Determination
2014–15Powerline Replacement Program cost pass through for AusNet Services
September 2014
© Commonwealth of Australia 2013
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AER reference: 45250 / D14-118132
AER Determination | AusNet Services - Powerline Replacement Fund pass-through1
Contents
Contents
Shortened forms
Overview
1Determination
2AusNet Services' pass through application
3Assessment approach
3.1Relevant regulatory requirements
3.2Assessment approach
3.3What we considered in making this determination
4Reasons for determination
4.1Occurrence of a pass through event
4.1.1Prudent and efficient costs
4.1.2Materiality
4.1.3Timing of AusNet Services' application
4.2Assessment of the pass through amount
4.2.1Matters and proposals set out by AusNet Services
4.2.2The increase in costs incurred by AusNet Services
4.2.3Actions to reduce the magnitude of the pass through amount
4.2.4Time cost of money
4.2.5Recovery of costs solely a consequence of the pass through event
4.2.6Have the costs already been factored into the annual revenue requirement
4.2.7Extent the costs are subject of a previous pass through determination
4.2.8Any other factors we consider relevant
Appendix A: Excerpts from the NER
Shortened forms
Shortened form / Full titleAER / Australian Energy Regulator
BMP / Bushfire Mitigation Plan
capex / capital expenditure
DSDBI / Department of State Development, Business and Innovation
ESV / Energy Safe Victoria
NEL / National Electricity Law
NER / National Electricity Rules
opex / operating expenditure
PRF / Powerline Replacement Fund
Overview
On 22 July 2014, SPI Electricity Pty Ltd (now rebranded as AusNet Services) submitted a cost pass through application to the Australian Energy Regulator (AER). The application related to costs incurred as a consequence of a direction issued by Energy Safe Victoria (ESV) requiring it to amend its Bushfire Mitigation Plan (BMP) to undertake a specified program of works in high bushfire risk areas. The cost of these projects is the subject of grant funding by the Victorian Government's Powerline Replacement Fund (PRF). Although the PRF funds most of the capital cost of the projects, AusNet Services will incur additional costs because the receipt of grant money is taxable in the hands of the recipient.
The role of the AER, as the economic regulator of Distribution Network Service Providers (DNSPs) in the National Electricity Market (NEM), is to assess AusNet Services' application against the cost pass through requirements in chapter 6 of the National Electricity Rules (NER). Specifically, if a positive change event occurs, we must determine the required pass through amount and how much of that amount should be passed through to network users in each regulatory year.This decision addresses those requirements, which are set out in clause 6.6.1 of the NER. An extract of the relevant clauses is at attachment A.
We have determined that AusNet Services' pass through application satisfies the requirements of a service standard event. In particular, the tax liability which will accrue in relation to the receipt of funding subsequent to the amendment to the BMP does materially increase the costs to AusNet Services of providing direct control services.
We formed this view by applying the definition of materially set out in chapter 10 of the NER for a cost pass through event. That is, an event results in a DNSP incurring materially higher costs if the change in costs (as opposed to the revenue impact) that the DNSP incurs in any regulatory year, as a result of that event, exceeds 1% of the aggregate revenue requirement (ARR) for the DNSP for that regulatory year. In making this decision, we compared the ratio of the building block costs identified by AusNet Services in each regulatory year to AusNet Services'ARR for that year.
As we have found that a service standard event has occurred, there is a need to consider the prudence and efficiency of the proposed variations to capital and operating expenditures, whether the amount is material and, if so, to determine a positive pass through amount to network users.
We are also required by the NER to determine the amount to be passed through in each remaining year of the regulatory control period. Based on our assessment of the relevant factors listed in clause 6.6.1(j) of the NER, we conclude the approved pass through amount for AusNet Servicesis $5.72 million ($ 2015).
This means that in 2015AusNet Services will increase its approved revenue by $5.72 m (an increase of around 1.2per cent from the determination).[1]AusNet Servicescan recoverthis amount from customers through higher network charges in 2015.
Structure of determination
This determination is structured as follows:
- Chapter 1 – sets out our determination onAusNet Services' pass through application
- Chapter 2 – sets out AusNet Services'pass through application
- Chapter 3 – sets out our assessment approach
- Chapter 4 – sets out our reasons for our determination.
AER Determination | AusNet Services - Powerline Replacement Fund pass-through1
1Determination
We consider AusNet Services'pass through application establishes that a pass through event occurred.The AER is satisfied that a service standard event as defined under the NER has occurred. We are also satisfied that the amounts determined by us are the prudent and efficient amounts that have been, or will be, incurred by AusNet Services in implementing its amended BMP. We are satisfied that a material increase in costs will occur in the 2015 calendar year. In making this determination we have considered the factors set out in clause 6.6.1(j) of the NER. Therefore, we have determined the approved pass through amount to be $5.72million ($2015).
