Victorian advanced metering infrastructure
roll-out
AMI budgets 2009-11 and charges 2010-11
AER draft determination
Public forum
Melbourne
21 August 2009
Presentation outline
•
•
Introduction
AMI budgets
–
–
•
AMI charges
–
–
•
•
Order in Council tests and AER processes
areas of initial concern to the AER and its draft
determination
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
Introduction
• 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
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
Budget application
Scope test
5C.2
Is activity within scope?
AER not obliged to approve,
but may do so if DNSP justifies
net benefit of activity
No
Yes
Is it a contract cost?
No
Yes
Did contract arise out of a
competitive tender process?
Prudent test
5C.3
Is it more likely than not that
expenditure will be incurred, or
expenditure does not substantially
depart from the commercial standard?
AER not obliged to accept, but
may do so if DNSP justifies net
benefit of activity
No
Yes
Note: OIC presumes “yes” in each decision point unless AER establishes otherwise
No
AER must approve
Yes
AER must approve
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 concernAMI 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 2009-11
– vendor insurance requirements built into AMI contracts
– self insurance also provided in ESCV’s EDPR
•
Equity raising costs
– United Energy proposed $7.1m over 2009-11
– 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
147.92
147.17
-0.5%
Jemena
146.72
146.72
0.0%
Powercor
330.01
328.25
-0.5%
SP AusNet
311.80
304.18
-2.4%
United Energy
234.56
227.09
-3.2%
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 2009-11; 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 2006-08:
–
–
–
–
–
IMRO costs
AMI net revenue or costs from 2006-08
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 underrecovery 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 concerncharges applications
Regulatory accounts
• Issues with all DNSPs charges applications
• Reported actual costs (2006-08) 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 10.01 per cent vs draft
determination AMI WACC at 8.96 per cent
CitiPower issues
• AER did not accept regulatory accounts data for 2006-08
• AER reduced CitiPower revenues by $4.4m for 2009-11
• CitiPower chose to under recover revenue in 2010 –
requires compensating increase in 2011 charges
– Consistent with revised OIC approach
– AER did not smooth 2011 price, as not permitted to compel a
DNSP to under recover in any one year
• AER therefore reduced proposed 2011 charges (-12.3%)
– to align with draft determination revenues in NPV terms
CitiPower metering charges
proposed vs draft decision
Annual metering charge ($/NMI)
2010
2011
proposed
Decision
proposed
Decision
Single phase
104.79
104.79
128.79
113.00
3 phase direct connected
136.98
136.98
168.36
147.72
3 phase current Transformer connected
172.99
172.99
212.62
186.55
CitiPower metering charges
indicative price change from 1 January
Meter type
2010
2011
Single phase non-off peak
236%
8%
Single phase off-peak
166%
8%
3 phase direct connected
76%
8%
3 phase CT connected
64%
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)
2010
2011
proposed Decision Proposed decision
Single phase single element
134.63
67.79
136.70
130.52
Single phase single element, with
contactor
134.63
67.79
136.70
130.52
3 phase direct connected
165.46
83.31
167.99
160.39
3 phase current Transformer
connected
183.95
92.62
186.77
178.32
Jemena metering charges
indicative price change from 1 January
Meter type
2010
2011
Single phase single element
151%
93%
Single phase single element with contactor
8%
93%
3 phase direct connected
-6%
93%
278%
93%
3 phase CT connected
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 2010.
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)
2010
proposed
2011
decision proposed decision
Single phase
96.67
96.67
125.17
111.48
3 phase direct connected
127.50
127.5
165.09
147.04
3 phase current Transformer
connected
168.94
168.94
218.74
194.82
Powercor metering charges
indicative price change from 1 January
Meter type
2010
2011
Single phase non-off peak
177%
15%
Single phase off-peak
100%
15%
3 phase direct connected
40%
15%
3 phase CT connected
31%
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
2010. 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)
2010
2011
proposed decision proposed decision
Single phase, single element with
contactor
76.96
75.88
110.18
94.23
Single phase, 2 element with
contactor
87.92
86.69
125.87
107.66
Multi-phase, 1 contactor (1 load
control)
102.12
100.69
146.19
125.04
Multi-phase, 2 contactors (2 load
controls)
113.29
111.70
162.18
138.71
Multi-phase Current Transformer
connected
145.87
143.82
208.82
178.60
SP AusNet metering charges
indicative price change from 1 January
Meter type
2010
2011
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 connected
40%
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)
2010
2011
proposed decision proposed decision
Single phase single element
88.44
71.80
95.12
92.12
Single phase single element,
with contactor
90.29
73.30
97.09
94.02
3 phase direct connected
99.78
81.01
107.28
103.89
3 phase current Transformer
connected
106.42
86.40
114.43
110.82
United Energy metering charges
indicative price change 1 January
Meter type
2010
2011
Single phase single element
222%
28%
Single phase single element with
contactor
180%
28%
3 phase direct connected
120%
28%
3 phase CT connected
86%
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] Based on single phase single element non off-peak meter, read quarterly
in 2009, approved by the ESCV
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?