Victorian advanced metering infrastructure roll-out AMI budgets and charges AER draft determination Public forum Melbourne 21 August 2009

Presentation outline Introduction AMI budgets –Order in Council tests and AER processes –areas of initial concern to the AER and its draft determination AMI charges –Order in Council requirements –AER considerations and indicative prices resulting from draft determination for each DNSP Process from here Opportunity for comments/ discussion

Introduction 2006 Victorian government decision to roll-out AMI to all Victorian electricity customers ESC/AER’s role set out in an August 2007 Order in Council (OIC) and subsequent revisions OIC provides for a pass-through of expenditures, AER determines expenditure budgets Metering charges set in relation to building block calculation, includes budgeted and actual expenditures Metering charges regulated under separate process from general distribution charges

January 2009 – AER framework and approach paper February 2009 – DNSPs submitted budget applications June 2009 – DNSPs submitted charges applications July 2009 – AER issued draft determination on charges to inform further consultation AER final determination on budgets and charges due 31 October 2009 Introduction

AMI budgets

Order in Council tests OIC sets out tests for the expenditure: –scope test –prudent tests competitive tender test expenditure incurred test commercial standard test For costs to be rejected, AER must establish costs are outside scope or not prudent Costs associated with ‘above scope’ activities can be accepted if net benefits determined

Order in Council tests

AER approach to assessment Review of: –DNSPs’ proposals to AER and ESCV (2008) –RFP/RFT documents, procurement strategy documents, signed contracts –internal business case documents –DNSP presentations to AER staff –further information on specific areas requested by AER AER engaged Energeia to provide advice on technical aspects and application of OIC tests Comparison of costs across expenditure categories to focus review on material areas

Scope test OIC contains lists of activities for each DNSP that are inside and outside scope In-scope activities very broad AER established that SP AusNet’s direct load control costs are outside scope – all other activities were found to be in-scope

Prudent tests Contract costs - Competitive tender test –procurement strategy documents, RFTs, contracts –Framework and approach sets out elements considered by the AER –contract costs = 38% of all proposed costs –AER did not receive contract information relating to $16.3 million of SP AusNet’s proposed contract costs – assessed as non contract costs

Prudent tests Non-contract costs – Expenditure incurred test –implications for DNSPs of not incurring costs –CitiPower, Powercor and SP AusNet proposed costs for customer response trials – AER established unlikely to be incurred –United Energy Distribution’s (UED) self insurance and equity raising costs unlikely to be incurred Non-contract costs – Commercial standard test –categories of expenditure proposed –circumstances of DNSP, as compared to reasonable commercial business in the circumstances –AER unable to establish any proposed costs reflected substantial departure from the commercial standard that a reasonable business would exercise in the circumstances

AER initial areas of concern- AMI budget applications

2-element meters Proposed by SP AusNet and Powercor above OIC minimum specifications AER’s Framework and approach – out of scope activities need to be justified on net benefit grounds time of use pricing – only available when AMI communications operational (est. 2012) tariff reassignments – high transitional costs short-term net benefit demonstrated – however may not be necessary in second budget period once AMI communications are fully operational

WiMAX SP AusNet communications solution, very large bandwidth Potential to support unregulated services, which are outside scope further information showed lower ongoing opex costs than alternative mesh radio solution Energeia considered WiMAX a reasonable choice, given AMI requirements and SP AusNet’s circumstances Using only bandwidth required to meet AMI functionality AER unable to establish that SP AusNet is using WiMAX to provide communications services beyond AMI, therefore inside scope

Direct load control SP AusNet proposed a utility managed load control relay in all meters outside scope – AER requested net benefit assessment in accordance with Framework and Approach SP AusNet stated concern that minimum functionality specifications are not detailed enough to ensure its load control plans technology provided for in the minimum functionality specifications is cheaper than SP AusNet’s proposal, and provides more customer choice no net benefit was established for the proposal AER established proposed costs are outside scope

Other areas under scope test Number of other items of proposed AMI technology above AMI minimum specifications most recommended by independent technical experts AER and Energeia considered these are reasonably required to enable the DNSPs to meet required AMI functionalities