2AusNet Services'pass through application
On 22 July 2014 the AER received a cost pass through application from AusNet Services relating to a direction issued by ESV requiring it to amend its Bushfire Migration Plan (BMP) to undertake a specified program of works in high bushfire risk areas. These works are required to underground power lines in certain designated, high risk areas. The cost of these projects is the subject of grant funding by the Victorian Government's Powerline Replacement fund (PRF). This application seeks approval of a positive pass through amount related to the additional tax payable by AusNet Services as a result of the Victorian Government's funding grant. This amount is $5.72 million ($2015), to be wholly recovered in the 2015 calendar year.
More particularly, AusNet Services will incur additional costs because the receipt of grant money is taxable in the hands of the recipient. Grants under the PRF are for the capital amount of each project, less a (small) deduction calculated in accordance with the applicable Victorian Guideline for customer funded works (Guideline 14). This taxation effect consistent with the AER's understanding that capital contributions, whether in cash or in kind, are taxable in the hands of the recipient.
Following the 'Black Saturday' bushfires in 2009, the Victorian Government held a Royal Commission. The Commission made numerous findings and recommendations to improve the safety of electrical distribution networks to mitigate the risk of future bushfires. The Victorian Government subsequently responded to these recommendations through a series of initiatives. This application concerns recommendation 27.Recommendation 27 concerns undergroundingoverhead powerlines in high bushfire risk areas.
Table 2.1 - AusNet Services pass through amounts calculation ($2015 million)
Input cost changes / 2014 / 2015PRF grant contribution / 4.44 / 16.75
Tax on PRF funds @30% / 1.33 / 5.02
Eligible pass through amount ($2015) / 6.36
Positive pass through amount in each year / 5.72
Source: AusNet Services application: amended post tax revenue model
To implement the PRF the Victorian Department of State Development, Business and Innovation (DSDBI) sought advice and assistance from the AER in relation to the regulatory treatment of grant funded works and technical assistance assessing the proposed projects. The principal purpose of the AER's assistance was to assist the control board of the PRF to assess whether the project cost estimates were reasonable before making capital grants.
Weworked closely with the Victorian Government to assist DSDBI and Energy Safe Victoria to develop the program of undergrounding high voltage distribution lines in high fire risk areas. Our contribution related to the assessment of the scope and cost of the proposed projects now subject to this application for a cost pass through.However, a further benefit of our involvement in the grant process is that we have direct knowledge of the basis of the funding provided by the PRF. The AER is not the decision maker with respect to the individual projects to be undertaken as part of the amended program of works. The decision maker was the control board of the PRF. The control board made its decisions in accordance with Victorian Government requirements for probity in public transactions. As we are satisfied that the capital grants were made on a sound basis we are also satisfied that the claimed tax liability as a direct consequence of those grants is reasonable. This is relevant to our assessment as to whether the claimed costs are prudent and efficient. This is discussed further in chapter four.
3Assessment approach
We are required to consider a pass through application in accordance with relevant provisions of the NER. The relevant clause is clause 6.6.1 of the NER.
3.1Relevant regulatory requirements
The clauses of the NER we had regard to when making our determination are attached in appendix A. In particular, the relevant factors we must take into account when making a pass through determination are set out in clause 6.6.1(j) of the NER, set out below:
Relevant factors
(j) In making a determination under paragraph (d) or (g) in respect of a Distribution Network Service Provider, the AER must take into account:
(1) the matters and proposals set out in any statement given to the AER by the provider under paragraph (c) or (f); and
(2) in the case of a positive change event, the increase in costs in the provision of direct control services that, as a result of the positive change event, the provider has incurred and is likely to incur until:
(i) unless subparagraph (ii) applies – the end of the regulatory control period in which the positive change event occurred; or
(ii)if the distribution determination for the regulatory control period following that in which the positive change event occurred does not make any allowance for the recovery of that increase in costs – the end of the regulatory control period following that in which the positive change event occurred; and
(2A) in the case of a negative change event, the costs in the provision of direct control services that, as a result of the negative change event, the provider has saved and is likely to save until:
(i)unless subparagraph(ii) applies – the end of the regulatory control period in which the negative change event occurred; or
(ii)if the distribution determination for the regulatory control period following that in which the negative change event occurred does not make any allowance for the pass through of those cost savings to Distribution Network Users – the end of the regulatory control period following that in which the negative change event occurred; and
(3) in the case of a positive change event, the efficiency of the provider's decisions and actions in relation to the risk of the positive change event, including whether the provider has failed to take any action that could reasonably be taken to reduce the magnitude of the eligible pass through amount in respect of that positive change event and whether the provider has taken or omitted to take any action where such action or omission has increased the magnitude of the amount in respect of that positive change event; and
(4) the time cost of money based on the weighted average cost of capital for the provider for the regulatory control period in which the pass through event occurred; and
(5) the need to ensure that the provider only recovers any actual or likely increment in costs under this paragraph (j) to the extent that such increment is solely as a consequence of a pass through event; and
(6) in the case of a tax change event, any change in the way another tax is calculated, or the removal or imposition of another tax, which, in the AER's opinion, is complementary to the tax change event concerned; and
(7) whether the costs of the pass through event have already been factored into the calculation of the provider's annual revenue requirement for the regulatory control period in which the pass through event occurred or will be factored into the calculation of the provider's annual revenue requirement for a subsequent regulatory control period; and
(7A) the extent to which the costs that the provider has incurred and is likely to incur are the subject of a previous determination made by the AER under this clause 6.6.1; and
(8) any other factors that the AER considers relevant.
