AERs Draft Decision for NSW distributors 2015 2019

AER’s Draft Decision for NSW distributors 2015 -2019 Consumer Challenge Panel Response AER Pre-determination Conference 8 December 2014 Bruce Mountain

Outline • Prices (from 1 July 2015) • Profits • Revenue • WACC • RAB • Opex • Capex 2

Average network charges for households in NSW from 1 July 2015 will still be above Victoria average and compare poorly internationally Source: EPRI, AER Draft Decision, Ofgem RIIO ED 1 proposals, OECD (for PPP exchange rates), CME analysis 3

NSW’s DNSPs have delivered remarkable pecuniary gains to their owner In 2012/13 NSW distributors’ pecuniary benefit per connection was 5. 6 times higher than UK Power Networks’ pre-tax profit per connection. * 2013/14 not included because interest rate data needed to calculate competitive neutrality fees no longer available 4

After the AER’s DD, Aus. Grid’s revenues will still be (much) higher than IPART allowed IPART 5 AER

Likewise for Endeavour too (although gap not as large) 6

And Essential’s increases relative to IPART’s last decision, much like Aus. Grid 7

WACC: some progress, but still higher than IPART and even more so Ofgem. Why ? * All Australian decisions rebased to use consistent 2014 Risk Free Rate 8

DD Debt allowance is particularly problematic 9

Following DD, NSW Regulated Asset Bases don’t decline in real terms 10

And after DD, the gap between asset values in NSW, VIC and GB is still very large 11

Progress has been made in respect of Endeavour’s opex allowance 12

Aus. Grid is being allowed to charge users for as much opex as IPART allowed 13

And likewise for Essential 14

Compared to Vic DNSPs, the per customer DD opex allowances are still higher Mainly country Mainly urban 15

Endeavour capex now back to first IPART control period allowance. This seems reasonable. 16

Aus. Grid capex back to IPART allowances. This seems reasonable 17

Likewise for Essential 18

Summary of key points • From CCP’s perspective, AER DD should set the high water mark for revenues, assets, WACC and expenditure. Compromises have already been made and backtracking from here would be unwise. • Opex and capex allowance seem roughly reasonable although some “adjustments” to the benchmarking to narrow the VIC-NSW gap is problematic and needs to be addressed. • Allowance for Debt is too high. BBB calculations that do not reflect actual DNSP borrowing costs are flawed. The AER must have regard to actual borrowing costs. • NSW DNSPs have recognised the significant inefficiencies that consumers have been pointing to for years. However, despite excessive costs, the regulatory outcomes have nonetheless delivered excessive profits. This must end. Shareholders, not consumers, must bear the consequence of inefficiency. 19