SAPN’s proposal: initial comments Bruce Mountain

Outline Capex Opex Revenue RAB WACC TAX Profits 2

1,000 Mega bytes 542 documents and spreadsheets 34 consultant reports. Compared to Ergon, Energex, AusGrid, Endeavour and Essential, more consultancy reports, bigger (in mega bytes) and only slightly fewer documents than most prolific (Ergon documents and spreadsheets). How should we be thinking about a system of regulation that works this way? –In the commercial world, deals are not done like this. –Does this reflect a breakdown in trust? –What does an application like this say about SAPN’s desire to meaningfully engage with consumers ? 3 But first, a few words on SAPN’s proposal

Much higher opex is proposed 4

5 Likewise, much higher capex

6 Regulated Asset Base projected to increase significantly

7 Higher revenues reflect much higher proposed spending but partially offset by lower rate of return

But proposed WACC (net of risk free rate) higher than current regulatory period 8 * SAPN proposal restated to be consistent with AER Risk Free Rate in NSW Draft Decision of 3.55%

And proposed income tax in next period now almost 3X as much as AER allowed for current period 9 Source: SAPN proposal, ACT Orders

Claim for tax charge to consumers - about $450m - not insignificant. Important to know that this is a realistic estimate Competition Tribunal decision meant SAPN allowed to recover $414m (nominal) in tax charges from consumers during current regulatory period (2011 to 2015). But for 2011 to 2013 financial years inclusive, SAPN financial statements show that it has received tax credit of $4.2m. SAPN financial statements describe tax consolidation under head entity “Utility Management Pty Ltd”, and various Caribbean subsidiaries. So, how much tax has SAPN actually paid, and how does this compare to what it has been allowed to recover from electricity users? Transparency very important in assessing SAPN claims and AER decision: if SAPN is paying substantially less tax than AER expected, the regulatory arrangements for taxation must address this. 10

The profitability of SAPN’s regulated business is a concern In 2012 the regulated business of UK Power Networks (majority owned by CKI) achieved profit before interest and taxes (PBIT) of GBP711m for delivering electricity to around 8 million connections, giving a PBIT per connection of $161 per connection. In 2012/13 SA Power Networks’ distribution business achieved PBIT of $595m for delivering electricity to connections to give PBIT margin of $710 per connection. Even after adjustment for financing costs, SAPN’s regulated distribution business still seems to deliver about 4 times more pre-tax profit than UKPN per connection. SAPN has underspent regulatory capex and opex allowances but not by large amounts. Why then is SAPN so profitable in absolute terms and in comparison to UKPN ? Regulatory asset valuation per connection is about 4 times higher for SAPN than UKPN and (real) WACC has been about 33% higher in SA than GB. Can these differences be justified or is this evidence of regulatory failure ? These concerns should be investigated by the AER. 11