hugh grant (ccp4) presentation to the aer on powerlink's 2018-22 revenue proposal march 2016
TRANSCRIPT
![Page 1: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/1.jpg)
]"
AER$Public$Forum$15th$March$2016"
Preliminary"Perspec/ves""
Powerlink’s"2018922"Revenue"Proposal"
Hugh$Grant$$AER$Consumer$Challenge$Panel$Member$
1"
![Page 2: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/2.jpg)
"
OBSERVATIONS"OF"CURRENT""""""""REGULATORY"PERIOD"(2013917)"OUTCOMES"
2"
![Page 3: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/3.jpg)
Observa/ons"on"Current"Regulatory"Period"Outcomes"
! Powerlink"is"achieving"return"on"equity"levels"much"higher"than"the"AER’s"assumed"return"on"equity"
! Powerlink"will"achieve"a"total"of"around"$300"million"in"‘windfall"gains’"over"the"current"period,"due"to"its"revenue"allowances"being"based"on"capex"that"it"did"not"require"
! Many"of"the"consumers’"cri/cisms"of"Powerlink’s"2013917"revenue"determina/on"have"been"proven"to"be"correct"
! Powerlink"has"con/nued"to"receive"very"high"bonuses"from"the"AER’s"Service'Target'Performance'Incen2ve'Scheme'(STPIS)'
! Returns"on"RAB"drive"Powerlink’s"prices"to"a"greater"extent"than"all"other"Australian"networks"9"accoun/ng"for"77%"of"Powerlink’s"revenue"
3"
![Page 4: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/4.jpg)
""
PROPOSED"REVENUE"
4"
![Page 5: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/5.jpg)
Powerlink"Revenue"Building"Block"Trends"
*"2002907"figures"pro9rated"to"5"years"(rather"than"6"years)"for"comparison"purposes"**"Based"on"the"average"interest"rates"that"applied"in"the"previous"3"regulatory"periods"
0"
1000"
2000"
3000"
4000"
5000"
6000"
2002)07*" 2008)12" 2013)17"" 2018)22"Proposed"
2018)22"Underlying**"
Return"on"Capital" Opex" DepreciaCon" Tax"
5"
![Page 6: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/6.jpg)
High"Level"Observa/ons"on"Powerlink’s"Proposed"Revenue"
! Powerlink"is"con/nuing"to"propose"very"high"opex"levels"
! Powerlink"is"proposing"a"68%"increase"in"deprecia/on"allowance"compared"to"the"current"period"
! If"interest"rates"had"remained"at"the"same"level"as"the"previous"regulatory"periods,"Powerlink’s"proposed"revenue"and"prices"would"be"around"25%"higher"
! Returns"on"past"investments"will"con/nue"to"drive"Powerlink’s"future"prices"9"accoun/ng"for"71%"of"Powerlink’s"proposed"2018922"revenue"
6"
![Page 7: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/7.jpg)
Building"Block"Revenue"Components:"The"AER’s"Ability"to"Influence"
Return"on"Capital"
""""
Deprecia/on"
Opex"
RAB"Infla/on"less"deprecia/on"
="x"
Tax"Allowance"
Incen/ve"Payments"
Weighted"Average"Cost"of"Capital"(WACC)"
"""
Opening"Regulated"Asset"Base"
(RAB)"
Total""Revenue"
Issues"over"which"the"AER"has"strong"discre/on"under"the"current"rules""Issues"over"which"the"AER"has"limited"discre/on"under"the"current"rules"
+"+"+"+"
+"
Capex"+"
Returns""on""RAB"
7"
![Page 8: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/8.jpg)
"
RAB"GROWTH"
8"
![Page 9: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/9.jpg)
Powerlink:"RAB"Growth"
0"
1000"
2000"
3000"
4000"
5000"
6000"
7000"
8000"
2000"2001"2002"2003"2004"2005"2006"2007"2008"2009"2010"2011"2012"2013"2014"2015"
Sources:"AER"Roll"Forward"model"and"Powerlink’s"2018922"Revenue"Proposal"Powerlink’s"2015"RAB"is"assumed"to"be"$7.149"billion"as"stated"in"Powerlink’s"2018922"revenue"proposal,"rather"than"$7.64bn"assumed"in"the"AER’s"2013917"Revenue"Determina/on"
9"
![Page 10: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/10.jpg)
Comparison"with"SP"AusNet’s"RAB"Growth"
Powerlink’s"2015"RAB"is"assumed"to"be"$7.149"billion"as"stated"in"Powerlink’s"2018922"revenue"proposal,"rather"than"$7.64bn"assumed"in"the"AER’s"2013917"Revenue"determina/on"
0"
1000"
2000"
3000"
4000"
5000"
6000"
7000"
8000"
Powerlink" SP"AusNet"
1:Jul:99" 30:Jun:15"
10"
![Page 11: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/11.jpg)
Powerlink’s"Extraordinary"RAB"Growth"
Over"the"past"16"years:"
! Powerlink’s"RAB"increased"to"around"4"/mes"its"1999"value""
! By"comparison,"SP"AusNet’s"RAB"grew"to"around"1.7"/mes"its"1999"value"
"
11"
![Page 12: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/12.jpg)
Powerlink"RAB:"Normalised"for"Peak"Demand"
0"0.1"0.2"0.3"0.4"0.5"0.6"0.7"0.8"0.9"1"
2001"2002"2003"2004"2005"2006"2007"2008"2009"2010"2011"2012"2013"2014"
Powerlink*RAB/Pk*Demand*
12"
![Page 13: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/13.jpg)
Powerlink"RAB:"Normalised"for"Energy"Delivered"
0"
0.02"
0.04"
0.06"
0.08"
0.1"
0.12"
0.14"
0.16"
2001"2002"2003"2004"2005"2006"2007"2008"2009"2010"2011"2012"2013"2014"
Powerlink*RAB/Energy*Delivered*
13"
![Page 14: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/14.jpg)
Exogenous"Factors"Do"Not"Explain"Powerlink’s"Higher"Investment"Levels"
! In"2012,"the"EUAA"performed"a"study"into"the"Australian"transmission"networks’"different"investment"levels"
! That"study"concluded"that"Powerlink’s"higher"investment"levels"can"not"be"explained"by"exogenous"factors"(e.g."differences"in"customer"density,"demand"growth,"reliability"standards"or"ageing"assets)""
! It"concluded"that"Powerlink’s"investment"levels"were"much"higher"than"the"other"transmission"networks"9"both"in"absolute"terms,"and"aker"normalisa/on"for"growth"in"network"outputs"such"as"peak"demand"and"energy"delivered"
Source:"A"comparison"of"outcomes"delivered"by"electricity"transmission"network"service"providers"in"the"Na/onal"Electricity"Market,"EUAA"2012"" 14"
![Page 15: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/15.jpg)
Capital"Efficiency:""Queensland"Govt"Independent"Review"Panel"Findings"
''
“An'industry'engineering'culture'biased'toward'expanding'the'network'infrastructure'and'enlarging'the'capital'base'of'the'NSPs'='driving'inefficient'expenditure”"''
