The Australian Energy Regulator has issued its draft decision on Envestra's access arrangement proposal for the South Australian gas distribution network for the period 1 July 2011 to 30 June 2016.
Envestra's South Australian network delivers gas to approximately 396,000 residential customers in Adelaide and a number of regional centres. The network also supplies around 10,000 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 19 per cent as at 1 July 2011. The proposed average increase in real network charges over the access arrangement period was 11 per cent per year.
The AER has not accepted Envestra's access arrangement proposal.
"Envestra proposed a significant capital expenditure program on mains replacement to address the safety risk, inadequate capacity and deteriorating condition of the distribution network," AER chairman Andrew Reeves said today. "After careful consideration of this program, the AER has agreed that this additional expenditure is required to maintain the safety and reliability of the network and reduce gas leakage.
"However, other aspects of the proposed expenditures are not justified. The AER considers total capital expenditure of $415 million for the access arrangement period is efficient, which is $104 million (20 per cent) less than Envestra proposed. Operating expenditure of $260 million has been approved, which is $84 million (24 per cent) less than proposed. Allowance has been made for higher capital and financing costs, though not to the extent proposed by Envestra."
The AER has also rejected Envestra's demand forecasts. While demand has been less than forecast in recent years, Envestra's proposed rate of decline in average residential consumption and economic growth assumptions appear unrealistic in the circumstances. The AER's draft decision provides for forecast total demand which is, on average, eight per cent higher than forecast by Envestra.
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 7.5 per cent, and average around 5.5 per cent per annum in subsequent years. The effect on retail tariffs, of which distribution network charges make up approximately 52 per cent, is a real increase of around four per cent as at 1 July 2011. Real increases in subsequent years would average around three per cent per annum.
A typical SA residential customer's annual bill is $570. The increases approved by the AER would result in such a customer's annual bill increasing on average by $26 each year. The increases would have been $45 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 to 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.