% 5.50% 2014-15 2015-16 2016-17 2017-18 2018-19 10 year trailing average AER transition cost of debt (as at April 2014)

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WACC – Trailing average cost of debt

4

The level of under-compensation is significant for the NSW businesses at close to $1 billion over 5 years across Ausgrid Endeavour and Essential: close to $1 billion over 5 years across Ausgrid, Endeavour and Essential:

Under-compensation from AER transition ($m, nominal)

2014-15 2015-16 2016-17 2017-18 2018-19 Total 2014-19 AUSGRID $91 $97 $103 $108 $113 $510 ENDEAVOUR $35 $38 $40 $42 $44 $198 ESSENTIAL $43 $46 $49 $52 $55 $244 ESSENTIAL $43 $46 $49 $52 $55 $244 TOTAL $168 $180 $191 $201 $211 $951

* Assuming rates remain at April 2014 levels over the 5 years.

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WACC – Low proposed cost of equity

4

We have proposed a stable long-term approach to setting the cost of equity:

10.1% based on the CAPM using long-term estimates of the risk free rate 4.78%, MRP 6.5% and the best available empirical estimate of equity beta 0.82. Our proposed cost of equity is at the low end of the reasonable range of estimates:

12 0%

Cost of equity estimates (reasonable range)

10 7% 10.9% 11.5% 11.0% 11.0% 11.5% 12.0% (% pa) NSW DNSPs proposed cost of equity 10.1% 10.1% 10.7% 10.0% 10.5%

• st of equity

9.0% 9.5% Long-term CAPM Short-term CAPM Black CAPM Fama-French 3 Factor Model Fama-French 3 Factor Model CAPM informed by DGM

Co

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CAPM CAPM Factor Model (Low) Factor Model (High) by DGM

Changes to user pays services

4

The AER has determined that the following services will be classified as ‘Alternative Control Services’ for which cost reflective prices will be Alternative Control Services , for which cost reflective prices will be determined and charged directly to the customer benefiting from the

• service. The changes will take full effect from July 2015.

Public Lighting – some price increases will exceed CPI to achieve cost reflectivity. y Metering – previously bundled into the general network tariff. Will now b i ibl t t i t h be visible to customers in a separate charge. Ancillary Network Services – previously partially subsidised through Ancillary Network Services previously partially subsidised through the general network tariff. Prices for some services will rise as subsidies are removed and prices fully reflect costs.

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Public Lighting g g

• Largely implemented the pricing models approved in the AER’s 2010

d t i ti d t d t fl t th t t determination, updated to reflect the current costs.

• Essential Energy has been under-recovering on street lighting in the

current regulatory period current regulatory period.

• Essential Energy has proposed price increases to achieve cost

reflective pricing closer to Ausgrid and Endeavour. p g g

• We will work further with the AER and customers to develop

alternatives to the AER’s models to help provide pricing transparency d i l t bill and simpler customer bills.

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Issues driving metering prices

4

Each DNSP has worked to minimise barriers for metering competition when developing cost reflective prices, within the customer prices constraints and individual circumstances. Differences include:

• Ausgrid has invested heavily in Type 5 meters and will need to

recover its costs. This will lead to a higher exit fee than for the

• ther DNSPs.
• Essential and Endeavour have accelerated depreciation of the
• Essential and Endeavour have accelerated depreciation of the

existing assets given the lower value of the existing asset base.

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Section 3 The need for tariff reform The need for tariff reform

Industry challenge ahead

4

Declining electricity use puts pressure on customer prices

• 1. Historic tariff structures
• Network costs mostly fixed

C h l i bl b d h h

• Customer charges mostly variable - based on how much

electricity is used - on an inclining scale

• Price structures don’t reflect costs and are designed to

discourage network utilisation

• Consumer impact of declining consumption is perverse and

regressive

• 2. Technology
• Customers who can afford technology can avoid variable

electricit charges (ie home o ners ith disposable income) electricity charges (ie home owners with disposable income)

• Those that can’t afford or can’t access technology bear

the burden of declining electricity consumption (renters, high d i i l i )

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density units, low incomes)

Different ways of charging for electricity use

4

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Current Tariff Structures

5

Ausgrid Residential IBT

(not to scale)

ce

$142.17 $145.72

(not to scale)

nent Pric

19.48

Compon

12.92 12.86 15.38 13.96 14.96

C Fixed ($/p.a) 1st Block (c/kWh) 2nd Block (c/kWh) 3rd Block (c/kWh) 2013/14 2014/15 (c/ ) (0-4 MWh) (c/ ) (4-8 MWh) (c/ ) (> 8 MWh)

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2013/14 2014/15

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Future Tariff Options

5

p Tariff reform is essential if we are to meet electricity y customers’ long-term interests.