“A'deficient'commercial'model'in'that'there'was'no'rigorous'capital'ra:oning'by'the'Government,'as'shareholder'and'provider'of'capital,'to'
guide'investment'decisions”"'
“A'regulatory'model'that'does'not'allow'the'Australian'Energy'Regulator'(AER)'to'drive'the'networks'to'deliver'efficient'capital'and'opera2ng'programs”'''
'
Source:"Queensland"Government"Independent"Review"Panel"(IRP)"on"Network"Costs"""
15"
![Page 16: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/16.jpg)
Prudency/Efficiency"of"Load"Growth"Capex"Average$Annual$LoadBDriven$Capex$Divided$by$Average$Annual$Demand$Growth$for$Australia’s$Transmission$Networks"
Source:"A"comparison"of"outcomes"delivered"by"electricity"transmission"network"service"providers"in"the"Na/onal"Electricity"Market,"EUAA"2012""
16"
![Page 17: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/17.jpg)
Over9Es/ma/on"of"Demand"'
“Another'factor'contribu2ng'to'the'escala2on'in'capital'programs'has'been'
the'consistent'over<'es:ma:on'of'demand'by'the'NSPs'
“'The'Panel'also'notes'that'the'current'revenue'cap'control'mechanism'places'volume'risk'on'customers”'
“Where'demand'is'over=es2mated,'capital'programs'will'be'excess'to'
requirements'and'network'tariffs'to'customers'will'increase'during'the'regulatory'control'period'to'ensure'the'NSPs'are'able'to'recover'the'allowable'revenue”$
""
Source:"Queensland"Government"Independent"Review"Panel"(IRP)"on"Network"Costs""17"
![Page 18: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/18.jpg)
Excessive"Allowances"Due"to"Demand"Forecas/ng"Errors"
Source:"A"comparison"of"outcomes"delivered"by"electricity"transmission"network"service"providers"in"the"Na/onal"Electricity"Market,"EUAA"2012""
18"
![Page 19: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/19.jpg)
Powerlink"Revenue"Growth"
0"
200"
400"
600"
800"
1000"
1200"
2000"2001"2002"2003"2004"2005"2006"2007"2008"2009"2010"2011"2012"2013"2014"2015"2016"2017"
Powerlink*Revenue*Growth*
19"
![Page 20: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/20.jpg)
"
RETURN"ON"CAPITAL"
20"
![Page 21: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/21.jpg)
Powerlink:""Return"on"Capital"Trend"
0"
500"
1000"
1500"
2000"
2500"
3000"
3500"
2002'07*" 2008'12" 2013'17"" 2018'22"Proposed"
2018'22"Underlying**"
*"2002907"figures"pro9rated"to"5"years"(rather"than"6"years)"for"comparison"purposes"**"Based"on"the"average"interest"rates"that"applied"in"the"previous"3"regulatory"periods"
21"
![Page 22: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/22.jpg)
The"AER’s"Methodology"for"Determining"Return"on"Capital"Allowances"
! Australia’s"electricity"networks"are"extraordinarily"profitable"
! Many"stakeholders"have"repeatedly"cri/cised"the"AER"for"applying"excessive"WACCs"when"calcula/ng"the"networks’"‘return"on"capital’"allowances"
! However,"excessive"WACCs"are"only"part"of"the"problem"
! A"key"driver"of"the"networks’"extraordinary"profitability"levels"is"deficiencies"with"the"approach"to"determining"the"networks’"""""‘return"on"capital’"allowances"
! In"essence,"the"AER’s"methodology"for"determining"its"%"WACCs"is"inconsistent"with"the"capital"base"it"applies"its"WACCs"to"
! This"is"par/cularly"an"issue"for"the"AER’s"return"on"equity"allowances"22"
![Page 23: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/23.jpg)
The"AER’s"Approach"To"Determining"‘Return"on"Equity’"Allowances"
$DeterminaMon$Of$The$Percentage$Return$On$Equity$(ROE)$
The"AER"es/mates"the"percentage"return"on"equity"that"it"considers"investors"require"to"invest"in"businesses"with"similar"risk"profiles"to"the"electricity"networks"$MulMplying$The$Percentage$Return$On$Equity$To$A$TheoreMcal$Equity$Base"
The"AER"then"calculates"the"network’s"‘return"on"equity’"allowances"by"mul/plying"the"percentage"ROE"to"a"theore/cal"equity"base"9"which"the"AER"assumes"amounts"to"40%"of"the"network’s"RAB"value"
23"
![Page 24: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/24.jpg)
The"AER’s"Approach"To"Determining"‘Return"on"Debt’"Allowances"
$DeterminaMon$Of$The$Percentage$‘Return$On$Debt’"
! The"AER"es/mates"the"percentage"return"on"debt"that"it"considers"reflects"the"interest"rates"that"the"networks"pay"when"they"borrow"money"to"invest"in"the"business""
! This"is"intended"to"reflect"the"interest"rates"that"debt"providers"charge"businesses"with"similar"risk"profiles"to"the"electricity"networks"
$MulMplying$the$Percentage$‘Cost$of$Debt’$To$A$TheoreMcal$Debt$Base"
! The"AER"then"calculates"its"‘return"on"debt’"allowances"by"mul/plying"the"percentage"interest"rate"to"a"theore/cal"debt"base"9""which"the"AER"assumes"amounts"to"60%"of"the"network’s"RAB"value"
24"
![Page 25: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/25.jpg)
The"Networks’"Actual"Investment"Levels"Are"Much"Lower"
! The"networks’"actual"investment"levels"are"much"lower"than"the"AER’s"assump/ons"
! This"results"in"the"AER"providing"return"on"capital"allowances"much"higher"than"the"required"levels"
! This"is"par/cularly"an"issue"for"the"networks’"return'on'equity"allowances"
25"
![Page 26: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/26.jpg)
Powerlink’s"Actual"Capital"Bases"Compared"to"Theore/cal"Bases"
26"
![Page 27: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/27.jpg)
Powerlink"9"Theore/cal"vs"Actual"Investment"Levels"$Total$Investment"
! Powerlink’s"RAB"valua/on"is"1.55"/mes"its"actual"total"investment""! This"is"predominantly"due"to"the"RAB"infla/on"–"i.e."Powerlink’s"RAB"value"
includes"‘ar/ficial"capital’"that"it"has"not"invested"
Equity$Investment"
! The"AER’s"assumed"equity"investment"for"Powerlink"is"3.9"/mes"its"actual"equity"investment"
Debt$Investment"
! The"AER’s"assumed"debt"level"for"Powerlink"is"over"10%"higher"than"its"actual"debt"level"
27"