Related party margins CitiPower, Powercor, Jemena and United Energy engaged related parties to manage AMI roll-outs not competitively tendered (non-contract costs) no efficient cost review permitted in OIC AER unable to establish costs were not prudent under OIC tests draft decision indicated AER will examine related party margins as part of next reset, results may inform second budget period determination

Self insurance, equity raising costs Self insurance –United Energy proposed $0.4m over –vendor insurance requirements built into AMI contracts –self insurance also provided in ESCV’s EDPR Equity raising costs –United Energy proposed $7.1m over –effective double recovery of capital raising costs for 43% of proposed capex –substantial departure from recent AER benchmark rates –AER considered United Energy likely to fund capital using less expensive capital raising methods AER established costs unlikely to be incurred

Customer response trials CitiPower, Powercor and SP AusNet proposed a total of $4 million for customer response trials DPI advised that the trials are unlikely to go ahead in 2009 nor 2010 AER rejected costs under the expenditure incurred test

AER draft decision - budgets DNSP Total proposed budget ($m) AER draft decision ($m) Difference CitiPower % Jemena % Powercor % SP AusNet % United Energy %

AMI charges

OIC requirements OIC sets out calculation of building block revenue requirements and how these are translated into metering charges The DNSPs’ AMI charges for 2010 and 2011 recover –AMI opex and capex budgets for ; and –IMRO and AMI related costs incurred from 1 January to 2006 to 31 December 2008 Charges will be updated annually when budgeted costs are substituted with actual expenditures

Building block revenue requirement Building blocks include: Return on capital (some WACC parameters based on AER WACC review) Depreciation Operation & Maintenance costs Corporate tax allowance Costs incurred over : –IMRO costs –AMI net revenue or costs from –DUoS tax liability –Efficiency carryover –Costs relating to AMI trials, IT systems integration, project management, exchange and interest rate hedging expenditure

Charges adjustments Annual “true up” of charges to reflect actual costs incurred and revenue received Actual costs to be reported in regulatory accounts Future charges also reflect budget revisions –Actual expenditure can vary by 120% of initial budget; will drive future charges OIC permits DNSP’s to propose charges that result in under- recovery of revenues in early years, to minimise price shock –AER flagged this in F&A –Where DNSP proposed 2010 charges over recovered draft determination revenues, the AER reduced 2010 charges to ensure NPV neutrality with draft determination revenue requirement –Where DNSP proposed 2011 charges over recovered draft determination revenues, the AER reduced 2011 charges to ensure NPV neutrality with draft determination revenue requirement

AER initial areas of concern- charges applications

Regulatory accounts Issues with all DNSPs charges applications Reported actual costs ( ) that departed from audited regulatory accounts, which the AER did not accept under the requirements of the revised Order AER did not accept allocations of costs by the DNSPs which affected the size of benefits under the efficiency carryover mechanism in their favour

WACC – Debt Risk Premium DNSPs jointly proposed measurement of debt risk premium from Tabcorp bond –Issued four months after OIC required averaging period –Maturity of 5 years, OIC requires 10 years –variable rate bond, OIC requires fixed coupon Commonwealth Government bonds DNSPs proposed adjustments to reflect inconsistencies with OIC requirements DNSP proposal considered to be inconsistent with OIC AER re-examined Bloomberg data, finding it appropriate DNSPs’ proposed AMI WACC of per cent vs draft determination AMI WACC at 8.96 per cent

CitiPower issues AER did not accept regulatory accounts data for AER reduced CitiPower revenues by $4.4m for CitiPower chose to under recover revenue in 2010 – requires compensating increase in 2011 charges –Consistent with revised OIC approach –AER did not smooth 2011 price, as not permitted to compel a DNSP to under recover in any one year AER therefore reduced proposed 2011 charges (-12.3%) – to align with draft determination revenues in NPV terms

CitiPower metering charges proposed vs draft decision Annual metering charge ($/NMI) proposedDecisionproposedDecision Single phase phase direct connected phase current Transformer connected

CitiPower metering charges indicative price change from 1 January Meter type Single phase non-off peak236%8% Single phase off-peak166%8% 3 phase direct connected76%8% 3 phase CT connected64%8% Note: Under AMI, peak and off-peak now become single phase.

