Default price-quality paths for gas
pipeline services
Briefing on the Commission’s final decision
for financial market analysts
28 February 2013
Overview
Default price-quality paths for gas pipeline businesses
1. Context for the default price-quality paths
2. Key components of our decision
3. The price paths we have set for each business
4. Differences between the revised draft and final decisions
5. The quality standards we have set for each business
6. Overview of the approach we have used to set the price paths
2
Context for the default paths
We are required to set default price-quality paths under the new
Part 4 regime
–
New Part 4 specific purpose statement to guide us in setting prices
–
Input methodologies define key “building blocks” we must use to set the
default price-quality paths
–
Price path is set based on current and projected profitability of each
supplier
The default price-quality paths apply to:
3
–
GasNet, Powerco, and Vector’s gas distribution businesses; and
–
Maui and Vector’s gas transmission businesses.
Key components of our decision
•
Regulatory period set at 4 years, 3 months to apply from 1 July 2013 to
30 Sept 2017.
•
Price path applied as a revenue cap for transmission businesses and a
price cap for distribution businesses
•
4
–
Starting prices set based on current and projected profitability using
re-determined input methodologies
–
Rate of change for the price path: ‘X’ set at zero for CPI-X
–
No alternative rates of change or claw-back.
Quality standards based on emergency response times.
Profitability assessment with no price reset
Forecast revenues minus costs (incl. capital costs) – 01/07/13 to 30/09/2017 (no reset)
GasNet: -$0.3m
Powerco: -$7.1m
Vector Distribution:
+$56.5m
MDL: +$1.6m
Vector Transmission:
+$135.4m
5
Likely adjustments for each business
Adjustments for the first full pricing year of the regulatory period
GasNet
2%
Powerco
4%
The adjustments will be slightly larger if they are delayed
until the start of the supplier's next pricing year.
MDL
-1%
This chart shows the size of the average
adjustment to each supplier's price,
before inflation, if the adjustments are
made at the start of the regulatory
period, ie, 1 July 2013.
Vector Distribution
-18%
These adjustments are based on the current and
projected profitability of each supplier.
6
Vector Transmission
-29%
No alternative rates of change & no clawback
Alternative rates of change are available to avoid price shocks to
consumers, or to prevent undue financial hardship to suppliers
– Increases for Powerco, GasNet and Maui Development are below the levels
we have previously considered for price shocks to consumers.
– Vector have not provided any evidence to suggest that the downward
adjustment will result in undue financial hardship.
Claw-back is available where suppliers have increased their
prices above CPI over the period 1/1/2008 to 28/2/2013
– The revised draft proposed to apply claw-back to GasNet for increases above
CPI over the period 1 January 2008 to 30 September 2012.
– Our final decision has no claw-back as the assessment of GasNet’s current and
projected profitability suggests these increases were necessary to maintain a
reasonable rate of return.
7
Differences from the revised draft
Changes to the price path between the revised draft decision and the
final decision are minor.
• Distribution
– little difference between the final and the revised draft decision.
• Transmission
– MDL’s maximum allowable revenue in the first assessment period has
increased by $2.6m, largely as a result of changes in the allowance for
operating expenditure and our forecast of changes in revenue in constant
prices.
– Vector Transmission’s maximum allowable revenue for the first assessment
period has decreased by $2.1m, largely as a result of changes in the
allowances for capital expenditure and operating expenditure.
8
Differences from the revised draft
Present value of revenues over the regulatory period from the revised draft decision to the
final decision
400
350
300
250
Final
200
Draft
150
100
50
GasNet
9
Powerco
Vector_Dist
MDL
Vector_Trans
Quality standards for each business
Quality Standards set for emergency response time
– suppliers of gas pipeline services must take 180 minutes or less to respond to
any emergency; and
– gas distributors must take 60 minutes or less to respond to 80% of
emergencies.
Our preferred option is to also establish quality standards based
on reliability
– we consider reliability as the most important measure of the level of service
that suppliers should be providing to consumers
– however, we currently have little data to establish robust reliability targets.
