The Australian Energy Regulator has issued its draft decision on Envestra's access arrangement proposal for its Queensland gas distribution network for the period 1 July 2011 to 30 June 2016.
Envestra's Queensland network delivers gas to approximately 84,000 residential customers in and around Brisbane and a number of regional centres including Ipswich, Rockhampton and Gladstone. The network also supplies around 3,000 commercial and industrial customers.
Envestra proposed significant increases in capital and operating expenditures and a higher cost of capital to apply in the access arrangement period. As a result, Envestra's proposal envisaged a real increase in network charges for residential customers of 15 per cent as at 1 July 2011. The proposed average increase in real network charges over the access arrangement period was 8 per cent per year.
The AER has not accepted Envestra's access arrangement proposal.
"Envestra proposed a significant capital expenditure program to replace the majority of its ageing cast iron and unprotected steel mains," AER chairman Andrew Reeves said today. "The AER agrees that additional expenditure is justified in some areas, such as Ipswich, where the level of gas leakage is of concern. However, after careful consideration of this program, the AER considers Envestra has not demonstrated that a significant increase in expenditure across the Brisbane network is justified given the historical trend of declining gas leakage at current mains replacement rates.
"Similarly, other aspects of the proposed expenditures are not justified. The AER considers total capital expenditure of $121 million for the access arrangement period is efficient, which is $52 million (30 per cent) less than Envestra proposed. Operating expenditure of $85 million has been approved, which is $25 million (23 per cent) less than proposed. Some allowance has also been made for higher capital and financing costs, though not to the extent sought by Envestra."
The AER has also rejected Envestra's demand forecasts for residential customers, given Envestra's proposed rate of decline in average residential consumption is not consistent with the historical trend. The AER's draft decision provides for forecast residential demand which is, on average, five per cent higher than Envestra's proposal.
The AER has set a rate of return for Envestra of 10.0 per cent, which is lower than the 10.6 per cent proposed. In determining this value the AER did not accept Envestra's arguments regarding various parameters and also assessed the reasonableness of its overall rate of return.
Overall, the AER's draft decision would lead to a real increase in network charges as at 1 July 2011 of three per cent, and an average around three per cent per annum in subsequent years. The effect on retail tariffs, of which distribution network charges make up approximately 60 per cent, is a real increase of around two per cent as at 1 July 2011. Real increases in subsequent years would also average around two per cent per annum.
A typical residential customer's annual bill is $460 in Queensland. The increases approved by the AER would result in such a customer's annual bill increasing on average by $15 each year. The increases would have been $34 each year if the AER had accepted Envestra's proposal in full.
Envestra now has until 23 March 2011 to respond to the AER's draft decision and submit a revised access arrangement proposal. Submissions on the AER's draft decision and any revised access arrangement proposal are invited from interested parties by 21 April 2011.
In making this draft decision, the AER took into account advice from independent experts and submissions from interested parties.