To address current tariff challenges the following future options are To address current tariff challenges, the following future options are being considered:

• Continue to provide inclining blocks?
• The move to single block tariffs? (taxi fare tariffs)
• The move to declining, rather than inclining, blocks?

Additional consultation will take place over the next 12 months on our approach to future tariff options pp p

Stakeholder views on these options are welcomed

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Next Speakers p

Rod Howard, Chief Operating Officer, Endeavour Energy Joe Pizzinga, General Manager Finance & Compliance, g g Ausgrid Gary Humphreys, Chief Operating Officer, Gary Humphreys, Chief Operating Officer, Essential Energy

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Optional Material p

Following is optional material

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Optional Material p

$1,400

2014/15 Estimated Network Bill A R id ti l C t i 5 MWh

$967 $1,120 $1,269 $ $1,200

Avg Residential Customer consuming 5 MWh pa

$665 $676 $686 $747 $762 $800 $848 $925 $967 $800 $1,000 NUOS bill $443 $515 $587 $598 $400 $600 Annual N $200 $-

VIC | CitiPower ACT | ActewAGL VIC | United Energy VIC | PowerCor VIC | Jemena NSW | Endeavour WA | Western Power VIC | SPAusNet NT | Power & Water NSW | Ausgrid QLD | Energex SA | ETSA TAS | Aurora NSW | Essential QLD | Ergon

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Optional Material p

$6,000

2014/15 Estimated Network Bill A G l S l C t i 25 MWh

$4 326 $4,502 $5,428 $5,435 $5,000

Avg General Supply Customer consuming 25 MWh pa

$3,068 $3,086 $3,316 $3,699 $3,746 $4,117 $4,326 $4,000 OS bill $1,877 $2,349 $2,712 $2,850 $2,892 $3,068 $3,086 $2,000 $3,000 Annual NUO $1,000 $-

VIC | CitiPower VIC | PowerCor VIC | United Energy VIC | Jemena NSW | Endeavour NT | Power & Water ACT | ActewAGL WA | Western Power QLD | Energex QLD | Ergon TAS | Aurora NSW | Ausgrid VIC | SPAusNet NSW | Essential SA | ETSA

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Our share of your bill

1

y

Network charges make up about 50% of a household’s electricity bill g p y (Distribution 40%, Transmission 10%)

Electricity bills are made up of the following components in Essential Energy’s network area.

Transmission 6% Distribution 43% Climate change levy 1% Generating and buying electricity 20% Carbon price & government Carbon price & government green schemes 15% Retailer 16%

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Optional Material p

AER project timetable: Regulatory determinations

State/ Territory Service provider Form of transitional arrangement (length of process) Regulatory control period Framework & Approach Regulatory process Date Length F&A paper Regulatory proposal Draft decision Revised regulatory Submissions Final decision (length of process) Date Length published proposal due published regulatory proposal due* close* published Placeholder determination (3 1 Jul 2014 ‐ 30 Jun 2015 1 yr n.a. 31 Jan 2014 n.a. n.a. n.a. 30 Apr 2014 NSW/ACT Ausgrid, Endeavour Energy, Essential Energy, ActewAGL months) Full determination (11 months) 1 Jul 2015 ‐ 30 Jun 2019 4 yrs Part 1: 31 Mar 2013 Part 2: 31 Jan 2014 31 May 2014 30 Nov 2014 Jan 2015 Feb 2015 30 Apr 2015 E E E Qld/SA Energex, Ergon Energy, SA Power Networks Preliminary determination with mandatory re‐opener (12 months) 1 Jul 2015 ‐ 30 Jun 2020 5 yrs 30 Apr 2014 31 Oct 2014 30 Apr 2015 Jul 2015 Jul 2015 31 Oct 2015 Vic CitiPower, Powercor, Jemena, Jemena, SP AusNet, United Energy 1 Jan 2016 ‐ 30 Dec 2020 5 yrs 31 Oct 2014 30 Apr 2015 31 Oct 2015 Jan 2016 Jan 2016 30 Apr 2016 No transitional Tas Aurora Energy No transitional arrangements (15 months) 1 Jul 2017 ‐ 30 Jun 2022 5 yrs 31 Jul 2015 31 Jan 2016 30 Sep 2016 Dec 2016 Jan 2017 30 Apr 2017

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Optional Material p

Investment Prioritisation – Elements of risk

Network Reliability

• How is this project intended to impact on reliability on the network? Objective - Customers in your

electrical region should, on average, receive comparable service standards to customers in like situations within Australia situations within Australia.