3.2Assessment approach
When assessing AusNet Services'positive pass through application, we must first determine whether a ‘positive change event’ occurred. This assessment is done with reference to the NER and the current AER determination applicable to AusNet Services(that defines the pass through events AusNet Servicescan utilise during the regulatory control period). As part of this process, we also determine the materiality of the proposed past through amount. Under chapter 10 of the NER a positive change event for a DNSP is defined as:
....a pass through event that materially increases the costs of providing direct control services.
Once we determine a positive change event occurred we must then determine:
- the approved pass through amount; and
- (the amount of that approved pass through amount that should be passed through to Distribution Network Users in each regulatory year during the regulatory control period.[2]
We make this determination taking into account those factors set out in clause 6.6.1(j) of the NER (quoted above).
3.3What we considered in making this determination
We have made our determination in accordance with clause 6.6.1 of the NER.In forming our determination, we have:
- considered the application and supporting information we received from AusNet Services
- sought public submissions on the application
- consulted with the Victorian Government Department of State Development, Business and Innovation
- undertaken our own analysis to verify the information provided by AusNet Services
- applied the relevant factors set out in clause 6.6.1(j) of the NER to explain our decision.
4Reasons for determination
We are satisfied that AusNet Services'pass through application establishes that a pass through event occurred. We consider the tax liability ($6.36m $2015)to be incurred by AusNet Services in 2014 and 2015 materially increasesAusNet Services'costs in providing direct control services in the regulatory control period, as required under clause 6.6.1(j)(2) of the NER. This section details the reasons that have led us to these conclusions.
4.1Occurrence of a pass through event
In order for us to approve AusNet Services' application, there must be a positive change event. Powercor received a direction from Energy Safe Victoria (ESV) to undertake undergrounding in high bushfire risk areas. AusNet has applied to the AER for a pass through of costs arising from this action and the subsequent approval of their amended bushfire management plans. In Chapter 2 of their separate application Powercor sets out in detail the process by which the Victorian Government implemented recommendation 27 of the Victorian Government Bushfire Royal Commission. The background provided by Powercor in their application is also relevant to this project. Powercor cited recommendation 27 as follows:
Progressive replacement of all single-wire earth return (SWER) power lines in Victoria with aerial bundled cable, underground cabling or other technology that delivers greatly reduced bushfire risk. The replacement program should be completed in the areas of highest bushfire risk within 10 years and should continue in areas of lower bushfire risk as the lines reach the end of their engineering lives.
Progressive replacement of all 22-kilovolt (kV) distribution feeders with aerial bundled cable, underground cabling or other technology that delivers greatly reduced bushfire risk as the feeders reach the end of their engineering lives. Priority should be given to distribution feeders in the areas of highest bushfire risk.[3]
Powercor also explained that:
The [Department of State Development, Business and Innovation] DSDBI is responsible for the delivery of the [Powerline Bushfire Safety Program] PBSP. The PBSP was established to implement a $750 million program of works over a 10 year period to 2022 to reduce the risk of Victorian powerlines causing bushfires.
This included the establishment of the [Powerline Replacement Fund] PRF being one of five components of the PBSP. The PRF makes available up to $200 million to fund the replacement of bare wire powerlines over this 10 year period. Relevantly, the PRF was established to fund the replacement of SWER and 22kV powerlines maintained by Victorian DNSPs in areas of highest bushfire consequence with insulated overhead powerlines, underground powerlines or new conduct technologies.[4]
The primary implementation mechanism was a Direction, issued by ESVunder section 141(2)(e) of the Electrical Safety Act (Victoria) on 27 June 2014. The direction required AusNet Services to amend its BMP to include 15 powerline replacement projects subject of grants issued by the control board overseeing the PBSP. AusNet Services then submitted the amended plan for approval by Energy Safe Victoria. On 22 July 2014 ESV advised the amended plan was approved. The AER has examined the documentation provided with the application and is satisfied it is complete and accurate.