New Investment John Howarth Executive Manager Energy Infrastructure VENCorp 2 April 2004 Conference on ACCC Draft Statement of Principles for the Regulation of Transmission Revenues

Contents Why regulate State-owned enterprises who plan the transmission network? Incentive regulation What is the regulatory contract with an ex-ante capex? What should be included in an ex-ante capex cap? What about NEC process/consultation/disputes? What should happen to capex not included in firm cap? Off-ramps or force majeure Conclusions

Why Bother? All planners are state owned and accountable to duly elected governments Stakeholders can lobby government Why have a national regulator define how much capex should be spent within a state by a state owned enterprise? Lets all go home – haven’t we got more important things to do?

Because Transmission built inefficiently can destroy value and confidence in upstream investment Transmission not built can also allow market power to extract exorbitant revenues Transmission is not the only solution to load growth WE NEED TO STRIKE A BALANCE THROUGH GOOD INCENTIVE REGULATION

Incentives Don’t have to worry too much about regulatory incentives if the correct incentives are in place in terms of organisational governance –This is why the present and proposed arrangement for Victoria is different to other jurisdictions If the decision to build assets is within the same organisation that earns a revenue from the assets then regulatory incentives become very important Incentives to –Utilise existing assets –Employ alternative solutions to transmission investment –Time investments efficiently –Implement investments efficiently

What is New Investment In Victoria –Augmentation  $ 30 to 50 m per annum –Replacement  $ 60 m per annum –Support the business  $ 10 per annum In NSW

Ex-ante Estimates TransGrid Application

Ex-ante Estimates Powerlink Application

Ex-Ante Vs Ex-Post Is it easier to verify efficiency looking forward or backward? –The best information to assess the efficiency of a project is at the time of the investment decision –Using a stick or carrot after the money is spent (ex- post) is inefficient –Trying to estimate conditions 5 years out is inaccurate and may lead to inappropriate incentives/service outcomes Has ex-post worked? –QNI

What is Ex-ante Regulatory Contract? Needs to be a capped sum of money for a given level of service Cannot measure transmission service even supply reliability over a 5 year time-frame Measurable and accurate service definition is not yet possible for a transmission network particularly over a relatively short time frame compared to the asset lives

What Could be Treated on an Ex-ante Basis? Asset replacement Business support Augmentation to meet load growth that is indifferent to generation patterns (about 50% of Victorian augmentation but very dependent on network geography) Relies on being able to set an efficient level of investment at the start of the regulatory period

Other Concerns about Ex-ante What happens to the consultation and dispute process in the NEC as TNSP gets the revenue anyway? What is to stop projects not being undertaken and then put up for the next period?

Those Projects Outside Ex-ante VENCorp preference is for no ex-post optimisation but scrutiny on the regulatory test compliance at the time of the investment decision Justified amount in regulatory test is the amount to be rolled into the asset base allowing efficiency gains and penalising overspends during implementation This also allows full consultation/dispute process

Off-ramps Off-ramps required –Environmental changes –Taxes –Uncontrollable costs –i.e. Force majeure events Need a test for materiality

Conclusions Ex-ante could work for asset replacement, business support and some augmentation indifferent to generation patterns Large projects are best dealt with at the time of the investment decision and this requires the regulator to get their “hands dirty” A national planner appears to me to solve some of these regulatory problems