1 Electricity Distribution Price Review Metering Workshop 14 July 2005

2 Metering workshop outline  Framework & Approach –Responsibility for metering services –Form of regulation –Interval meter rollout –Responsibility for metering services  Revenue requirement –Capital expenditure –Operating expenditure –Return on capital –Return of capital (regulatory depreciation) –Forecast tax liability  Metering price controls & incentive arrangements  Metering service charges

3 Metering framework & approach  The framework & approach was developed on basis that the approach to metering services would be : –The same, regardless of whether the customer was first tier or second tier –Consistent with the Final Report from the joint jurisdictional regulators’ review of metrology procedures as understood by the Commission –Consistent with the NEC, & reliant on an extension to the derogation to the NEC authorising DBs exclusive responsibility for providing metering services to “small” second tier customers

4 Metering framework & approach – responsibility for metering services  At the time of the development of the framework & approach: –Retailer choice over whether the retailer or distributor is responsible for:  “Large” (>160 MWh p.a.) first tier customers or customers with a meter that meets the requirements of a metering installation type 1 – 4  Second tier customers with a meter that meets the requirements of a metering installation type 1 – 4 –Distributor responsibility for:  “Small” (<160 MWh p.a.) first tier customers with a meter that does not meet the requirements of a metering installation type 1 – 4  “Small” second tier customers with a metering installation type 5 – 7

5 Metering framework & approach – form of regulation  Prescribed service where DB exclusively responsible –Charges unbundled from DUoS charges  Excluded service where the retailer has the choice of responsible person –A separate process to be undertaken under Electricity Industry Guideline No. 14 to declare services contestable  Non-contestable excluded service for: –First tier customers that consume >160 MWh p.a. & have a manually read meter –Charges subject to Commission approval

6 Metering framework & approach – Interval Meter Rollout (IMRO)  The Commission has mandated a rollout of interval meters commencing during the regulatory period  Revenue requirement for prescribed metering services to consider analysis underpinning the Commission’s IMRO decision

7 Responsibility for metering services  Subsequent to the framework & approach the joint jurisdictional regulators’ review was finalised & the ACCC extended a derogation to the NEC relating to DB exclusive responsibility for metering services –The Commission maintains consistency with the joint jurisdictional regulators’ review of metrology procedures recommendations –The ACCC extended the derogation, excluding interval meters that are remotely read

8 Prescribed metering services revenue requirement  Approach mirrors the methodology applied to developing the revenue requirement for DUoS –Capital expenditure –Operating & maintenance expenditure –Regulatory depreciation (return of capital) –Return on capital –Forecast tax liability

9 Prescribed metering services revenue requirement – DB proposals vs. Draft Decision

10 Metering services revenue requirement – capital expenditure  Capital expenditure categories –Meter volumes –Unit costs – meter supply, installation, back office functions, site costs –Metering data services (IT) –Metering data services (other) –Project management & training  Assessed with the assistance of ECG

11 Capital expenditure – meter volumes  Framework & approach required DBs to set targets to meet IMRO schedule for each year ( ) based on meter type, meter purpose, reason  DB determined rollout profile  The Commission reviewed volumes for internal consistency with customer numbers & new connections recommended by Wilson Cook –Reductions in volumes proposed by AGLE & CitiPower  The Commission also considered feasibility of proposed volumes –AGLE: smoothed volume of meters proposed in 2007 over 2007, 2008 & 2009 –United Energy: reduced volume of meters proposed in 2008, smoothed remaining volume over 2008 & 2009

12 Capital expenditure – unit costs meter supply  Meter supply costs: includes unit costs, & delivery/storage costs – adopted ECG’s recommendations

13 Capital expenditure – unit costs installation  Installation costs: includes travel time, labour & supervision costs; excludes complex installation (site) costs –New meter costs recovered through excluded service charge, replacement meter costs included in metering price control –Commission adopted consistent unit cost across similar DBs –Incorporated a real labour rate escalation of 1.5% p.a.

14 Capital expenditure – unit costs installation – urban

15 Capital expenditure – unit costs installation – rural

16 Capital expenditure – unit costs back office  Back office functions: adopted ECG’s recommendations

17 Capital expenditure – site costs  Site costs: include costs associated with meter board replacement, rewiring & asbestos removal –Commission adopted consistent unit cost across similar DBs –Incorporated a real labour rate escalation of 1.5% p.a. –Costs expensed by TXU & United Energy  A separate charge to be levied where meters installed after hours

18 Capital expenditure – site costs

19 Capital expenditure – metering data services (IT)  Cost recovery of IT based on principle: –Costs of IT systems required by all customers recovered through DUoS price control –Costs of IT systems required by customers with a DB’s meter installed to be recovered through metering price control  ECG developed benchmark costs for a generic metering data system, which the Commission has accepted as reasonable