By contrast response times to emergencies targets can be set
independently of historical time series data, and are based on
industry knowledge
10
WACC
We have used a vanilla WACC of 7.44% (cost of capital
determination NZCC38)
– We estimated the vanilla WACC as at 1 December 2012
– Risk-free rate and debt premium using data from the month of
November 2012
Parameters used to estimate the WACC for DPPs for gas pipleline services
(as at 1 December 2012)
Risk-free rate (5 year)
Debt premium (5 year)
Leverage
Debt issuance costs
Asset beta
Equity beta
TAMRP
Cost of equity
Cost of debt
11
Estimate
2.88%
2.15%
44%
0.35%
0.44
0.79
7.00%
7.60%
5.38%
Vanilla WACC estimates:
Mid-point estimate
75th percentile estimate
6.63%
7.44%
How we forecast capex
We use suppliers’ own forecasts of up to a 20% increase over historic
levels for both network and non-network capex
– We rely on each supplier’s capex forecast because suppliers are well placed to
forecast required capex
– We have used a 20% limit as solely relying on suppliers’ forecasts would create an
incentive to bias their forecasts to increase their starting price
– Non-network capex updated from draft based on each supplier’s historic
expenditure
– Change in input prices based on capital goods price index
12
Reasons for limiting increases in capex
Relying on suppliers’ forecasts would create an incentive to bias their
forecasts to increase their starting price
– Customised price-quality paths can address material step changes in capex
Maui Development and Vector forecasts included capex increases
over 20%. They have the option to either:
– apply for a customised price-quality path
– undertake these projects within the DPP price cap
– defer these projects
Note that even if we used Vector’s capex projections, its price
decrease would still be 19%
13
Projected growth in network capex
Chart A.1 Constant price increase in capex allowance (2012-2017) compared to the historical average
(2008-2011) network capex
GasNet
12.8%
PowerCo
Vector Distribution
19.3%
-8.7%
MDL
Vector Transmission
14
20.0%
13.0%
How we forecast opex
Opex forecasts for both network and non-network are based on
actual opex for 2010/11. We have
– considered impact of changes in network scale on opex
– assumed operating efficiency growth to be zero
– based the change in input prices on weighted average of forecast of labour
cost index and producer price index
– included known factors not captured elsewhere in modelling (eg, insurance
costs, compressor fuel, and compliance costs)
15
How we forecast opex
Distribution network scale
– applied a scale elasticity of 0.98 based on forecasts in historic trends in
network length and customer numbers (based on the relationship between
scale and opex of gas distributors in Australia and NZ).
Transmission network scale
– assumed that operating expenditure is not affected by changes in scale.
16
Projected growth in opex
Projected growth in operational expenditure from 2012 to 2017
Gasnet
Powerco
Vector (Distribution)
MDL
Vector (Transmission)
0%
5%
10%
Total change in forecast opex (excl. out of trend factors)
17
15%
Change in opex input prices
20%
25%
Change due to network scale effects
30%
How we forecast constant price revenue for gas distributors
• We forecast revenue from residential, commercial, and
industrial users, broken down into the two types of billed
quantity all three distributors use
• Forecasts of billed quantities of gas are based on the gas
supply and demand scenarios for the Gas Industry Company
Limited, and historic trends in distributors’ gas quantities
• Forecasts of the number of users billed for their connection are
based on extrapolating each supplier’s historic trends
18
Constant price revenue 2012-2017 (distribution)
Projected constant price revenue growth for gas distribution businesses from
2012 to 2017
GasNet
Powerco
Vector Distribution
-4%
-3%
-2%
-1%
Change in constant price revenue
Change from commercial users
19
0%
1%
2%
3%
4%
Change from industrial users
Change from residential users
5%
6%
Role of constant price revenue for gas transmission
• We have set revenue caps for both gas transmission businesses
• We do not require a forecast of constant price revenue for
setting starting prices for gas transmission business
• However, we have developed forecasts for assessing
compliance and to illustrate the size of starting price
adjustments in percentage terms
20
How we derive smoothed price path
• Calculate present value of building blocks allowable revenue
from 1 July 2013 to 30 September 2017 (4 years 3 months)
• Derive a smoothed path taking account of forecast changes in
– prices (CPI-X) where X = 0
– quantities (distribution only) derived from forecast of constant price
revenue
• Compliance will be assessed on a pricing year basis
– For all suppliers but Maui Development this results in a 15 month
initial assessment period from 1 July 2013 to 30 September 2014
– For Maui Development 3 month assessment period at the end of the
regulatory period (1 Jul 2017 to 30 September 2017)
21
Questions?
For more information
Please contact: Karen Murray
[email protected]
Or visit:
http://www.comcom.govt.nz/initial-default-price-quality-path/
For information on:
•The revised draft decision
•The 2013-17 default price-quality path
Or visit:
http://www.comcom.govt.nz/additional-input-methodologies-forelectricity-and-gas-dpps/
For information on:
•The re-determined input methodologies
22