Customer and Consumer Panel 19 November 2015
Introductions Gerard Reilly
Meeting overview • Depreciation update – Paul Reynolds • STPIS update – Gary Edwards • Afternoon tea (10 mins) • Building Blocks of Revenue Proposal – Ian Lowry • How feedback has influenced the Revenue Proposal – Ian Lowry, Gerard Reilly, Jenny Harris • Meeting Recap
Depreciation Update Paul Reynolds– Revenue Reset Stream Leader
Depreciation • Depreciation reflects the reduction in asset value through use over time and is referred to as “Return of Capital (RofC)”; • Depreciation is one of the key building-blocks used to calculate Powerlink’s Maximum Allowable Revenue (MAR) and represents approximately 8%-10% of the MAR in Powerlink’s current regulatory period (2013-17); • Depreciation reduces the Regulated Asset Base (RAB)
Desired Outcomes from Depreciation • Two accepted principles from the use of depreciation for regulatory purposes 1. High degree of certainty that Capital cost are returned over time • This provides network owners investors with some safeguard from stranded asset risk and encourages on-going investment. 2. Encourage the efficient use of assets. • Seeks to align revenue allowances and use of assets over the life of the asset i.e. increasing utilisation into the future • If it is to achieve these principles the depreciation method for regulatory purposes relies on stable demand growth.
AER’s Current Approach • AER employs an Economic Depreciation methodology (Regulatory Depreciation) • Calculates straight-line depreciation to the opening Regulatory Asset Base (RAB) which has been indexed for inflation; • The calculated depreciation charge is reduced by the indexation value for inflation 4,000 300 Less than 50% Regulated Depn capital return in 3,500 250 the 1 st half of the RAB (Regulatory Depn) 3,000 asset life 200 2,500 RAB Value Depn Value 2,000 150 Greater than 50% of capital 1,500 100 return in the 2 nd 1,000 half of the asset life 50 500 - - Time Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Regulatory depreciation weights the RofC to the 2 nd half of the assets useful life; • • The regulatory depreciation method maintains a higher RAB value in the first half of the assets life thereby weighting the Return on Capital (RonC) to the first half of the assets life.
Current and Future Conditions • Network service providers face declining utilisation as a result of the • Downturn in economic conditions; • Self-generation capability eg. the up-take of solar PV; • Consumer behaviour; • Energy efficiencies; • Improvements in energy storage solutions; and • Advancement in distributive generation (power generated at point of consumption). • An environment in which levels of utilisation are declining is inconsistent with the key fundamental assumption of the economic depreciation methodology which implicitly assumes a steady utilisation growth; • Under these circumstances consumers and network owners face the following risks; • Upward pressure and instability on long term electricity prices; • Increase in prices may encourage further consumer migration away from the network, further exacerbating the pricing issues; and • Network owners face increasing “Stranded Asset” risk – may need to reassess the rate of return required to compensate for increased risk exposure.
Alternate Depreciation Approaches • Pricing issues would be addressed by aligning the recovery of capital to usage levels through a greater level of flexibility with the timing of the RofC; • Alternate depreciation methods may help to mitigate some of the perceived risk. Declining Balance Reduce Asset Life Straight-Line 350 Regulated Depn 300 Regulated Depn 300 Reg Depn (Short Asset Life) Declining Value 300 250 250 Regulated Depn Straight-line 250 200 200 200 Depn Value Depn Value Depn Value 150 150 150 100 100 100 50 50 50 - - - Time Time Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 • Declining balance • Straight-line depreciation • Reducing the length of the reduces the asset value depreciation method asset life over which the evenly over the life of the accelerates depreciation in RofC is recovered asset the early part of the assets • Various depreciation life and then declines over • Better suited to steady methods could then be time. utilisation growth levels employed to reflect the • Better aligned to a declining expected utilisation utilisation environment • Accelerates the RofC over a shorter life
Powerlink’s Approach • Revenue Proposal for the 2018-22 regulatory period, Powerlink’s initial view is to continue applying economic depreciation for regulatory purposes in accordance with the Australian Energy Regulator’s (AER) current approach. • a change in depreciation approach may be required in the future • The approach to depreciation for regulatory purposes for declining network utilisation in the future is complex, and this issue requires broader consultation with industry, consumers and regulators to inform any broader changes to the regulatory framework .
Feedback and Discussion • Powerlink is seeking feedback from stakeholders on the following questions, in order to assist in determining the future focus of investigations and consultation on depreciation for regulatory purposes: 1. How much value do you place on the user pays principle and the longer term stability of electricity price? 2. In an environment of static or declining transfer of electricity over the transmission network, what is the most appropriate depreciation approach for regulatory purposes for Powerlink to use for the long term interests of consumers and why?
STPIS Update Gary Edwards– Revenue Reset Stream Leader
What is the Service Target Performance Incentive Scheme (STPIS)? • The scheme is designed to provide performance incentives for TNSPs to improve or maintain a high level of service for the benefit of participants in the National Electricity Market and end users of electricity. • The AER develops and publishes a STPIS in accordance with the NER. • Powerlink commenced its participation in the scheme in 2007, and the scheme has been progressively expanded since then – currently on Version 3. • Version 5 of the STPIS will be applied to Powerlink from 1 July 2017.
STPIS (Version 5) Components • Service Component (SC) measures network reliability; • Market Impact Component (MIC) aims to improve network availability at times of most importance to the market; and Network Capability Component (NCC) is designed to deliver • improved capability from existing network assets to benefit customers and wholesale market outcomes.
STPIS – Version Changes From (Version 3) To (Version 5) Change Summary $ at risk $ at risk* • Revenue at risk is ± 1.0% MAR • Revenue at risk is ± 1.25% MAR SC Greater emphasis on ± $9.4m ± $10.0m • Network availability and • Network reliability focus network reliability – reliability focus unplanned outages • Loss of Supply Event Frequency • Loss of Supply Event Frequency only • Revenue at risk +2.0% MAR • Revenue at risk ± 1.0% MAR MIC Materially stronger ± $8.0m +$18.8m (bonus only) (bonus/penalty) incentive to deliver • Target based on fixed 5-year • Target based on fixed 5 median improvements in history years from past 7 year history network availability • Not applicable • NCIPAP projects - pro-rata - NCC Opportunity for based allowance up to 1% MAR Powerlink to deliver each year market benefits to • Incentive of 1.5 times average customers +$20.0m** annual project cost • Penalty clawback arrangement -$28.0m** up to 3.5% final year MAR * Assuming an average indicative annual MAR of $800m ** $ at risk are total for the 5 year regulatory period MAR = Maximum Allowed Revenue NCIPAP = Network Capability Incentive Parameter Action Plan
STPIS Key Messages • Increased emphasis on network reliability drivers under the service component to benefit market participants and customers. • During the recent revision of the STPIS, Powerlink initiated a review of its loss of supply event frequency thresholds, and proposed targets to improve network performance. • The symmetrical (bonus/penalty) scheme for the MIC will further incentivise Powerlink to deliver further improvements in network performance. • Powerlink’s past good performance will be used to set higher targets and be more onerous to achieve in Version 5. • Powerlink will be proposing only a small number of NCC priority projects.
Building Blocks of Revenue Proposal Ian Lowry– Revenue Reset Leader
Overview • Update on Revenue Proposal – last discussed with panel in August 2015 • Discussion on key building blocks – indicative • Rate of return • Forecast capital expenditure • Forecast operating expenditure • Application of AER Benchmarking • Questions & discussion
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