![Page 28: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/28.jpg)
Theore/cal"vs"Actual"Debt/Equity"Ra/os"
$As$a$percentage$of$its$actual$investment:$
! Powerlink"funded"16%"of"its"investment"from"equity""
! Powerlink"funded"84%"of"its"investment"from"debt"
As$a$percentage$of$RAB:$
! Powerlink’s"equity"investment"amounts"to"10.4"%"of"RAB,"rather"than"40"%"assumed"by"the"AER"
! Powerlink’s"debt"amounts"to"54.4"%"of"RAB,"rather"than"60"%"assumed"by"the"AER"
28"
![Page 29: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/29.jpg)
Outcomes"
! The"AER"is"providing"‘return"on"equity’"allowances"to"Powerlink"of"at"least"3.9"/mes"the"required"level"
! The"AER"is"providing"‘return"on"debt’"allowances"to"Powerlink"of"over"10%"above"the"required"level"
29"
![Page 30: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/30.jpg)
Powerlink’s"Actual"Return"on"Equity"
"Return"on"Equity"="""Net"Profit"Aker"Tax"(NPAT)"" " " " " """""""""""""Shareholder"Equity"
Shareholder"Equity"is"the"networks"actual"equity"investment"–"i.e."the"sum"of"the"networks’"share"capital"plus"retained"earnings"
30"
![Page 31: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/31.jpg)
Powerlink"–"Historical"Annual"Profits"and"Dividends"
0"
100"
200"
300"
400"
500"
600"
2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014"
Net"Profit"A4er"Tax"(NPAT)" Dividends"
Source:"Powerlink’s"Audited"Annual"Financial"Statements" 31"
![Page 32: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/32.jpg)
Powerlink:"Historical"Equity"Trend"
0"
100"
200"
300"
400"
500"
600"
700"
800"
900"
2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014"
Share"Capital"($M)" Retained"Earnings"($M)"
Source:"Powerlink’s"Audited"Annual"Financial"Statements" 32"
![Page 33: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/33.jpg)
Powerlink"Actual"Return"on"Equity"
0%#
10%#
20%#
30%#
40%#
50%#
60%#
70%#
80%#
2001#2002#2003#2004#2005#2006#2007#2008#2009#2010#2011#2012#2013#2014#
Actual#Return#on#Equity# AER#Theore>cal#Return#on#Equity#
33"
![Page 34: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/34.jpg)
Powerlink’s"Actual"Returns"9"Observa/ons"
! Over"the"past"15"years"Powerlink’s"annual"profits"have"grown"strongly"
! In"some"years"there"were"significant"spikes"in"Powerlink’s"profits""
! At"no"/me"over"the"past"15"years"did"Powerlink"experience"low"profits"or"losses"(unlike"all"other"businesses"of"its"size)"
! Powerlink"has"consistently"extracted"very"high"dividend"levels,"with"dividend"payout"ra/os"averaging"around"90%"
! Consequently,"Powerlink"has"reinvested"minimal"amounts"of"retained"earnings"into"the"business"
34"
![Page 35: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/35.jpg)
Powerlink’s"Actual"Returns"9"Observa/ons"
! Powerlink’s"extraordinary"growth"has"been"predominantly"funded"by"increased"debt"
! Powerlink’s"RAB"grew"by"around"4"/mes"with"no"change"to"its"share"capital"of"$401"million""
! Funding"such"levels"of"growth"through"debt"would"not"be"possible"for"businesses"that"operate"in"any"other"sector"of"the"Australian"economy""
! The"funding"constraints"that"apply"to"commercial"businesses"would"require"them"to"inject"significant"levels"of"equity"to"fund"such"growth"levels"
35"
![Page 36: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/36.jpg)
The"Implica/ons"of"the"Recent"TransGrid"Sale"
! In"November"2015,"a"number"of"investment"consor/ums"arempted"to"purchase"the"NSW"transmission"network"(TransGrid)"
! It"was"sold"for"$10.3"billion"–"approximately"165%"of"TransGrid’s"RAB"value"
! Over"the"past"two"years,"Australia’s"electricity"networks"have"made"many"asser/ons"that"the"AER’s"return"on"equity"allowances"would:"! Not"enable"them"to"recover"efficient"financing"costs""! Make"them"unarrac/ve"to"equity"investors""! Result"in"lower"investment"in"the"network""! Significantly"increase"their"financing"risks"
! The"extraordinary"sale"price"achieved"by"TransGrid"makes"a"mockery"of"those"claims"
36"
![Page 37: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/37.jpg)
The"Implica/ons"of"the"Recent"TransGrid"Sale"
! All"informed"investors"and"industry"analysts"are"aware"that"the"electricity"networks’"statements"to"regulators,"policy"makers"and"consumers"are"very"different"to"their"statements"to"investors"
! A"review"of"the"Spark'Infrastructure"equity"investment"prospectus"*"outlines"why"investors"are"queuing"up"to"pay"such"large"premiums"above"the"networks’"regulatory"values""
! Informed"investors"and"industry"analysts"were"not"in"the"least"surprised"that"TransGrid"sold"for"165%"of"its"regulatory"value"
! They"know"that"they"will"be"provided"with"‘return"on"equity’"allowances"of"around"4"/mes"the"level"that"they"actually"require"to"invest"in"the"networks"
*Spark"Infrastructure"9"Equity"Investment"in"TransGrid"and"Equity"Raising,"25"November"2015""37"
![Page 38: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/38.jpg)
"
POWERLINK"INVESTMENT"RETURN"OVER"15"YEARS"
38"
![Page 39: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/39.jpg)
Powerlink’s"Return"on"Equity"Over"The"Past"15"Years"
0"1000"2000"3000"4000"5000"6000"7000"8000"9000"10000"
Equity"Investment" Returns"
Dividends"($M)" Shareholder"Equity"($M)"
Shareholder"Equity"is"calculated"as"Business"Value"less"Debt"The"Current"Business"Value"has"been"calculated"as"165%"of"RAB,"as"per"the"recent"TransGrid"sale""
39"
![Page 40: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/40.jpg)
Powerlink’s"Actual"Total"Returns """
""""""The"Queensland"Government’s"$401"million"equity"investment"""""in"Powerlink"has"accrued"total"returns"of"$9.4"billion,"i.e.:"$$$$$$It$has$$returned$over$23$Mmes$the$equity$investment$
40"
![Page 41: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/41.jpg)
"HOW"DOES"THIS"COMPARE"WITH"THE"RETURNS"BEING"REALISED"BY"BLUE9CHIP"ASX50"INVESTMENTS?"
