AER’s Draft Decision for NSW distributors 2015-2019

Consumer Challenge Panel Response

AER Pre-determination Conference

8 December 2014

Bruce Mountain

Outline

• Prices (from 1 July 2015)

• Profits

• Revenue

• WACC

• RAB

• Opex

• Capex

2

Average network charges for households in NSW from 1 July 2015 will still be above Victoria average and compare poorly internationally

3

Source: EPRI, AER Draft Decision, Ofgem RIIO ED1 proposals, OECD (for PPP exchange rates), CME analysis

NSW’s DNSPs have delivered remarkable pecuniary gains to their owner

4

* 2013/14 not included because interest rate data needed to calculate competitive neutrality fees no longer available

In 2012/13 NSW distributors’

pecuniary benefit per connection was

5.6 times higher than UK Power

Networks’ pre-tax profit per

connection.

5

After the AER’s DD, AusGrid’s revenues will still be (much) higher than IPART allowed

IPART AER

6

Likewise for Endeavour too (although gap not as large)

And Essential’s increases relative to IPART’s last decision, much like AusGrid

7

WACC: some progress, but still higher than IPART and even more so Ofgem. Why ?

8

* All Australian decisions rebased to use consistent 2014 Risk Free Rate

DD Debt allowance is particularly problematic

9

Following DD, NSW Regulated Asset Bases don’t decline in real terms

10

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And after DD, the gap between asset values in NSW, VIC and GB is still very large

12

Progress has been made in respect of Endeavour’s opex allowance

13

AusGrid is being allowed to charge users for as much opex as IPART allowed

14

And likewise for Essential

Compared to Vic DNSPs, the per customer DD opex allowances are still higher

15

Mainly urban

Mainly country

16

Endeavour capex now back to first IPART control period allowance. This seems reasonable.

17

AusGrid capex back to IPART allowances. This seems reasonable

18

Likewise for Essential

Summary of key points

• From CCP’s perspective, AER DD should set the high water mark for revenues, assets, WACC and expenditure. Compromises have already been made and back-tracking from here would be unwise.

• Opex and capex allowance seem roughly reasonable although some “adjustments” to the benchmarking to narrow the VIC-NSW gap is problematic and needs to be addressed.

• Allowance for Debt is too high. BBB calculations that do not reflect actual DNSP borrowing costs are flawed. The AER must have regard to actual borrowing costs.

• NSW DNSPs have recognised the significant inefficiencies that consumers have been pointing to for years. However, despite excessive costs, the regulatory outcomes have nonetheless delivered excessive profits. This must end. Shareholders, not consumers, must bear the consequence of inefficiency.

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