1. Draft decisions 2011-16 Access Arrangements for APT Allgas and Envestra (Qld) Warwick Anderson General Manager, Network Regulation 1 March 2011 Public forum

2. Housekeeping matters Please sign the attendance sheet A record of this meeting will be made 2

3. Purpose of the forum Present the main features of the AER’s draft decision on the access arrangement proposals submitted by APT Allgas and Envestra Inform parties intending to make submissions on the AER’s draft decision 3

4. Submissions Submissions on the AER’s draft decision can be sent to QLDSAgas@aer.gov.au, until 21 AprilQLDSAgas@aer.gov.au The AER’s access arrangement guideline provides guidance on making submissions –available at www.AER.gov.au Timeframes under the NGL and NGR limit the AER’s ability to accept late submissions 4

5. 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

6. Haulage Tariffs – APT Allgas Real price index starts at $1 in 2005-06 6

7. Total revenues (including ancillary services) - APT Allgas 7

8. Revenues & Prices - Envestra The AER has determined lower revenues & prices than those proposed by Envestra. The main reductions are to Envestra’s 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

9. Haulage Tariffs - Envestra Real price index starts at $1 in 2005-06 9

10. Total revenues (including ancillary services) - Envestra 10

11. 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

12. Breakdown of revenues (2011-16) – APT Allgas 12

13. Breakdown of revenues (2011-16) – Envestra 13

14. 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

15. WACC parameters 15 Parameters (%) Earlier AA period APT Allgas proposal Envestra proposal AER draft decision Nominal risk free rate5.35.15.35.7 Inflation forecast2.82.52.62.5 Cost of equity11.312.213.010.5 Equity beta1.1 0.8-1.10.8 Market risk premium66.56.5-8.06 Cost of debt6.68.98.79.6 Debt risk premium1.33.93.43.9 Gearing (D/(D+E))60 5560 Nominal cost of capital8.710.210.610.0

16. Revenues under different WACCs – APT Allgas 16

17. Revenues under different WACCs – Envestra 17

18. Regulatory asset base – APT Allgas 18

19. Capital expenditure – APT Allgas AER accepted APT Allgas’s proposed capex. AER identified a few issues with APT Allgas’s capex proposal. But the impact was not material. 19

20. Total capex – APT Allgas 20

21. Capex by purpose – APT Allgas Earlier AA period (actual) Next AA period (as proposed/accepted) 21

22. Regulatory asset base – Envestra 22

23. Capital expenditure - Envestra Envestra proposed a 71% real increase in capex compared to the earlier AA period –due largely to Envestra’s 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

24. Total capex - Envestra 24

25. Capex by purpose - Envestra 25

26. Mains replacement capex - Envestra 26

27. 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

28. Regulatory depreciation – APT Allgas 28

29. Regulatory depreciation - Envestra 29

30. 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 AER’s draft decision results in a 12% real increase in opex compared the earlier AA period. 30

31. Total opex – APT Allgas 31

32. 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 AER’s draft decision results in an 11% real reduction in opex compared to the earlier AA period. 32

33. Base year costs - Envestra 33

34. Total opex - Envestra 34

35. 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

36. APT Allgas residential customer numbers forecast 36

37. APT Allgas average residential consumption forecast 37

38. Demand forecast - Envestra For the most part, the proposed demand forecasts are reasonable. AER adjustments: –average gas usage for residential customers 38

39. Envestra residential customer numbers forecast 39

40. Envestra average residential consumption 40

41. 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

42. Consultant advice Cost of capital: Professor Kevin Davis Opex and capex forecasts: Wilson Cook Labour cost growth: Access Economics Demand forecasts: ACIL Tasman 42

43. Timeline Release of draft decisions17 February 2011 Public forum on draft decisions1 March 2011 Revised proposals to be submitted23 March 2011 Submissions on draft decisions due21 April 2011 Release of final decisionsLate May 2011 43