41"
![Page 42: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/42.jpg)
Comparison"of"Powerlink’s"Returns"With"ASX"50"Companies"
0"1,000"2,000"3,000"4,000"5,000"6,000"7,000"8,000"9,000"
10,000"
Powerlink"Qld" Woolworths" NAB" BHP" Telstra" Lend"Lease"
Dividends"($M)" Shareholder"Value"($M)"
42"
![Page 43: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/43.jpg)
Powerlink’s"Returns"Compared"to"Blue"Chip"ASX50"En//es """Over"the"past"15"years,"the"Queensland"government’s"$401"million""investment"in"Powerlink"has"delivered:"
! 23"/mes"the"returns"achieved"by"the"Australian"construc/on"sector"(Lend"Lease)"
! 15.5"/mes"the"returns"achieved"by"the"Australian"telecommunica/ons"sector"(Telstra)"
! 10.5"/mes"the"returns"achieved"by"the"Australian"minerals"and"resources"sector"(BHP)"
! 10"/mes"the"returns"achieved"by"the"Australian"banking"sector"(NAB)"
! 3.6"/mes"the"returns"achieved"by"Australia’s"most"profitable"supermarket"(Woolworths)"
No"other"ASX"50"stock"comes"close"to"Powerlink’s"returns"
These$extraordinary$returns$are$being$achieved,$despite$Powerlink$being$the$most$inefficient$transmission$network$in$Australia$ 43"
![Page 44: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/44.jpg)
Comparison"of"Powerlink’s"Returns"with"ASX"50"Companies"
Powerlink"is"an"incredible"investment"–"from"both"an"income"and"a"capital"growth"perspec/ve"
Income$$! Powerlink’s"is"typically"delivering"20930%"return"on"equity"! Most"ASX50"companies"have"struggled"to"deliver"5%"
Capital$Growth$! The"Queensland"government’s"$401"million"equity"investment"in"
Powerlink"is"now"valued"at"around"$7.4"billion"–$i.e.$it$has$grown$by$over$18$Mmes$over$the$past$15$years$
! Most"ASX"50"companies"have"struggled"to"grow"their"shareholder"value"by"50%"over"that"period,"with"the"share"prices"of"many"companies"actually"reducing,"e.g.:"• Telstra’s"share"price"dropped"by"11%"• Lend"Lease’s"share"price"dropped"by"30%" 44"
![Page 45: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/45.jpg)
"
WHAT"IS"DRIVING"THESE"OUTCOMES?"
45"
![Page 46: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/46.jpg)
Return"on"Equity"Determina/on"–"Na/onal"Electricity"Rule"Requirement""
The"‘Return"on"Equity’"es/ma/on"requirements"in"the"Na/onal"Electricity"Rules"(NER)"are"not"par/cularly"prescrip/ve:''6A.6.2'Return'on'Equity'
''(f)'The'return'on'equity'for'a'regulatory'control'period'must'be'''
'''''es2mated'such'that'it'contributes'to'the'achievement'of'the'allowed''
'''''rate'of'return'objec2ve'
'
''(g)'In'es2ma2ng'the'return'on'equity'under'paragraph'(f),'regard'must'
''''''be'had'to'the'prevailing'condi2ons'in'the'market'for'equity'funds'
"""Source:"Na/onal"Electricity"Rules"Chapter"6A,"Version"79,"Economic"Regula/on"of"Transmission"Services,"Clauses"6A62"(f)"and"(g),"Page"784"
""46"
![Page 47: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/47.jpg)
What"is"Driving"These"Outcomes?"
