NETWORKCOSTPASSTHROUGHAPPLICATION
-ResponsetotheCommission’sRequestforFurtherInformation
For completeness, this document restates the pass through application submitted on 5 February 2013, withupdated figures and the additional informationrequested by the Commission.
SUMMARY
In September andOctober 2008,a number of electricalequipmentfailures atCasuarinaZone Substationresultedinwidespreadpowerdisruption toDarwin’snorthernsuburbs(the Casuarinaincident).Consequently,the NTGovernmentestablishedanindependentinquiry headedbyMervynDavies(the DaviesReview)toinvestigate these eventsandrecommend improvementstobe made toPower andWater’soperatingandmaintenance practices.
The rootcause oftheeventwasacatastrophic failureof anelectricalcircuitbreakerin a uniquelyharshenvironmentwhichcontributestothe prematureagingofelectricalequipment. PowerandWater’ssubsequentimplementation oftheDaviesReviewrecommendationswas directedbyGovernmentandwasdriven byconsiderationsof public andstaff safetyandthe restoration of areliable essentialservice toNTelectricityconsumers.
The broadrangingnature ofthe DaviesReviewresultedinrecommendationswhichhave had significantimpactson PowerandWater’soperatingandcapitalexpenditures. TheDavies Review of the Casuarinaincidentledto:
•a thorough assessmentof the conditionof PowerandWater’snetwork assets;
•asignificantprogramofinspectionandremedialworks,whereassetconditionwas poor; and
•theadoption of improved assetmanagementprocesses1.
To address the immediate issues identified in the Davies Review recommendations, a dedicatedbusinessunit,theRemedialAssetManagementProgram(RAMP),wasformed,and a RemedialWorksPlanwasdeveloped.The objectiveof the RemedialWorks Plan wasto:
•carryoutthe inspection andcondition assessmentof Power andWater’snetworkassets likelytobe atrisk;
•developaprioritisedprogramofassetreplacementandrefurbishment,tominimise safetyandsupplysecurityrisks;and
•developashorttermmaintenanceprogramthatwouldevolveintoasetoflongterm practicesandconsequentlyan improvedmaintenance culture.
A Long Term Action Plan wasalsodeveloped,focusingon the maintenance practicestobe adoptedby Power Networks. Thishasresultedin a fundamentalchange tomaintenance practices.Maintenance activityismore intensive andbecomingmore effective,asittransitions toa regimeof assetinspection,conditionmonitoringanddiagnostictesting.
Power andWater previouslyoperatedon constrainedrevenuesresultinginassetmanagement practicesfocusedaroundcorrective maintenance andrun tofailure.The DaviesReview recommendeda change tomorepreventative maintenance practices,which wasimplemented with Governmentsupport.
1IndependentEnquiryintoCasuarinaSubstationEventsandSubstationMaintenanceacrossDarwin-Final ReportChairman:MervynDavies,4February2009.
Power andWater requeststhatthe Commission consider the fullamountof Power Networks’ expenditurethathasexceededthatallowedforbytheCommissioninits 2009NetworkPrice Determination(NPD),andnotlimitthecostpassthroughamounttoprojectsandstep changestoexpenditure levelsdirectlyattributedtothe DaviesReview recommendations.
ThefulloperatingandcapitalexpenditureshortfallwasapprovedbytheNTGovernment throughthe StatementofCorporate Intent(SCI)process.Itisreflectiveofthe Government’s requirementtoimprove thesecurityandreliabilityof electricitysupplyintheTerritory.Asa consequence,substantialenhancementsweremadetoPowerNetworks’assetmanagement regime with theembeddingof an improvedmaintenancecycleculture within Power Networks, asespousedinthe DaviesReview recommendations.
OPERATINGEXPENDITURE
The operatingexpenditure (opex)projectsandstepchangestooperatingexpenditure levels directlyattributedtotheDaviesReview recommendationsare setoutin Table A.
