The Australian Energy Regulator today issued its final decision on the transmission determination to apply to TransGrid's electricity transmission network for the period 1 July 2009 to 30 June 2014.
The AER is the national regulator with responsibility for assessing the efficient costs of energy network businesses and approving revenues for their monopoly services. This process generally follows a five year cycle.
TransGrid planned to boost its capital expenditure over the next five years to $2.5 billion to improve the transmission network and ensure it remains secure and compliant with NSW government reliability standards.
"In part, this expenditure is required to meet growing peak demand, which is still expected to increase, if slightly more slowly over the next five years than previously expected," AER Chairman, Mr Steve Edwell, said.
"To some extent, the need for increased investment is being driven by a greater use of air conditioning. Expanding the network to keep air conditioners running on a few hot days makes the network more costly to build and operate as this capacity is then under-utilised for much of the year. There is also a need to replace obsolete equipment needed to maintain network performance.
"The final decision approves $2.4 billion of capital investment in TransGrid's electricity transmission network for the next five years, which is an increase of more than 72 per cent from the current level of $1.4 billion over the past five years. TransGrid has assured the AER that it has access to sufficient finance to deliver its investment commitments.
"This capital allowance will allow TransGrid to undertake a number of important network projects including commencing construction of a 500 kV network around the Newcastle–Sydney–Wollongong area to meet future load growth, as well as reinforcement of the inner Sydney 330 kV system to improve reliability."
Since the AER's draft decision last November, TransGrid has provided further information supporting six additional contingent projects. Contingent projects are investments that may be required, but it is uncertain that they will occur in the next regulatory control period. Hence, they are treated separately from the forecast capital expenditure allowance. Approval as a contingent project means that the capital expenditure may be allowed, should the need for the investment be confirmed by a predefined ‘trigger-event’. The estimated cost of the contingent projects approved in the final decision is $1.8 billion. Expenditure to advance work on improving the reliability of electricity supply to the Sydney CBD (Sydney CBD supply project) and to upgrade the QNI and Victorian interconnections forms part of this contingency allowance.
Impact on consumers
The final decision will add approximately $2.30 to the average NSW residential customer's annual bill of $983.
The AER's final decision will result in a 4.8 per cent annual nominal increase in average transmission charges from 1 July 2009, or a real increase of 2.3 per cent per annum. This has decreased from the 6.6 per cent per annum nominal increases (four per cent real) anticipated in the draft decision. Transmission charges represent about six per cent of the average cost of final delivered energy in NSW.
The AER also continues to apply a service standards regime to TransGrid's transmission network.
"For the first time the AER is providing a financial incentive for TransGrid to minimise the market impact of network outages on customers in the national electricity market," Mr Edwell said.
Impact of the economic downturn
Since the AER began its review of TransGrid's revenue proposal in June 2008, domestic and international economic conditions have deteriorated sharply. This has led to revised projections of economic growth, labour and commodities prices as well as funding costs for network businesses.
"For the final decision, the AER reconsidered some key aspects of its draft decision, taking into account recent changes in the economic outlook."
The most significant development since the AER's draft decision in November 2008 is the reduction in the yield on Commonwealth Government 10-year bonds from 5.46 per cent to 4.29 per cent in March 2009. This bond yield is the benchmark for determining TransGrid’s return on capital.
"The AER has carefully considered the impact of recent developments in financial markets, and the economy more broadly, and considers that a marginally lower rate of return on investment for TransGrid is appropriate. This means that TransGrid's revenues for the next five years will be less than those determined in the draft decision.
"The economic downturn is also slowing growth in the cost of inputs such as labour and materials. The AER has undertaken a detailed analysis of forecast changes in these costs and, while they are still expected to rise over the next five years, the magnitude of these increases is now expected to be lower than previously anticipated. The AER's final decision on TransGrid's regulated revenues for the next five years reflects these revised cost forecasts.
"Despite the revised economic outlook, there remains a need to build new network capacity to meet future customer demand in NSW. As a result, transmission charges in NSW are still forecast to rise during the next five year period, albeit more moderately than previously expected." Mr Edwell said.
In making its final decision, the AER took into account TransGrid's revised revenue proposal, submissions from interested parties and advice from independent experts. These documents are available on the AER's website.