Draft decisions 2011-16 Access Arrangements for APT Allgas

Draft decisions 2011-16 Access Arrangements for APT Allgas and Envestra (Qld) Warwick Anderson General Manager, Network Regulation 1 March 2011 Public forum Housekeeping matters Please sign the attendance sheet A record of this meeting will be made 2 Purpose of the forum Present the main features of the AERs draft decision on the access arrangement proposals submitted by APT Allgas and Envestra Inform parties intending to make submissions on the AERs draft decision 3 Submissions Submissions on the AERs draft decision

can be sent to [email protected], until 21 April The AERs access arrangement guideline provides guidance on making submissions available at www.AER.gov.au Timeframes under the NGL and NGR limit the AERs ability to accept late submissions 4 Revenues & Prices - APT Allgas The AER has determined lower revenues & prices than those proposed by APT Allgas. The main reductions are to the proposed WACC, forecast opex and tax allowance. Tariffs for haulage services are expected to rise in real terms by about 3.6 per cent per annum (on average) over the AA period. The tariffs for ancillary services were revised and will increase each year only by the rate of change in CPI. 5 Haulage Tariffs APT Allgas Real price index starts at $1 in 2005-06

$1.40 $1.35 $1.30 $1.25 Allgas - Actual Allgas - Proposed $1.20 $1.15 Allgas - AER DD $1.10 $1.05 $1.00 $0.95 $0.90 6 20 06 -0 7 20

07 -0 8 20 08 -0 9 20 09 -1 0 20 10 -1 1 20 11 -1 2 20 12 -1 3 20 13 -1

4 20 14 -1 5 20 15 -1 6 $m (2010-11) Total revenues (including ancillary services) - APT Allgas 80 70 60 50 40 30 20 10 0 7

Revenues & Prices - Envestra The AER has determined lower revenues & prices than those proposed by Envestra. The main reductions are to Envestras proposed WACC, forecast capex and forecast opex. Tariffs for haulage services are expected to rise in real terms by about 2.6 per cent per annum (on average) over the AA period. The tariffs for ancillary services were revised and will increase each year only by the rate of change in CPI. 8 Haulage Tariffs - Envestra Real price index starts at $1 in 2005-06 $1.70 $1.60 Envestra Qld - Actual $1.50 $1.40 $1.30 Envestra Qld - Proposed Envestra Qld - AER DD

$1.20 $1.10 $1.00 $0.90 9 20 06 -0 7 20 07 -0 8 20 08 -0 9 20 09 -1 0 20 10

-1 1 20 11 -1 2 20 12 -1 3 20 13 -1 4 20 14 -1 5 20 15 -1 6 $m (2010-11) Total revenues (including ancillary services) Envestra

60 50 40 30 20 10 0 10 Key drivers of results Key drivers: Return on capital (asset base * cost of capital) Return of capital (depreciation) Capital expenditure forecasts Operating expenditure forecasts Demand forecasts - for converting revenues to prices. 11

Breakdown of revenues (2011-16) APT Allgas Opex 29% Other 2% Return on capital 69% 12 Breakdown of revenues (2011-16) Envestra Other 9% Opex 31% Return on capital 60%

13 Cost of capital (WACC) The nominal cost of capital has increased significantly (see following table) Debt risk premium, more than tripled since the earlier AA period. The cost of equity has decreased, due mostly to a reduction in the equity beta. The AER has set the market risk premium to its pre-GFC level of 6%. 14 WACC parameters Parameters (%) Earlier AA period APT Allgas proposal Envestra proposal AER draft

decision Nominal risk free rate 5.3 5.1 5.3 5.7 Inflation forecast 2.8 2.5 2.6 2.5 Cost of equity 11.3

12.2 13.0 10.5 Equity beta 1.1 1.1 0.8-1.1 0.8 Market risk premium 6 6.5 6.5-8.0

6 Cost of debt 6.6 8.9 8.7 9.6 Debt risk premium 1.3 3.9 3.4 3.9 Gearing (D/(D+E)) 60

60 55 60 Nominal cost of capital 8.7 10.2 10.6 10.0 15 Revenues under different WACCs APT Allgas 90.0 80.0 $m (nominal)

70.0 60.0 50.0 Allgas - Proposed 40.0 Allgas - AER DD 30.0 Allgas - Earlier AA 20.0 10.0 0.0 2011-12 2012-13 2013-14 16 2014-15

2015-16 Revenues under different WACCs Envestra 80.0 70.0 $m (nominal) 60.0 50.0 40.0 Envestra Qld - Proposed 30.0 Envestra Qld - AER DD 20.0 Envestra Qld - Earlier AA 10.0 0.0

2011-12 2012-13 2013-14 17 2014-15 2015-16 Regulatory asset base APT Allgas As at 30 June ($m , nominal) 600 500 400 300 Proposed 200

AER approved 100 0 18 Capital expenditure APT Allgas AER accepted APT Allgass proposed capex. AER identified a few issues with APT Allgass capex proposal. But the impact was not material. 19 Total capex APT Allgas Actual Allgas forecast Estimate AER allowance QCA allowance

