Regulatory Proposal to the AER, 2011 – 2015 0 Public Forum, 17 December 2009
Presentation outline 1 Charles Popple Group General Manager Networks Strategy and Development 1. Background About SP AusNet ► Our network and distribution area ► Focus on customer service ► Asset management strategy 2. Our Proposal Building blocks ► 2006-2010 regulatory period ► Capex ► Opex ► Other building blocks 3. Outcomes Impact on customers ► Pricing and tariffs ► Reliability
1. Background About SP AusNet 2 ► Our network and distribution area ► Focus on customer service ► Asset management strategy
Snapshot of our network 3 � Distributes electricity to 610,000 customer supply points � Spans more than 80,000 sq km � 47 66/22 kV zone substations � 57,000 distribution substations � 371,000 power poles and 100,000 streetlights � 46,000 kilometres of underground cable and overhead lines
Unique characteristics of our distribution area 4 � Difficult terrain and climatic conditions – Alpine regions are mountainous, heavily forested, with significant vegetation cover – Coastal areas are subject to high winds and salt – Windy and dry conditions in Victoria’s south and hot, dry and windy conditions in the North � Covers some of Melbourne’s fastest growing suburban corridors � Average customer density is low, reflecting isolated farms and small country towns � Great Dividing Range imposes a physical separation
Our focus on customer service 5 � In the current regulatory period, invested $71 million (real 2010 $) specifically to improve customer service and reliability � In the forthcoming regulatory period, our Proposal – meets safety and technical standards – sets out plans to maintain supply reliability – includes some specific measures to deliver targeted improvements in customer service
Historic network performance 6 400 350 300 250 Network USAIDI 200 150 100 50 0 2005 2006 2007 2008 2009 � Note: Based on 3.2 Beta exemption regime
Asset management strategy (AMS) 7 � Basis of SP AusNet’s expenditure plans and demonstrates that those plans are consistent with the NEL objectives and rule requirements � Informed by 30-year Network Development Strategy, which addresses the longer term capacity and investment requirements of the network � Underpinned by the regulatory and commercial imperatives of delivering prudent and efficient cost and service performance, without compromising safety � This does not mean lowest possible cost nor does it mean guaranteed supply � Rigorous cost benefit analysis of all expenditure decisions, including risk management in relation to asset performance and network reliability
8 ► 2006-2010 regulatory period ► Other building blocks Building blocks ► Capex ► Opex 2. Our Proposal
Summary of our Proposal 9 � Overarching objective is a safe network, with efficient and sustainable customer service Summary of key forecasts � Proposed capital and operating expenditure maintains existing levels of network Capex (Net real 2010 $) $ 1,372 M performance � Proposal reflects the financial environment, Opex (Real 2010 $) $894 M climate change and customer expectations � Forecast capital and operating and Closing RAB (By 2015, nominal) $3,264 M maintenance expenditures are driven by: – increased asset replacement works WACC (Nominal) 10.86% – increased augmentation and customer connection capex New demand tariffs – IT expenditure - 46.25% P 0 of – higher unit costs � Changes proposed to strengthen incentives to - 5.5% P x of improve network reliability � AMI will be used to deliver cost-reflective price signals through new tariffs
Review of 2006-2010 regulatory period 10 Key Factors SP AusNet’s Response � Peak demand growth and the costs of � Safety: Statutory safety requirements and servicing customer connection growth internal safety policies and practices are consistently above ESC forecasts complied with at all times � Input costs have risen faster than the rate of cost escalation assumed by the ESC � Customer connections: Highly responsive to � Disruptive natural events including six connection requests extreme events have occurred, such as 2007 � Network reliability: Invested significantly Gippsland Floods, 2008 April Storm and 2009 Bushfires ($71 million in real 2010 $) to improve � Global financial crisis has resulted in a sharp customer reliability increase in the cost of capital � Network reinforcement: Increased Network wide utilisation, following prudent and economic deferral of some reinforcement projects � Information technology: Replacement and rationalisation of IT systems and infrastructure to maintain IT capability