! These"AER’s"methodology"for"determining"its"%"ROE"is"inconsistent"with"the"capital"base"it"applies"its"%"ROE"to"
! The"AER"is"currently"es/ma/ng"that"investors"require"a"ROE"of"around"7.3%"to"invest"in"businesses"with"similar"risk"profiles"to"Australia’s"electricity"networks"
! This"7.3%"es/mate"has"been"determined"on"the"basis"of"the"%"return"that"equity"investors"require"on"their"actual$investment"
! For"example,"it"is"based"on"the"market"risk"premium"(MRP)"that"investors"require"on"their"actual"equity"investment"
! However,"the"AER"calculates"its"‘return"on"equity’"allowances"by"mul/plying"the"7.3%"to"a"theore/cal"equity"base""
! For"Powerlink,"that"theore/cal"equity"base"amounts"to"around"4"/mes"Powerlink’s"actual"equity"investment" 47"
![Page 48: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/48.jpg)
Recommenda/on"to"the"AER"
"
The"AER"needs"to"either:"
• Modify"its"return"on"equity"(ROE)"es/ma/on"methodology"to"reflect"that"the"%"ROE"will"be"applied"to"an"inflated"equity"base;"or"
• Apply"its"%"ROE"to"an"equity"base"that"is"more"reflec/ve"of"the"networks’"actual"equity"investment"–"which"is"clearly"much"lower"than"40%"of"RAB"
48"
![Page 49: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/49.jpg)
The"AER"Must"Not"Be"Distracted"by"Arempts"to"Confuse"the"Issue"
$
! The"AER"must"not"be"distracted"by"arempts"to"confuse"the"issue$
! For"example,"the"above"recommenda/on:"
! Is"not$challenging"the"requirement"to"applying"ar/ficial"infla/on"to"the"ongoing"RAB"revalua/ons"
! Is"not"challenging"the"AER’s"approach"to"applying"ar/ficial"infla/on"to"the"calcula/on"of"the"networks’"deprecia/on"allowances"
! The$fundamental$issue$is$that$AER’s$methodology$for$determining$its$%$ROE$is$inconsistent$with$the$capital$base$it$applies$it$to$
! That$is$what$is$driving$the$networks’$extraordinary$profitability$49"
![Page 50: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/50.jpg)
"
CAPEX"
50"
![Page 51: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/51.jpg)
"CAPITAL"EFFICIENCY"
51"
![Page 52: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/52.jpg)
Capital"Efficiency:""Queensland"Govt"Independent"Review"Panel"Findings"
''
“An'industry'engineering'culture'biased'toward'expanding'the'network'infrastructure'and'enlarging'the'capital'base'of'the'NSPs'='driving'inefficient'expenditure”"''
“A'deficient'commercial'model'in'that'there'was'no'rigorous'capital'ra:oning'by'the'Government,'as'shareholder'and'provider'of'capital,'to'
guide'investment'decisions”"'
“A'regulatory'model'that'does'not'allow'the'Australian'Energy'Regulator'(AER)'to'drive'the'networks'to'deliver'efficient'capital'and'opera2ng'programs”'''
52"
![Page 53: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/53.jpg)
Total"Costs"of"Australia’s"Transmission"Networks""
53"
![Page 54: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/54.jpg)
Powerlink’s"Excess"Network"Capacity"
! Powerlink’s"excessive"capex"programs"over"the"previous"decade"have"produced"significant"levels"of"excess"network"capacity"
! This"excess"capacity"will"ensure"that"Powerlink"con/nues"to"exceed"the"reliability"standard"requirements"for"many"years"to"come"
! The"AER"has"not"appropriately"considered"the"networks’"excess"capacity"in"its"recent"capex"determina/ons"
! This"issue"is"par/cularly"important"to"the"AER’s"assessment"of"Powerlink’s"capex"proposal""
54"
![Page 55: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/55.jpg)
"
REPLACEMENT"CAPEX"
55"
![Page 56: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/56.jpg)
Powerlink:"Historical/Proposed"Replacement"Capex"
0"
50"
100"
150"
200"
250"
2002&07" 2008&12" 2013&2017" 2018&22"
Powerlink*Repex*($M*average/year)*
Source:"""Powerlink" 56"
![Page 57: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/57.jpg)
What"Drove"Powerlink’s"Drama/c"Step"Change"in"Repex"in"2007?""
! A"review"of"Powerlink’s"jus/fica/ons"for"its"drama/c"step"change"in"repex"in"2007,"iden/fies"that"its"was"considered"to"be"a"“once"in"a"genera/on”"increase"
! However,"the"AER"has"subsequently"accepted"Powerlink’s"2008912"repex"levels"to"represent"“business"as"usual”"expenditure"
57"
![Page 58: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/58.jpg)
Key"Issues"with"Powerlink’s"Repex"Forecasts"! Insufficient"Demonstra/on"of"Outcomes"
o Powerlink"has"failed"to"demonstrate"the"outcomes"(e.g."system"performance"outcomes)"that"its"major"proposed"repex"expenditure"will"deliver"
! Not"Jus/fied"On"Actual"Asset"Condi/on"Informa/on"o Powerlink’"provides"very"scant"asset"condi/on"informa/on""o Rather,"it"is"heavily"reliant"on"statements"sugges/ng"that"its"assets"are"ageing"
! Insufficient"Considera/on"Of"Powerlink’s"Major"Repex"Spend"Over"The"Past"Decade"o Powerlink’s"extraordinary"repex"spend"over"the"past"decade"has"effec/vely"
‘pre9installed’"a"large"propor/on"of"its"future"repex"needs"
! Insufficient"Top9Down"Restraint"
! Insufficient"considera/on"of"Powerlink’s"excess"system"capacity"and"declining"system"u/lisa/on""
58"
![Page 59: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/59.jpg)
Key"Concerns"with"the"AER’s"Repex"Assessment"Process"
! Insufficient"considera/on"of"actual"asset"condi/on"informa/on"o Overly"reliant"on"asset"age"as"a"proxy"for"asset"condi/on"o The"AER’s"limited"considera/on"of"“Asset"Health”"indicators,"has"typically"involved"cursory"observa/ons"of"asset"u/lisa/on"and"remaining"life"trends""
! The"AER’s"process"is"overly"reliant"on"short9term"trend"analysis"and"acceptance"of"the"networks’"recent"asset"replacement"prac/ces""o The"AER"is"predominantly"sezng"repex"allowances"on"the"basis"of"the"networks’"repex"spend"levels"during"the"previous"period"–"which"have"not"been"demonstrated"to"be"efficient"
! Insufficient"considera/on"of"the"networks’"major"repex"spend"over"the"past"decade"
! Insufficient"considera/on"of"the"networks’"increasing"excess"capacity"and"declining"asset"u/lisa/on"levels"
"
59"
![Page 60: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/60.jpg)
Standard"Asset"Lives?"! The"networks"are"assuming"asset"lives"much"shorter"than"they"
actually"achieve"in"prac/ce"
! There"are"also"major"varia/ons"in"the"“standard"asset"lives”"being"used"by"Australia’s"electricity"networks"
! The"AER"is"providing"the"networks"with"too"much"discre/on"in"the"sezng"of"asset"lives""
! The"AER"needs"to"enforce"greater"consistency"in"the"determina/on"of"“standard"asset"lives”,"rather"than"con/nuing"to"allow"the"networks"to"choose"asset"lives"that"op/mise"their"returns"for"each"revenue"reset"
! There"are"also"significant"varia/ons"in"the"networks’"assumed"unit"prices"for"similar"assets,"sugges/ng"differences"in"rela/ve"efficiency"
60"
![Page 61: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/61.jpg)
"
CONTINGENT"PROJECTS?"