40 Real $'m 2010-11 35 30 25 20 15 10 5 0 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 20 2012-13

2013-14 2014-15 2015-16 Capex by purpose APT Allgas Next AA period Earlier AA period (as proposed/accepted) (actual) Non-system 6% Non-system 9% Network renewal 23% Network renewal 29%

Customer Requested 57% Network augmentation 8% Network augmentation 5% 21 Customer Requested 63% Regulatory asset base Envestra A s at 30 Ju n e ($m , n o m in al) 600 500

400 300 Proposed 200 AER approved 100 0 22 Capital expenditure - Envestra Envestra proposed a 71% real increase in capex compared to the earlier AA period due largely to Envestras proposed expansion of its mains replacement program. The AER accepted most of the proposed capex. Adjustments for

contingency amounts overhead costs real cost escalation and mains replacement in Brisbane. 23 Total capex - Envestra Actual spend Envestra forecast Estimate AER allowance QCA allowance 40 Real $'m 2010-11 35 30 25 20 15

10 5 0 2006-07 2007-08 2008-09 2009-10 2010-11 24 2011-12 2012-13 2013-14 2014-15 2015-16 Capex by purpose - Envestra Mains replacement Grow th Assets Other capital expenditure 18 16

14 12 10 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 (estimate) 2010-11 (estimate) 25 2011-12 2012-13

2013-14 2014-15 2015-16 Mains replacement capex - Envestra Actual Approved Forecast 70 Mains replaced (km) 60 50 40 30 20 10 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

26 Return of capital Both Envestra & APT Allgas proposed shorter asset lives than used previously. The AER has accepted these asset lives increased the rate of depreciation. Return of capital has increased significantly. The following graph shows the trend in regulatory depreciation. 27 $m (2010-11) -0.5 -1.0 -1.5 -2.0 28 2015-16

2014-15 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 Regulatory depreciation APT Allgas 2.5 2.0 1.5

1.0 0.5 0.0 -1.0 -2.0 -3.0 29 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11

2009-10 2008-09 2007-08 2006-07 $m (2010-11) Regulatory depreciation - Envestra 4.0 3.0 2.0 1.0 0.0 Operating expenditure APT Allgas APT Allgas proposed a 23% real increase in opex compared to the earlier AA period, principally due to:

increased input costs increased UAG costs, and the need for various types of non-base year costs. The AER amendments, including input cost escalators a reduction in the price assumptions for UAG various proposed step changes. The AERs draft decision results in a 12% real increase in opex compared the earlier AA period. 30 Total opex APT Allgas APT Allgas opex Actual Estimate QCA allowance AER allowance Allgas's forecast

25 Real $'m 2010-11 20 15 10 5 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 31 Operating expenditure - Envestra Envestra proposed a 16% real increase in opex compared to the earlier AA period, principally due to: increasing input costs increasing UAG costs increased network development, and the need for various non-base year costs.

The AER required a number of amendments, including: input cost escalation network development UAG expenditure and several of the proposed non base year costs. The AERs draft decision results in an 11% real reduction in opex compared to the earlier AA period. 32 Base year costs - Envestra $(2009-10)/km Opex/km 9000 8000 7000 6000 5000 4000

3000 2000 1000 0 33 Total opex - Envestra Envestra opex Actual Estimate QCA allowance Envestra's forecast AER allowance 25 Real $'m 2010-11 20 15

10 5 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 34 Demand forecast - APT Allgas For the most part, the proposed demand forecasts are reasonable. AER adjustments: average gas usage for residential customers lower growth in business customer numbers 35 APT Allgas residential customer numbers forecast Residential customer numbers 100,000 90,000 80,000 70,000

60,000 50,000 40,000 30,000 20,000 10,000 0 2006-07 2007-08 2008-09 2009-10 2010-11 Actual 2011-12 2012-13 2013-14 2014-15 AER draft decision 36 2015-16 APT Allgas average residential consumption forecast

Average residential consumption 14 12 GJ 10 8 6 4 2 0 2006-07 2007-08 2008-09 Actual 2009-10 2010-11 2011-12

APT Allgas proposal 37 2012-13 2013-14 2014-15 AER draft decision 2015-16 Demand forecast - Envestra For the most part, the proposed demand forecasts are reasonable. AER adjustments: average gas usage for residential customers 38 Envestra residential customer numbers forecast Residential customer numbers 100,000 90,000

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Actual AER draft decision 39 Envestra average residential consumption Average residential consumption 12 10 GJ 8 6

+ 4 2 0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Actual AER draft decision 40 Envestra proposal Terms and conditions Submissions: overall terms and conditions were weighted too much in favour of the service providers. The AER accepts most of the proposed terms and conditions for both service providers. However, changes are required to provide a better balance between the service providers and customers

41 Consultant advice Cost of capital: Professor Kevin Davis Opex and capex forecasts: Wilson Cook Labour cost growth: Access Economics Demand forecasts: ACIL Tasman 42 Timeline Release of draft decisions 17 February 2011 Public forum on draft decisions 1 March 2011 Revised proposals to be submitted

23 March 2011 Submissions on draft decisions due 21 April 2011 Release of final decisions Late May 2011 43