TableA–Operating ExpendituredirectlyattributedtoDaviesReview recommendations($M)
OPEX$M (actual/ forecast) / DaviesReview recommendation / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / TOTALRemedial Works Program Opex / 11.11Undertake anoverall remedial program / RAMP2 / 15.30 / 5.00 / 8.56 / 5.68 / - / - / 34.54
Substation Services Group3 / - / - / - / - / 10.11 / 5.00 / 15.11
Stepchange inNetworks’ workforce levels / 11.8Modernising maintenance knowledge / - / 1.39 / 1.43 / 4.09 / 4.22 / 4.34 / 15.47
11.9Acceleratereform ofmaintenance operations
TOTAL$M / 15.30 / 6.39 / 9.99 / 9.77 / 14.33 / 9.34 / 65.11
RAMPOperatingCosts
TheshorttermrecommendationsfromtheDaviesReviewwerelargelymanagedby the RemedialAssetMaintenance Program(RAMP). RAMPwas establishedasaseparateBusiness Unitwasbythe PowerandWater’sManagingDirector,headedupbyGeneralManagerKeith Beven.Atthepeakofthe program in 2011/12,the RAMPgrouphadabout30 staff members.
The zone substationworkscarriedoutbythe RAMPteamwere transferredtothe Substation Servicesgroupof PowerNetworksin 2012/13. The condition assessmentprocessesand thresholdsdevelopedto identifyacceptableconditionstandardshas becometheresponsibility of maintenance operations.
2Thevariancein RAMPopexcanbe explainedasfollows:
•In2008-09therewasaonce-offexpenditureof$10.7monthehireofgensetsto providepower whileCasuarinaZoneSubstationwasbeingrestored.
•In2010-11,therewasa significantincreasein personnel.
3The2013-14OpexForecastof$5mfortheSubstationsServicesgroupwithinPowerNetworksdoesnot includeinternalexpenseseg. corporateoverheadsandinternalconsumption,asinternalexpensesforthe 2013-14SCIforecasthavenot yet notbeen finalised(ie. allocateddowntothislevel).
StepChangetoOpexinWorkforceLevels
2009-10positions
The DaviesReviewidentifiedaninitialneedtorecruitsixadditionalqualifiedelectricaltrades personnel,ideallyexperiencedinconditionmonitoringtechniques.Italso recommendedthata five yearforecastofpersonnelrequirementsandtheirsourcing,todeliverthe forecastworks program,be reviewedannually.
TheDaviesReviewalsorecommendedthatorganisationchangesresultingfromaFebruary 2008reportbyPricewaterhouse Coopers(PwC)intoPowerNetworks’ Structure,Processand Capabilitybe beddeddown,toimprove the responsibilityandaccountabilityformaintenance actionsandjobownershipbytheworkforce.InitsFebruary2008report,PwCrecommended anadditionalnine positionscoveringplanning,standards,customerconnections,protections andfieldservices,andrecommendedthe adoptionof the assetowner/service deliverymodel (refer to Attachment 1 “Structure, Process and Capability Review”by PricewaterhouseCoopers).
Followingtheinternalreviewofworkforcerequirementspertherecommendationsofthe DaviesReview,anadditionalfifteenpositionswereapprovedandrecruitedtoin2009/10 (refer toAttachment2 Power andWater InternalOfficeMemo,“Recruitmentof NewPositions within the Service DeliverySection (Power Networks) to Supportthe Restructure”).
2011-12positions
Due to the increased capital works program resulting from the Davies Review recommendationsforPowerNetworks,PowerandWaterengagedHueginConsultingin2010 todetermine the size of the workforce requiredtodeliver the program of worksandidentify whethera ‘gap’ existsversusthe currentworkforce. Toassessthis,Hueginassessedthe level andbehaviourofdemandforvariouscapitalprojectsandrepairsandmaintenance work,and comparedthisagainsttheworkforceprofileatthetime.Huegindevelopedagapanalysis modelthatmappeddemandinhoursandFullTime Equivalent(FTE) numbersforeach personneltypeagainstthesupply(internal positions available)tocalculateresource discrepancies(refer toAttachment3 “Power andWater -DeliveringtheProgram of Works– Sustainably”byHueginConsulting).