61"
![Page 62: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/62.jpg)
Con/ngent"Projects"
! Powerlink"is"proposing"$590"million"in"con/ngent"projects"
! This"would"increase"Powerlink’s"proposed"capex"by"around"60%"
! The"AER"needs"to"demonstrate"that"it"is"in"consumers’"long9term"interests"for"such"a"high"level"of"con/ngent"projects"to"be"determined"outside"of"the"revenue"determina/on"process"
62"
![Page 63: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/63.jpg)
BUSINESS IT CAPEX
63
![Page 64: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/64.jpg)
IT"Capex"9""Historical"and"Proposed"
0"
2"
4"
6"
8"
10"
12"
14"
2002(07" 2008(12" 2013(2017" 2018(22"
Business'IT'Capex'($M'average/year)'
Source:"Powerlink" 64"
![Page 65: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/65.jpg)
What"Drove"Powerlink’s"Drama/c"Step"Change"in"IT"Capex"in"2007?""
! A"review"of"Powerlink’s"jus/fica/ons"for"its"drama/c"step"change"in"IT"Capex"in"2007,"iden/fies"that"its"was"considered"to"be"a"“once"in"a"genera/on”"increase"
! However,"the"AER"has"subsequently"accepted"Powerlink’s"2008912"""IT"Capex"levels"to"represent"“business"as"usual”"expenditure"
65"
![Page 66: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/66.jpg)
Concerns with Powerlink’s Proposed Business IT Capex "
! So_ware/Hardware$Refresh$Program$($22M)$"
o Powerlink’s"jus/fica/on"for"this"major"expenditure"program"is"limited"to"two"sentences:"
'
“The'SoLware'/'Hardware'Refresh'program'aims'to'maintain'Powerlink’s'exis2ng'
Business'IT'hardware'and'soLware'assets'to'ensure'they'are'reliable'and'fit'for'purpose.''
The'program'seeks'to'replace'and'refresh'exis2ng'hardware'as'it'reaches'end'of'life'and'
manage'the'soLware'upgrades'required,'to'ensure'consistent'delivery'and'conformance'
to'Enterprise'Architecture'and'industry'standard'standards”'
"o In"light"of"the"Powerlink’s"major"IT"expenditure"over"previous"regulatory"periods,"Powerlink"needs"to"provide"much"more"detail"on"the"business"case"for"such"a"major"expenditure"program"
66
![Page 67: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/67.jpg)
Concerns with Powerlink’s Proposed Business IT Capex
! SpaMal$Business$Intelligence$and$AnalyMcs$$($7.5M)$o It"appears"that"Powerlink"already"has"a"number"of"business"intelligence"(BI)"
applica/ons""o The"proposal"does"not"demonstrate"how"a"further"BI"tool"will"deliver"business"
benefits"or"improve"Powerlink’s"efficiency"o The"AER"needs"to"consider"the"outcomes"of"Powerlink’s"previous"BI"
expenditure"before"considering"further"BI"expenditure"
! ERP$ModernisaMon$Expenditure$$($4.1$M)$o With"the"major"levels"of"ERP"funding"provided"over"the"past"two"regulatory"
periods,"it"is"not"clear"why"there"is"a"need"for"ERP"modernisa/on""o Powercor"and"Energy"Australia""both"have"significant"investments"in"SAP"
applica/ons,"but"have"not"proposed"such"“modernisa/on”"expenditure"o It"would"be"expected"that"such"expenditure"is"already"included"in"Powerlink’s"
proposed"Sokware/Hardware"Refresh"Program"" 67
![Page 68: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/68.jpg)
Concerns with Powerlink’s Proposed Business IT Capex "! Enterprise$IntegraMon$($3.2M)$o It"appears"that"Powerlink"has"previously"received"significant"funding"for"enterprise"
integra/on"
o Again,"it"would"be"expected"that"this"expenditure"is"already"included"in"Powerlink’s"proposed"SoLware/Hardware'Refresh'Program'
! Insufficient$DemonstraMon$of$Business$Benefits$! Powerlink’s"IT"Capex"proposal"does"not"demonstrate"the"business"benefits"it"has"
realised"from"its"major"IT"expenditure"over"the"previous"decade"
! Furthermore,"there"appears"to"be"some"significant"duplica/on"of"expenditure"for"Powerlink’s"proposed"IT"programs"and"its"proposed"recurrent"SoLware'/'Hardware'Refresh'Program'"
68
![Page 69: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/69.jpg)
OPEX
69
![Page 70: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/70.jpg)
Powerlink:"Historical/Proposed"Opex"
0"
50"
100"
150"
200"
250"
2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014" 2015" 2016" 2017"
Powerlink*Opex*trend*($M)*
70"
![Page 71: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/71.jpg)
Opex"by"Regulatory"Period"
*"2002907"figures"pro9rated"to"5"years"(rather"than"6"years)"for"comparison"purposes"
0"
200"
400"
600"
800"
1000"
1200"
2002(07*" 2008(12" 2013(17"" 2018(22"Proposed"
71"
![Page 72: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/72.jpg)
"
EFFICIENCY"OF"POWERLINK’S""""BASE"YEAR"OPEX?"
