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 1

Introduction, minutes and previous actions Matthew Myers 2

Contingent Projects – action from Jan 20 meeting TNSP Project Cost Estimate in Contingent Project Contingent Comments Revenue Determination Application Cost Project Decision ($m) ($m) Cost ($m) South Pine – Net increase in costs for Powerlink Sandgate N/A* 19.9 19.9 underground cable vs overhead line Undergrounding costs. Munno Para ElectraNet 26 39.3 39.3 Reinforcement AER adjusted project delivery costs Adelaide Central ElectraNet 105 136.1 131.4 and project risk allowances Reinforcement downwards. Heywood AER excluded the cost of removing ElectraNet Interconnector 63 66 47 two aged 132kV lines that limited Upgrade power flow. Net cost after removing avoided or Main Grid System ElectraNet 80 169.4 166 replaced projects. AER adjusted Strength 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 3 14 projects but did not identify estimated costs for individual undergrounding projects.

Brief benchmarking update • 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. 4

Revenue Determination process update  Feb 20 Jul 20 May 21 Nov 21 Apr 22 AER publishes F&A AER publishes Final Submissions close on Revised Revenue AER publishes Final F&A Paper. Revenue Proposal. Proposal due. Decision. Position Paper. 2019 2020 2021 2022 Oct 19 Jun 20 Jan 21 Sept 21 Dec 21 Submissions close on Revenue Proposal PQ notifies AER on need PQ submits Expenditure AER publishes Draft Revised Revenue for Framework & Approach Forecasting Methodology to due. Decision. Proposal. (F&A) stage. the AER.  5

Framework and Approach (F&A) paper update • 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. 6

Long-term revenue impacts Dana Boxall 7

Purpose • Update RPRG on: o our analysis of long ‐ term revenue impacts and options for ‘smoothing’ revenue over the long ‐ term, including potential benefits and barriers. o 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. 8

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 9

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. 10

Modelling outcome 11 * Estimated Residential Transmission Component

Barriers / benefits analysis Objective Depreciation Profile Indexation of RAB Barriers Benefits Barriers Benefits Clause 6A.6.3(b)(1) of the NER Rules allow limited flexibility Clause 6A.2.4 (c)(4) of the NER requires depreciation to reflect “the Ability to implement for a change in the requires the regulatory asset base nature of the assets or category of ‐‐‐ under the NER depreciation profile. must be increased by adjusting for assets over the economic life of inflation. that asset or category of assets.” Regulatory risk. Will require a Certainty and consistency in Smoother revenue commitment (AER / Customer / PQ) Will not protect from changes in the approach to implementation ‐‐‐ over time for longer period (e.g. several WACC in future periods. for agreed future periods. regulatory periods). The timing of full recovery of capital Full recovery of Retains full recovery of Risk of lower future shareholder Increased shareholder costs will depend on changes in MAR capital cost. returns. returns earlier. WACC. The burden of costs borne by Front ‐ ended depreciation will Back ‐ ended depreciation Intergenerational current and future users will vary ‐‐‐ increase the share of costs borne by will decrease the share of equity through time. current users. costs born by current users. 12

Powerlink position • Powerlink’s position is to not progress this work further as part of the Revenue Proposal process, due to: o Rule changes being required. o Regulatory risks. o Minimal customer benefits. 13

Interactive discussion Do you have any feedback on the outcomes of the analysis or conclusions Powerlink has drawn? Do you agree/disagree with Powerlink’s position? 14

Operating expenditure update Andrew Bannister 15

Purpose • 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. 16

Opex – engagement milestones to July 2020 Oct 19 Review and refine Feb 20 Review and refine Apr 20 Review and refine Jul 20 Initial discussion with RPRG Updated forecasts Preliminary Position and Forecast Initiation Paper (PPFP) RPRG / Customer Panel engagement Initiated internal First discussion with RPRG engagement on potential on potential opex increases on updated forecasts of opex, Public consultation on Powerlink’s opex adjustments capex, MAR and RAB, including PPFP, including updated opex updated opex increases increases • Engagement post July 2020 regarding opex will be determined later in the process (e.g. any further workshops/deep dives that may be needed). 17

Potential opex increases – overview • 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. 18