20 Capital expenditure – metering data services (IT)

21 Capital expenditure – metering data services (other)  Metering data services (other) costs associated with Portable Data Entry Units –Commission accepted ECG recommendation that DB proposals are reasonable Capex – metering data services (other), $million, real $2004 AGLECitiPowerPowercorTXUUnited Energy As per submissions & ECG recommendations

22 Capital expenditure – project management & training  Project management & training –ECG assessed DB proposals –ECG estimated project management costs based on 4 people at $100,000 each –ECG estimated training costs based on training cost per installer & number of installers –The Commission accepted ECG’s recommendations Project management & training, $million, real $2004 AGLECitiPowerPowercorTXUUnited Energy As per submissions 3.1 Incl in installation costs ECG recommendation

23 Prescribed metering services capital expenditure – DB proposals vs. Draft Decision

24 Metering services revenue requirement – operating & maintenance expenditure  Operating & maintenance expenditure categories –Maintenance: meters, metering data services (IT) –Operating: unit costs of meters, metering data services –Indirect costs –Project management & training (TXU only)

25 Maintenance – meters  Meters –Costs associated with maintaining metering stock  To be recovered through metering price control where DB is exclusively responsible for metering services –ECG assessed on a per customer basis, & recommended DB proposals for all but AGLE –The Commission has accepted ECG’s recommendations as reasonable

26 Maintenance – meters

27 Maintenance – metering data services (IT)  Metering data services (IT) –ECG assumed costs include hardware, software & labour –Developed maintenance costs for a generic metering data system –Commission accepted ECG’s recommendations as reasonable, with the exception of TXU

28 Maintenance – metering data services (IT)

29 Operating – customer service costs  Customer service costs –Costs associated with making appointments, multiple visits, communications & dealing with customer complaints  These costs have been included for replacement meters only  Commission adopted consistent unit cost across similar DBs & included an additional $1 per meter for the provision of information

30 Operating – customer service costs

31 Operating – metering data services  Metering data services –Costs associated with the collection, processing, storage & provision of metering data –DBs indicated that the time & cost per read will increase for interval meters –Commission adopted consistent unit costs across similar DBs

32 Operating – metering data services

33 O&M – Indirect costs  Indirect costs –Principle: indirect costs allocated to DUoS price control, excluded services & metering price control consistent across regulatory periods –All DBs except UE allocated indirect costs to the metering price control, but have maintained the levels ascribed to the DUoS price control & excluded services –Therefore, no indirect costs allocated to metering price control  Direct overheads included for TXU based on existing cost allocation

34 Prescribed metering services operating & maintenance expenditure – DB proposals vs. Draft Decision

35 Regulatory depreciation  The annual rate at which accumulated capital is returned to investors – is a function of the RAB & the depreciation period  Applied in a straight-line manner consistent with depreciation of the DUoS RAB  Opening asset base as at January 1, 2006 – zero  Each DB was asked to stipulate the depreciation period for accumulation meters, interval meters, metering data services – IT & other  The depreciation periods assumed by each DB have been applied

36 Return on assets, taxation & enhanced offerings  Return on assets –The Commission will apply the same WACC as that decided for the DUoS price control  Taxation –As the Commission’s WACC is after-tax in form, an allowance must be included to cover expected tax liabilities –Tax depreciation rates have been applied consistently across the DBs for each prescribed metering services category –Tax liability considered for prescribed services in aggregate  Enhanced offerings –Additional expenditure has not been provided

37 Metering price controls & incentive arrangements  The Commission has set an overarching price control that limits the annual average increase of prescribed metering service charges similar in operation to the price control on DUoS tariffs  An efficiency carryover mechanism will also apply to the metering price control  An M-factor has been introduced to counter the combined effect that a CPI-X price cap & efficiency carryover mechanism may have on the roll out of interval meters  The Commission’s requirements for DUoS tariffs with regard to reporting requirements, timing & rebalancing will also apply to metering service charges

38 Metering price controls  The Commission will specify the revenue for 2006, based on the building block revenue requirement & the value of X M  Consistent with its approach to the price control for DUoS, the Commission will adhere to the principles of –Net Present Value (NPV) neutrality –The building block revenue requirement to be approximately the same as the forecast revenue earned in 2010 to avoid a price shock in 2011 –Where possible, the same X M to be adopted for each distributor

39 Metering price controls Value of X MT, all distributors, , per cent AGLECitiPowerPowercorTXU United Energy Value of R MT, all distributors, $million, real $2004 AGLECitiPowerPowercorTXU United Energy

40 Metering service charges  Prescribed metering service charges for: –Meter provision based on the type of meter –Metering data services based on the frequency of meter read  Charges are: –Set to recover the revenue requirement for the metering price control –To be paid by all customers who consume less than 160 MWh per annum who do not have an interval meter that is remotely read & who utilise the metering services provided by the distributor –The same, regardless of whether the customer has an accumulation meter or an interval meter installed