72"
![Page 73: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/73.jpg)
The"AER’s"Opex"Assessment"Approach"
! The"AER"intends"to"use"the"base=step='trend'approach"to"its"determina/on"of"Powerlink’s"opex"allowances,"i.e.:""o DeterminaMon$of$the$efficient$base$year$opex"o ApplicaMon$of$step$changes$–"adjus/ng"the"base"year"expenditure"to"account"for"any"other"forecast"cost"changes"over"the"regulatory"period"due"to"new"regulatory"obliga/ons""
o DeterminaMon$of$rateBofBchange$factors$9"determina/on"of"escala/on"factors"to"take"account"of"changes"over"the"regulatory"period"due"to"price,"output"and"produc/vity"changes"
! This"approach"is"overly"dependent"upon"trend"analysis"and"an"acceptance"of"the"networks’"historical"costs"as"being"efficient""
! It"does"not"demonstrate"the"efficiency"of"the"networks’"base"year"opex""
73"
![Page 74: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/74.jpg)
"
THE"NEED"TO"APPLY"BENCHMARKING"
74"
![Page 75: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/75.jpg)
The"Need"to"Apply"Benchmarking"to"Powerlink’s"Opex"
! The"Rules"formally"require"the"AER"to:"! Undertake"benchmarking"to"assess"the"rela/ve"efficiencies"of"networks"! Apply"the"outcomes"to"determine"efficient"costs"for"the"networks"
! In"its"recent"determina/ons,"the"AER"applied"benchmarking"to"determine"the"efficient"base"year"opex"for"the"distribu/on"networks"9"but$not$for$the$transmission$networks$$
! There"is"extensive"evidence"of"material"inefficiency"in"Powerlink’s"base"year"opex"
! The"AER"determina/on"of"Powerlink’s"efficient"base"year"opex"needs"to"be"informed"by"benchmarking""
75"
![Page 76: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/76.jpg)
The"AER"has"Comprehensive"Opex"Benchmarking"Informa/on"
• The"AER"develops"its"Transmission"Benchmarking"Reports"using"data"collected"from"its"regulatory"informa/on"no/ces"(RINs)"
• This"data"has"been"compiled"in"accordance"with"the"AER’s"consistent"informa/on"requirements"and"it"includes"five"years"of"data"that"has"been"audited"by"the"transmission"networks""
• As"outlined"by"Economic"Insights:""“While'no'dataset'will'ever'be'perfect,'this'data'is'the'most'consistent'and'
thoroughly'examined'dataset'of'the'transmission'networks'yet'assembled'
in'Australia”'"
• As"stated"by"the"AER:"“We'consider'that'the'benchmarking'analysis'presented'in'this'report'is'
reasoned'and'comprehensive.'We'have'collected'data'on'all'major'inputs'
and'outputs'for'transmission'businesses,'and'we'consider'the'data'used'is'
robust.'The'PPIs'present'expenditure'against'known'drivers,'and'the'MTFP'
specifica2on'by'Economic'Insights'is'consistent'with'established'literature”"76"
![Page 77: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/77.jpg)
The"TNSPs"Have"Comprehensive"Opex"Benchmarking"Informa/on""
For"many"years"the"TNSPs"have"selec/vely"used"the"numerous"benchmarking"reports"to"support"their"opex"efficiency"claims,"e.g.:"
! Powerlink"has"consistently"been"highly"selec/ve"in"the"use"of"ITOMS"benchmarking"results"to"demonstrate"its"opex"efficiency"
! Powerlink’s"2018922"revenue"proposal"refers"to"an"“independent'expert'opinion”"from"Huegen"Consul/ng"
! TransGrid"and"Transend’s"recent"revenue"proposals"selec/vely"referred"to"the"outcomes"of"the"following"benchmarking"reports:""– Interna/onal"Transmission"Opera/ons"and"Maintenance"Study"(ITOMS)""– Interna/onal"Transmission"Asset"Management"Study"(ITAMS)"– Mercer"Human"Resource"Effec/veness"Monitor"2012"– UMS"Corporate"Overheads"High"Level"Compara/ve"Assessment""– The"Huegen"Transmission"Benchmarking"Study"2013"Report"
" 77"
![Page 78: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/78.jpg)
The"TNSPs"Have"Comprehensive"Opex"Benchmarking"Informa/on""
! A"review"of"the"TNSPs’"previous"regulatory"submissions"iden/fies"that"the"TNSPs’"have"selec/vely"referred"to"around"40"benchmarking"studies"in"support"of"their"previous"opex"claims"
! Clearly"the"required"data"and"informa/on"for"benchmarking"the"TNSPs’"opex"is"readily"available"and"the"AER"has"the"informa/on"gathering"powers"to"obtain"whatever"informa/on"it"needs"
! It"is"also"clear"that"the"AER’s"previous"regulatory"decisions"were"informed"by"the"opex"benchmarking"results"presented"by"the"TNSPs"
78"
![Page 79: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/79.jpg)
SP"AusNet"Believes"That"It"is"Much"More"Efficient"than"the"other"TNSPs"
! All"of"the"transmission"networks"appear"to"have"engaged"Huegen"Consul/ng"during"this"round"of"resets"to"demonstrate"their"opex"efficiency"
! For"example,"SP"AusNet’s"current"revenue"proposal"states"that:"
“Huegin’s'analysis'of'OPFP'demonstrates'that'AusNet'Services'has'
delivered'higher'rates'of'opex'produc2vity'growth'than'its'peers'and'
well'above'the'industry'average”'
“Economic'Insights'explains'that'an'adjustment'for'step'changes'
further'improves'historic'performance,'with'AusNet'Services'achieving'substan:ally'beJer'rates'of'improvement'than'the'industry'average”''
“AusNet'Services’'strong'track'record'of'outperforming'the'industry'average'with'respect'to'produc2vity'gains'is'prima'facie'evidence'that'
its'base'year'opex'is'efficient”""
79"
![Page 80: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/80.jpg)
SP"AusNet’s"View"is"Reinforced"by"the"EUAA"TNSP"Benchmarking"Study"
"“In'Queensland'opera:ng'expenditure'increased'significantly,'whereas'the'opera:ng'expenditure'of'the'TNSPs'in'other'states'remained'reasonably'constant.'Per'MWh'delivered,'there'is'a'significant'difference'between'the'
lowest'and'the'highest”'"
“Even'for'TNSPs'with'comparable'levels'of'delivered'energy,'opera2ng'
expenditure'per'MWh'differs'significantly.'For'example'in'Queensland'twice'as'much'opera:ng'expenditure'per'MWh'delivered'is'recovered'than'in'Victoria”'"
“The'provision'of'transmission'network'services'in'Victoria'has'been'
consistently'beYer'than'in'other'states'in'respect'of'regulated'revenues,'the'
size'of'the'regulated'asset'base,'and'the'level'of'opera2ng'expenditure'and'
capital'expenditure”'"
Source:"A"comparison"of"outcomes"delivered"by"electricity"transmission"network"service"providers"in"the"Na/onal"Electricity"Market,"EUAA"2012""
80"
![Page 81: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/81.jpg)
The"AER"Has"Not"Jus/fied"Its"Decision"to"Not"Use"Benchmarking"
! It"appears"that"the"AER’s"main"reason"for"not"applying"benchmarking"to"the"TNSPs’"opex"determina/ons"is"due"to"resource"constraints""