Jemena issues Jemena provided letters to corroborate data but these were inconsistent with regulatory accounts, therefore not accepted 2008 costs data not consistent with regulatory accounts Jemena cost allocation for efficiency carryover not substantiated, large revenue impact- $22m reduction Jemena proposed under recovery of $6.6m in 2010 and 2011 –Consistent with revised OIC approach AER reduced Jemena’s proposed revenue requirements by $27.9m over 2009–11 AER therefore reduced 2010 proposed charges (-49.6%) and 2011 charges (-4.5%) –to align with draft determination revenues in NPV terms

Jemena metering charges proposed vs draft decision Annual metering charge ($/ NMI) proposedDecisionProposeddecision Single phase single element Single phase single element, with contactor phase direct connected phase current Transformer connected

Jemena metering charges indicative price change from 1 January Meter type Single phase single element151%93% Single phase single element with contactor8% 93% 3 phase direct connected-6% 93% 3 phase CT connected278% 93% Single phase single element and single phase single element with contactor replace single phase non off peak and single phase off peak.

Powercor issues AER did not accept Powercor 2006, 2007 data, as not consistent with regulatory accounts Powercor requested changes to 2006 regulatory accounts via letters – not accepted by AER Powercor under recovered revenues by $18.5m in This delivered higher charges for 2011 –Consistent with revised OIC approach AER reduced Powercor’s revenues by $8.5m over the 2009–11 The AER therefore reduced proposed 2011 charges (-10.9%) –to align with draft determination revenues in NPV terms

Powercor metering charges proposed vs draft decision Annual metering charge ($/NMI) proposeddecisionproposeddecision Single phase phase direct connected phase current Transformer connected

Powercor metering charges indicative price change from 1 January Meter type Single phase non-off peak177%15% Single phase off-peak100%15% 3 phase direct connected40%15% 3 phase CT connected31%15% Note: Under AMI, peak and off-peak now become single phase.

SP AusNet issues Minor issues with provisions Adjustment to efficiency carryover amount for customer service costs SP AusNet chose to under recover revenues by $7.1m in Results in higher 2011 charges –Consistent with revised OIC approach AER reduced SP AusNet’s revenues by $11.1m over the 2009–11 AER reduced proposed charges in 2010 (-1.4%) and 2011 (-14.5%) to align with draft determination revenues in NPV terms

SP AusNet metering charges proposed vs draft decision Annual metering charge ($/NMI) proposeddecisionproposeddecision Single phase, single element with contactor Single phase, 2 element with contactor Multi-phase, 1 contactor (1 load control) Multi-phase, 2 contactors (2 load controls) Multi-phase Current Transformer connected

SP AusNet metering charges indicative price change from 1 January Meter type Single phase single element 1 contactor (1 load control) 110%24% Single phase, 2 element 2 contactors (2 load controls) 101%24% Multi phase, 1 contactor (1 load control)0%24% Multi phase, 2 contactor (2 load controls)0%24% Multi phase CT connected40%24% Note: single phase 1 element and 2 element replace single phase non off peak and single phase off peak.

United Energy issues Minor adjustment to efficiency carryover amount – for customer service costs UED proposed revenue neutrality for both 2010 and 2011 charges –Consistent with revised OIC approach AER reduced UED revenues by $12.7m over the 2009– 11 AER therefore reduced 2010 charges to align with draft determination revenues in NPV terms AER reduced proposed charges in 2010 (-18.8%) and 2011 (-3.2%) to align with draft determination revenues in NPV terms

United Energy metering charges proposed vs draft decision Annual metering charge ($/ NMI) proposeddecisionproposeddecision Single phase single element Single phase single element, with contactor phase direct connected phase current Transformer connected

United Energy metering charges indicative price change 1 January Meter type Single phase single element222%28% Single phase single element with contactor 180%28% 3 phase direct connected120%28% 3 phase CT connected86%28% Note: single phase single element, and single phase single element with contactor replace single phase non off peak and single phase off peak.

Price impacts summary Across all DNSPs, 2010 charges represent an average increase of $53 on 2009 metering charges [1], with a further $25 increase in 2011 [1] [1] Based on single phase single element non off-peak meter, read quarterly in 2009, approved by the ESCV[1]

Process from here DNSPs must submit amended Submitted budgets for AER approval by 28 August (AER will publish) Stakeholders’ submissions due 11 September AER final determination on budgets and charges due 31 October 2009 New metering charges apply from 1 January 2010

Questions, comments?