Historical capex 11 � Forecast: $996M (real 2010 $, net of Historical expenditure versus Benchmark customer contributions) 300 � SP AusNet will spend approx $247M (33%) over the regulatory allowance 250 � Includes additional work undertaken 200 specifically to improve reliability Real 2010$M 150 � SP AusNet has successfully funded this extra capex 100 50 0 2006 2007 2008 2009 2010 Actual S-Factor Benchmark
Forecast capex 12 Forecast capital expenditure versus historical expenditure � Total net capex forecast for the 2011- 2015 regulatory period: $1,372M (real 350 2010 $) 300 � 48% higher than in the previous 250 48% regulatory period Real 2010$M 200 � Averages $274M p.a. 150 100 50 0 EDPR Average 2011 2012 2013 2014 2015 Benchmark 2006-10 Reinforcement Net Customer Connections Reliability Maintain Quality Improve Env, Safety and Legal SCADA and Network Control Non-System - IT Non System - General
Main drivers of increase in forecast capex 13 Driver Capex Impact � Demand growth: forecast growth in � Network reinforcement and Customer maximum demand of 4.4% (versus actual Connections: to provide sufficient new growth of 6.7% to date in current regulatory capacity period) and growth in customer connections of 2.1% � Asset replacement (Reliability Maintain) and � Maintaining network condition compliance (Environmental, Safety and Legal) : to ensure that public safety and network reliability and quality are maintained � Maintaining our Information Technology (IT) � Non-system IT: to provide system capability infrastructure needed to facilitate asset management, operational efficiency and planned customer service standards � Higher unit costs: unit rates predicted to � All categories of capex increase by around 9.5% in real terms over forecast period
Meeting demand growth 14 � Customer connections forecast to Forecast reinforcement and customer connection capex average 13,596 p.a. (2.1% p.a.) , continues to be strong over the forthcoming 180 regulatory period 150 Demand forecasts 53% 120 2500 4.8% Real 2010$M 2400 4.7% 90 2300 4.6% % growth rate 60 2200 4.5% MVA 2100 4.4% 30 2000 4.3% 1900 4.2% 0 1800 4.1% Average 2011 2012 2013 2014 2015 2011/12 2012/13 2013/14 2014/15 2015/16 2006-10 Year 50% POE (MVA) % Growth (MVA) Reinforcement Net Customer Connections
Meeting growth in peak demand 15 Growth corridors � Demand associated with new housing developments tends to be relatively peaky due to the rapid uptake of air conditioning � Air-conditioning electrical load is responsible for the peak load on the network on an increasing number of occasions each year Temperature dependant load Source: VENCorp Electricity Transmission Planning in Victoria
Maintaining network condition 16 � SP AusNet’s asset replacement Forecast Asset replacement (Reliability Maintain) and compliance (Environmental, Safety and Legal) capex programs are condition based 120 � There is a strong correlation between asset age and condition 100 � Implementation of the asset plans 80 53% maintains the average age of the Real 2010$M network 60 40 20 0 Average 2011 2012 2013 2014 2015 2006-10 Reliability Maintain Env, Safety and Legal
Network age profile 17 Installation profile � Our asset replacement strategies minimise asset life cycle costs by: 3.0% – careful modelling of network performance risk Assets with 50 to 60 … are expected to year expected life be replaced over this 2.5% – focused condition monitoring programs built over this period period ... – sophisticated analysis of asset life 2.0% extension and replacement options % of Replacment Cost – selective asset life extension programs 1.5% – efficient delivery of asset replacement though integration with network 1.0% augmentation projects 0.5% Major development of Actual and proposed metro and country replacement profile similar to distribution network original profile 0.0% 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Year of Installation
Deliverability 18 � SP AusNet has recently reviewed its organisational structure to enhance its delivery capability � Annual levels of capex forecast are already being achieved in the most recent years of the current regulatory period � Average real increase of 48% in forecast electricity distribution capex represents a 17% increase on total annual SP AusNet capex � SP AusNet’s experience in efficiently executing its previous capex program is reflected in its Project Delivery Model
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