The Australian Energy Regulator (AER) today released a draft decision on Multinet and Envestra’s access arrangements, including charges for use of their gas distribution networks, for the 2013–17 period. Envestra and Multinet are two of three gas distribution service providers in Victoria. Envestra also provides gas distribution services to Albury and its surrounding region in New South Wales.
Multinet
The AER has not accepted Multinet’s forecast revenue for this period. The draft decision is to accept $782 million of the $1,145 million ($nominal) proposed by Multinet. This represents a 32 per cent reduction compared to Multinet’s proposal.
The AER’s reference tariffs are approximately 34 per cent lower on average than they would have been under Multinet’s proposal. From 1 January to 30 June 2013, tariffs will remain at 2012 prices. Then, on 1 July 2013, Multinet’s tariffs will reduce by approximately 21 per cent to reflect the AER’s decision. From 1 January 2014 the AER forecasts tariffs to increase only for inflation.
If the decrease in distribution tariffs from the AER’s draft decision was passed through to consumers, a typical residential bill of around $1050 could be expected to reduce by about $67 from 1 July 2013 based on this draft decision. Prices would then increase by $6 each year after that. Multinet’s proposal would result in an increase of around $54 at 1 July 2013, then increase by $10 each year.
The most significant drivers of the difference between Multinet’s proposal and the AER’s draft decision are the rate of return, forecast capital expenditure (capex) and forecast operating expenditure (opex).
The rate of return relates to the cost of financing capital assets, such as providing a return on equity and paying interest on loans. In its draft decision the AER has used a lower return on equity than that proposed by Multinet. The AER considers that this better reflects current market conditions and risks. The AER will update the estimates of financial parameters when it makes its final determination.
The AER has lower expectations of capex requirements over the five year forecast period. A substantial proportion of Multinet’s proposed capex is for distribution mains replacement (for example, the replacement of aging cast iron pipelines). The AER recognises the importance of this to ensure a safe and efficient network. However, the AER considers that Multinet has not established the necessity or efficiency of some parts of its mains replacement program for the 2013–17 period. Should circumstances change during the 2013–17 period, such that an expanded mains replacement program becomes necessary, Multinet will be able to seek to recover these costs through a pass-through application.
Other substantial reductions have been made to capex for expansion of capacity, customer connections and overheads. These revisions generally bring expenditure more in line with historic levels or industry standards. Overall, The AER’s draft decision is to approve $195 million of the $410 million ($nominal) of capex proposed by Multinet (a reduction of approximately half).
The AER’s draft decision also substantially revises Multinet’s proposed opex. The AER did not approve Multinet’s proposed ‘bottom-up’ approach to forecasting opex. Instead, the AER used its usual base year approach to forecasting opex. This approach brought Multinet’s forecast opex more in line with historic levels of opex. The draft decision is to approve $291 million of the $391 million ($nominal) of opex proposed by Multinet (a reduction of approximately 26 per cent).
Envestra Victoria
The AER has not accepted Envestra Victoria’s forecast revenue for this period. The draft decision is to accept $867 million of the $1,221 million ($nominal) proposed by Envestra. This represents a 29 per cent reduction compared to Envestra’s proposal.
The AER’s reference tariffs are approximately 29 per cent lower on average than they would have been under Envestra Victoria’s proposal. From 1 January to 30 June 2013, tariffs will remain at 2012 prices. On 1 July 2013, Envestra’s tariffs will reduce by approximately 0.3 per cent to reflect the AER’s decision and then increase by CPI from 1 January 2014.
Based on this draft decision, a typical residential bill of $1140 could be expected to decrease by about $1 from 1 July 2013 if passed through to consumers. Prices would then increase by $9 each year after that. Envestra’s proposal would result in an increase of around $61 at 1 July 2013, then increase by $55 each year.
As was the case with Multinet, the most significant drivers of the difference between Envestra’s proposal and the AER’s draft decision are the rate of return, forecast capex and forecast opex.
The AER has used a lower return on equity in its draft decision than that proposed by Envestra. The AER considers that this better reflects current market conditions and risks. The AER will update the estimates of financial parameters when it makes its final determination.
As with Multinet, the AER has lower expectations of Envestra’s capex requirements. A substantial proportion of Envestra’s proposed capex is for distribution mains replacement. The AER considers that Envestra has not established the necessity or efficiency of some parts of its mains replacement program for the 2013–17 period. Should circumstances change during period, such that an expanded mains replacement program becomes necessary, Envestra will be able to seek to recover these costs through a pass-through application.
Overall, the AER’s draft decision is to approve $354 million of the $872 million ($nominal) of capex proposed by Envestra (a reduction of approximately 59 per cent).
The AER’s draft decision also makes revisions to Envestra’s proposed opex. These revisions generally bring expenditure more in line with historic levels. The draft decision is to approve $329 million of the $420 million ($nominal) of operating expenditure proposed by Envestra (a reduction of approximately 22 per cent).
Envestra Albury
The AER has not accepted Envestra Albury’s forecast revenue for this period. The AER’s draft decision is to accept $30 million of the $37 million ($nominal) proposed by Envestra (a 18 per cent reduction). The AER’s draft reference tariffs are approximately 18 per cent lower on average than those in Envestra’s proposal.
Similar to Envestra Victoria, the most significant drivers of the difference between Envestra’s proposal and the AER’s position are the rate of return, forecast capex and forecast opex.
Next steps
Envestra and Multinet are able to respond to the AER’s draft decision by submitting revised regulatory proposals. Other stakeholders also have the opportunity to provide submissions in response to the AER’s draft decision. The AER will make a final decision on Envestra and Multinet’s regulatory proposals in March 2013.
These draft decisions are part of the AER’s current assessment of access arrangements for all Victorian transmission and distribution service providers for the 2013–17 access arrangement period. Draft decisions for APA GasNet and SP AusNet were released on 11 September 2012.
The Multinet and Envestra draft decisions have been delayed due to information deficiencies in these businesses’ proposals and in their responses to AER information requests.