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

– Order in Council tests and AER processes– areas of initial concern to the AER and its draft

determination • AMI charges

– 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

• 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

Introduction

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

Note: OIC presumes “yes” in each decision point unless AER establishes otherwise

Scope test 5C.2

Budget application

Is activity within scope?

Did contract arise out of a competitive tender process?

AER must approve

Is it a contract cost?

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 approve, but may do so if DNSP justifies

net benefit of activity

AER must approve AER not obliged to accept, but may do so if DNSP justifies net

benefit of activity

Yes

Yes

Yes

No

No

No

Yes

No

Prudent test 5C.3

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 concern-AMI 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

DNSPTotal 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 requirementBuilding 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 under-recovery 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 concern-charges 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 chargesindicative 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 chargesindicative 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%

3 phase CT connected 278% 93%

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 chargesproposed vs draft decision

Annual metering charge ($/NMI)

2010 2011

  proposed 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 chargesindicative 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 chargesproposed 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 chargesindicative 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 chargesproposed 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 chargesindicative 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 withcontactor 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?