Public Safety, Environmental and Regulatory Impact

• All known safety, environmental and regulatory non-compliances having been identified are

treated with the highest priority to ensure the risks are contained. The proposed works are g y essential to ensure that safety or environmental risks are mitigated, and/or to ensure compliance with Statutory/Regulatory obligations.

Network Initiated Fire

• Mitigate the risk of personal injury or property damage due to the network or network activity
• Mitigate the risk of personal injury or property damage due to the network or network activity.

Workplace Health & Safety

• To improve the overall level of WH&S standards in accordance with organisational goals for

targeted improvement by removing or treating identified hazards. g p y g g

Network Capacity

• To ensure that there is sufficient capacity in the network to meet the demands placed on it and

ensure compliance with regulatory requirements.

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Household Network Bill Increases - ESSENTIAL

4

20.0% 22.5% 7 5% 10.0% 12.5% 15.0% 17.5% % Target: Our share of customers’ electricity bills will increase by

• 2.5%

0.0% 2.5% 5.0% 7.5% 1 2 3 4 5 6 7 8 9 y no more than CPI 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Past and proposed average household price increases

Year 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15 2014‐15 2015‐16 2016‐17 2017‐18 2018‐19 Dollar change $116 $152 $191 $201 ‐$29 ‐$40 $30 $30 $31 $32 $32 Dollar change $116 $152 $191 $201 $29 $40 $30 $30 $31 $32 $32 Percentage change 17.8% 19.7% 20.8% 18.1% ‐2.2% ‐3.1% 2.3% 2.3% 2.3% 2.3% 2.3% Proposed increases (SRP) 2014-19 Past increases 2009-14 Transitional 2014-15 l h ld d i i Networks NSW

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placeholder decision

Household Network Bill Increases - ENDEAVOUR

4

20.0% 22.5% 7.5% 10.0% 12.5% 15.0% 17.5% Target: Our share of customers’ electricity bills will increase by no

• 2.5%

0.0% 2.5% 5.0% % 1 2 3 4 5 6 7 8 9 y more than CPI 2009-1 2010-1 2011-1 2012-1 2013-1 2014-1 2015-1 2016-1 2017-1 2018-1

Past and proposed average household price increases

Year 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15 2014‐15 2015‐16 2016‐17 2017‐18 2018‐19 Dollar change $65 $64 $85 $31 $1 ‐$36 $7 $ 8 $ 8 $ 8 $ 8 Percentage change 17 8% 15 0% 17 3% 5 4% 0 1% 5 9% 1 2% 1 2% 1 2% 1 2% 1 2% Percentage change 17.8% 15.0% 17.3% 5.4% 0.1% ‐5.9% 1.2% 1.2% 1.2% 1.2% 1.2% Proposed increases (SRP) 2014-19 Past increases 2009-14 Transitional 2014-15 l h ld d i i Networks NSW

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placeholder decision

Household Network Bill Increases - AUSGRID

4

30.0% 15.0% 20.0% 25.0% Target: Our share of customers’ electricity 0.0% 5.0% 10.0% 1 2 3 4 5 6 7 8 9 customers electricity bills will increase by no more than CPI 2009-1 2010-1 2011-1 2012-1 2013-1 2014-1 2015-1 2016-1 2017-1 2018-1

Past and proposed average household price increases

Year 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15 2014‐15 2015‐16 2016‐17 2017‐18 2018‐19 Dollar change $108 $83 $105 $158 $20 ‐$13 $18 $15 $21 $20 $20 Percentage change 31 8% 18 7% 19 8% 25 0% 2 5% ‐1 6% 2 2% 1 8% 2 5% 2 3% 2 2% Percentage change 31.8% 18.7% 19.8% 25.0% 2.5% ‐1.6% 2.2% 1.8% 2.5% 2.3% 2.2% Proposed increases (SRP) 2014-19 Past increases 2009-14 Transitional 2014-15 placeholder decision Networks NSW

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p