Revenue Proposal Reference Group (RPRG) Meeting #4 27 February 2020, - - PowerPoint PPT Presentation

Revenue Proposal Reference Group (RPRG) Meeting #4

27 February 2020, 10:00am – 12:00pm

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Introduction, minutes and previous actions

Matthew Myers

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Contingent Projects – action from Jan 20 meeting

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TNSP Project Cost Estimate in Revenue Determination ($m) Contingent Project Application Cost ($m) Contingent Project Decision Cost ($m) Comments Powerlink South Pine – Sandgate Undergrounding N/A* 19.9 19.9 Net increase in costs for underground cable vs overhead line costs. ElectraNet Munno Para Reinforcement 26 39.3 39.3 ElectraNet Adelaide Central Reinforcement 105 136.1 131.4 AER adjusted project delivery costs and project risk allowances downwards. ElectraNet Heywood Interconnector Upgrade 63 66 47 AER excluded the cost of removing two aged 132kV lines that limited power flow. ElectraNet Main Grid System Strength 80 169.4 166 Net cost after removing avoided or replaced projects. AER adjusted project risk allowances downwards. TransGrid QNI Minor Upgrade 141 222.8 TBA

* Revenue Determination included a contingent project estimate of $233 million for undergrounding associated with 14 projects but did not identify estimated costs for individual undergrounding projects.

Brief benchmarking update

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• Further analysis is needed on the January 2020 indicative benchmarking results we

provided to RPRG.

• As previously discussed, Powerlink observed a 0MWh unserved energy result in 2019.

Powerlink’s model does not allow for a 0 result to be entered.

• When entered as a number near to zero, Powerlink observed the order of magnitude of

(e.g. a 0.01 vs. 0.000001 input) might significantly impact results.

• Powerlink has raised this with the AER and we are working together to understand the

results.

Revenue Determination process update

5 2019 2020 2021 2022

Oct 19 PQ notifies AER on need for Framework & Approach (F&A) stage. Feb 20 AER publishes F&A Position Paper. Jun 20 PQ submits Expenditure Forecasting Methodology to the AER. Jul 20 AER publishes Final F&A Paper. Jan 21 Revenue Proposal due. May 21 Submissions close on Revenue Proposal. Sept 21 AER publishes Draft Decision. Dec 21 Submissions close on Revised Revenue Proposal. Apr 22 AER publishes Final Decision. Nov 21 Revised Revenue Proposal due.

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Framework and Approach (F&A) paper update

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• The AER’s F&A provides direction on how certain aspects of the Revenue Proposal should be framed (e.g.

including incentive schemes, the Expenditure Forecast Assessment Guidelines and whether actual or forecast depreciation will be used to establish the opening Regulated Asset Base (RAB) position).

• The AER published its Preliminary F&A Paper on 20 February 2020 and has called for submissions, which

are due 20 March 2020.

• Powerlink will make a submission to the Preliminary F&A Paper, which is likely to:
• confirm our acceptance of the majority of elements of the F&A;
• reiterate our view that a review of the Service Target Performance Incentive Scheme (STPIS) is

needed and any revised STPIS should be applied to our next Regulatory Period; and

• reiterate our desire to apply regulatory sandbox arrangements and have transitional

arrangements in place for significant reviews and rule changes for our next regulatory period.

• The AER has advised they reviewing the data supplied by Powerlink and will consider the merits of

conducting a STPIS review outside of the Revenue Determination process.

Long-term revenue impacts

Dana Boxall

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Purpose

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• Update RPRG on:
• our analysis of long‐term revenue impacts and options for ‘smoothing’ revenue
• ver the long‐term, including potential benefits and barriers.
• why our position, based on the analysis, is not to pursue options to ‘smooth’

revenue over the long‐term as part of the Revenue Determination process. Please refer to the RPRG slides provided in December 2019 for the background to this discussion.

Background

• On 5 December 2019, Powerlink had an initial discussion with the RPRG about whether

there is interest in exploring the potential opportunity to ‘smooth’ price impacts over the long‐term, while ensuring reasonable returns for shareholders.

• This discussion was in response to customer concerns of material price increases in the

future and in the context of the current low risk free rate environment.

• Two potential levers to achieve a ‘smoother’ price over the long term were discussed

being: 1) Depreciation 2) Indexation of RAB

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Feedback from customers

• Key areas of concerns included ability to implement, likelihood of acceptance and

magnitude.

• AER stated similar concepts have been explored in the past and have not been

accepted.

• RPRG members expressed they would like to understand:

a) how some of the options proposed by Powerlink would be implemented in practice. b) what the impact could potentially look like.