! That"suggests"that"the"AER"should"focus"its"scarce"resources"on"iden/fying"the"most"material"opex"inefficiencies"
! There"is"extensive"evidence"that"Powerlink’s"opex"is"the"most"materially"inefficient"of"the"5"Australian"TNSPs"
! Therefore,"the"AER"should"devote"its"scarce"resources"to"applying"benchmarking"to"the"determina/on"of""Powerlink’s"efficient"base"year"opex"
81"
![Page 82: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/82.jpg)
Benchmarking"Can"Be"Supplemented"By"Other"Techniques""
! In"its"recent"opex"determina/ons"for"the"distribu/on"networks,"the"AER"supplemented"its"benchmarking"with"other"assessment"techniques"
! The"AER"can"apply"a"similar"approach"to"Powerlink’s"opex"determina/on""
! Like"all"techniques,"benchmarking"has"its"imperfec/ons""
! Benchmarking"is"an"accepted"and"proven"technique"in"regulatory"prac/ce""9"Ofgem"(UK)"has"applied"it"effec/vely"for"over"20"years,"and"commenced"it"without"a"perfect"data"set"
! All"regulators"that"use"benchmarking"acknowledge"those"imperfec/ons,"and"take"them"into"account"in"their"decision9making"
82"
![Page 83: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/83.jpg)
"
LABOUR"COSTS"
83"
![Page 84: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/84.jpg)
The"AER’s"Approach"to"Determining"Labour"Costs"
• In"determining"its"labour"price"change"factor"for"TransGrid"and"Transend,"the"AER"adopted"the"average"of"Deloire"Access"Economics’"and"Independent"Economics’"wage"price"index"(WPI)"forecasts"for"the"Electricity,'Gas,'Water'and'Waste'Services'(EGWWS)'
industry""
• That"approach"resulted"in"the"AER"applying"real"price"growth"factors"to"TransGrid"and"Transend’s"labour"prices""
• The"above"forecasts"do"not"reflect"the"specific"drivers"of"the"electricity"network"sector"
• The"electricity"network"sector"is"currently"in"contrac/on"due"to"declining"demand"for"its"product/services,"whereas"the"other"sectors"covered"by"the"forecasts"are"not""
84"
![Page 85: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/85.jpg)
Industries"in"Contrac/on"Do"Not"Face"Real"Labour"Price"Increase"Drivers"
! The"Australian"electricity"network"sector"is"currently"in"a"major"contrac/on"phase"
! Industries$in$contracMon$do$not$face$real$labour$price$increasing$drivers"
! There"is"currently"minimal"wage"pressure"within"the"Australian"economy"–"the"mining"boom"has"passed"and"skilled"labour"is"readily"available""
! The"AER"needs"to"use"labour"price"forecasts"that"are"specific"to"the"electricity"network"sector""
! Such"forecasts"will"confirm"that"Powerlink’s"labour"costs"should"be"reducing,"rather"than"increasing""
85"
![Page 86: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/86.jpg)
Labour"and"Workforce"Prac/ces"9"Qld"Govt"IRP"Report" “The IDC was particularly concerned about the IRP’s reports of a noticeable cultural disregard for cost within the distribution network businesses”
“The capital programs and operating costs of the GOCs have increased sharply and unsustainably”
“Overhead expense (indirect costs) have grown rapidly in recent years and places the Queensland DNSPs among the least efficient in the NEM”
“Across the three companies, 647 employees earned in excess of 1.5 times their base pay….27 employees earned twice their base pay in 2011/12”
“Contract resources are used inefficiently……internal resources are being under�utilised”
“The start times of work crews are often not matched to the requirements of particular projects. A rigid adherence to these start times means that there is a mismatch, leading to reduced productivity and possibly longer outage durations”
“The differences in fatigue management policies complicate crew scheduling and joint workforce management leading to response delays, inefficiencies and potential safety issues”
86"
![Page 87: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/87.jpg)
Labour"and"Workforce"Prac/ces"9"Qld"Govt"IRP"Report"
87"
![Page 88: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/88.jpg)
The"Queensland"Networks’"EBA’s"Are"Driving"Inefficient"Labour"Costs"
! The"Queensland"government"IRP"Report*"iden/fied"that"the"Queensland"networks’"enterprise"agreements"are"driving"inefficient"labour"prac/ces"and"labour"costs"
! The"AER"must"ensure"that"Powerlink"is"not"allowed"to"con/nue"to"treat"EBA"outcomes"as"a"“pass"through”""
*"Queensland"Government"Independent"Review"Panel"(IRP)"on"Network"Costs"88"
![Page 89: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/89.jpg)
"
SERVICE"TARGET"PERFORMANCE"INCENTIVE"SCHEME"(STPIS)"OUTCOMES"
89"
![Page 90: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/90.jpg)
Powerlink’s"Bonuses"under"the"Service"Target"Performance"Improvement"(STPIS)"Scheme"
0.00#
5.00#
10.00#
15.00#
20.00#
25.00#
2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014# 2015#
Powerlink*+*STPIS*Bonuses*($M)*
Source:"Powerlink" 90"
![Page 91: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/91.jpg)
Incen/ve"Scheme"Outcomes"
" The"outcomes"of"the"AER’s"incen/ve"schemes"indicate"highly"assymetric"outcomes"in"favour"of"the"networks"
" The"AER"needs"to"nego/ate"targets"that"deliver"genuine"efficiency"and"service"performance"improvements"
91"
![Page 92: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/92.jpg)
"
DEPRECIATION"
92"
![Page 93: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/93.jpg)
Powerlink"Deprecia/on"Trend"
0"
100"
200"
300"
400"
500"
600"
700"
2002*07*" 2008*12" 2013*17"" 2018*22"Proposed"
Deprecia(on+($M)+
*"2002907"figures"pro9rated"to"5"years"(rather"than"6"years)"for"comparison"purposes" 93"
![Page 94: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/94.jpg)
What"is"Driving"Powerlink’s"Proposed"Deprecia/on"Allowance"Increase?"
! The"AER"Issues"Paper"iden/fied"that"there"are"2"key"drivers"of"Powerlink’s"proposed"deprecia/on"allowance"increase"! Lower"remaining"asset"lives"! Changes"to"the"infla/on"adjustment"
! The"AER"needs"to"ensure"that"remaining"asset"lives"applied"to"its"deprecia/on"allowances"reflect"the"actual"asset"lives"being"achieved"by"the"networks"
" 94"
![Page 95: Hugh Grant (CCP4) Presentation to the AER on Powerlink's 2018-22 Revenue Proposal March 2016](https://reader033.vdocument.in/reader033/viewer/2022042723/58872b7f1a28abfb0b8b78fb/html5/thumbnails/95.jpg)
]"Thank"You"
Hugh$Grant$$
AER$Consumer$Challenge$Panel$Member'95"