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Modelling outcome

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* Estimated Residential Transmission Component

Barriers / benefits analysis

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Objective Depreciation Profile Indexation of RAB

Barriers Benefits Barriers Benefits Ability to implement under the NER Clause 6A.6.3(b)(1) of the NER requires depreciation to reflect “the nature of the assets or category of assets over the economic life of that asset or category of assets.” Rules allow limited flexibility for a change in the depreciation profile. Clause 6A.2.4 (c)(4) of the NER requires the regulatory asset base must be increased by adjusting for inflation. ‐‐‐ Smoother revenue

• ver time

Regulatory risk. Will require a commitment (AER / Customer / PQ) for longer period (e.g. several regulatory periods). Certainty and consistency in approach to implementation for agreed future periods. Will not protect from changes in the WACC in future periods. ‐‐‐ Full recovery of MAR The timing of full recovery of capital costs will depend on changes in WACC. Retains full recovery of capital cost. Risk of lower future shareholder returns. Increased shareholder returns earlier. Intergenerational equity The burden of costs borne by current and future users will vary through time. ‐‐‐ Front‐ended depreciation will increase the share of costs borne by current users. Back‐ended depreciation will decrease the share of costs born by current users.

Powerlink position

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• Powerlink’s position is to not progress this work further as part of the Revenue

Proposal process, due to:

• Rule changes being required.
• Regulatory risks.
• Minimal customer benefits.

Interactive discussion

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Do you have any feedback on the outcomes of the analysis or conclusions Powerlink has drawn? Do you agree/disagree with Powerlink’s position?

Operating expenditure update

Andrew Bannister

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Purpose

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• Gain initial input from the RPRG on six potential opex increases, and potential next

steps to progress.

• Note: the six proposed opex increases and the $ value associated with them are high‐

level, indicative only at this stage.

Opex – engagement milestones to July 2020

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Oct 19 Review and refine

Initiation Initiated internal engagement on potential

• pex adjustments

Initial discussion with RPRG First discussion with RPRG

• n potential opex increases

Updated forecasts RPRG / Customer Panel engagement

• n updated forecasts of opex,

capex, MAR and RAB, including updated opex increases

Feb 20 Review and refine Apr 20

Preliminary Position and Forecast Paper (PPFP) Public consultation on Powerlink’s PPFP, including updated opex increases

Review and refine Jul 20

• Engagement post July 2020 regarding opex will be determined later in the

process (e.g. any further workshops/deep dives that may be needed).

Potential opex increases – overview

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• 28 potential opex adjustments were identified by the business.
• We have identified six key potential increases to further investigate and progress at this

point.

• We are awaiting input from an external consultant on potential insurance premiums

and will assess whether there is a potential opex increase associated with this – this is currently not included.

• Current estimate of potential increases is ~$10–$14m (19/20, real) per annum for the

next regulatory period. This is equivalent to ~5%‐6.5% increase against the current period opex allowance.

Potential opex increases

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Candidate Opex p.a. ($19/20, real), 2023‐27 regulatory period Description

Nature Conservation Act fees Up to $1m Proposed amendments to the application of Section 35 of the Nature Conservation Act could potentially result in Powerlink being charged fees by the Queensland Parks and Wildlife Service (QPWS) for co‐location of assets within national parks. Powerlink has approximately 184km of transmission lines, 9 telecommunication sites and one substation impacted, for a total of 735 hectares, which may be impacted by this change. Transmission Ring Fencing Unknown The AER review of the TNSP ring‐fencing guideline may result in additional opex costs. The quantum of these costs will depend on the extent of the changes proposed and will be assessed further following workshops with the AER and publication of the draft Guideline in May 2020. National Transmission Planning fee Up to $5m The Draft Integrated System Plan (ISP) Rules considers a proposed amendment to the Rules to enable the allocation of the costs for National Transmission Planner (NTP) services provided by AEMO to TNSPs. Powerlink’s estimate is based on AEMO’s 19/20 budget and forecast and calculated on a $MW/h basis, which is how current AEMO fees are calculated. Powerlink, via the ENA, is currently pursuing this as a potential cost pass through arrangement with the AER.

Potential opex increases

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Candidate Opex p.a. ($19/20, real), 2023‐27 regulatory period Description

Cyber security $3.6m‐$5.6m depending on maturity level The risk of cyber security attack on critical infrastructure providers is an area of significant focus across the energy supply chain and within government. This step change recognises a significant increase required in operating expenditure to maintain different levels of cyber security readiness under the Australian Energy Sector Cyber Security Framework (AESCSF). Costs associated with this activity include additional labour, licences and support activities including assurance activities. Generator Technical Performance Standards ~$0.25m Powerlink has experienced a sustained increase in support required to provide operational advice on system‐related matters, as a result of the National Electricity Amendment (Managing Power System Fault Levels) Rule 2017 No. 10. This Rule change placed an obligation on TNSPs to maintain minimum levels of system strength and significantly increased associated system modelling and planning activities. IT licences movement to cloud ~$2.5m capex/opex trade‐off This capex/opex trade off relates to the changing environment of IT services with a greater number of applications being hosted off site increasing licencing and support costs, however reducing the requirement to procure hardware and support. Key platforms to shift include Microsoft, SAP, VMWare and GIS.

Interactive discussion

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What are your initial thoughts on the opex increases proposed by Powerlink? Are there any that you are supportive or not supportive of at this point? What additional information would you consider is needed for our next discussion (as part of the updated forecasts in April 2020)?

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