SubsequenttotheHueginReportrecommendations,afurther23additionalpositionsfor Power Networkswere approvedandrecruitedtoin early2011(refer toAttachment4 for the approvedWorkforceBusinessCases).4AconservativeapproachwastakenbyPowerNetworks in2010/11nottorequestpositionsuntilthebusinesswasinapositiontoeffectivelyuse them,andassuch notallof the positionsrecommendedbyHuegin Consultingwere accepted.
4Ofthe23 newpositions,16 relatedtotheStrategy PlanningandServiceDeliverygroupsofPower Networks,and7relatedtotheRAMP/SubstationServicesgroup.Asthe personnelcostsfor RAMP/SubstationServicesarealreadyincludedintheRAMPOperatingCosts,thesehavebeen excluded fromthecalculationfortheStepChangestoOpex.ThecostoftheadditionalpositionsinStrategyPlanningandServiceDeliverygroupsofPowerNetworkshavebeen includedfrom2011-12onwards.
CAPITALEXPENDITURE
Capitalexpenditure(capex)projectsinitiatedorre-scopedtoimplementtheDaviesReview recommendationsare setoutin TableB.
TableB–CapitalExpendituredirectlyattributedtotheDaviesReview recommendations5($M)
CAPEX$M (actual/ forecast) / DaviesReview recommendation / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / TOTALPXD39311
Restorationof CasuarinaZone Substation / 11.11Replace CasuarinaZone Substation11kV Switchboard / 3.07 / 4.67 / -0.97∗ / 1.03 / 0.00 / 7.79
PRD39541
RebuildSnell St Zone Substation6 / 11.7Reportonasset condition,risks andfailures
11.11Undertakean overallremedial program / 0.00 / 1.31 / 5.55 / 14.18 / 12.50 / 33.55
PRD39501
ReplaceManton 22kV Switchboard / 11.7Reportonasset condition,risks andfailures
11.11Undertakean overallremedial program / 0.00 / 0.00 / 0.39 / 1.21 / 2.00 / 3.59
PRD39712
Reinforce Winnellie– Berrimah11kV Network / 11.7Reportonasset condition,risks andfailures
11.11Undertakean overallremedial program / 0.00 / 0.00 / 0.01 / 0.80 / 1.80 / 2.61
PRD39703
PRD39707
PXD39713
Purchasespare zonesubstation transformers / 11.7Deliver improved systemsand processes,
11.5including supporting policiesand policy
documentation / 0.00 / 0.77 / 2.18 / 0.67 / 0.19 / 3.81
5Forfurtherbackgroundinformationonindividualbusinesscasesforthe projects,refertoAttachment5.
∗Thenegative2010/11capexfigurerelatingtotheRestorationofCasuarinaZoneSubstationprojectwasdue toajournaladjustment.
6ThisprojectwasincludedinthePowerNetworksCapitalExpenditureWorksProgrampriortotheCasuarina incident.Onlythe expenditureduetothe expandedscopeoftheprojecthasbeen included.
CAPEX$M (actual/ forecast) / DaviesReview recommendation / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / TOTALPRD39738
PRD39534
Purchasetwo mobile substationsand switchboards / 11.7Reportonasset condition,risks andfailures / 0.00 / 0.00 / 6.44 / 4.71 / 2.64 / 13.79
PRD30002
RebuildWeddell
–Archer66kV Line / 11.7Reportonasset condition,risks andfailures / 0.00 / 0.00 / 0.00 / 1.93 / 12.00 / 13.93
PXK32080
Replace22kV Katherine Switchboard / 11.7Reportonasset condition,risks andfailures
11.11Undertakean overallremedial program / 0.00 / 1.18 / 5.03 / 3.34 / 0.00 / 9.55
TOTAL$M / 3.07 / 7.93 / 18.62 / 27.87 / 31.13 / 88.61
WiththeexceptionofRebuildSnellStZoneSubstation(PRD39541),noneofthecapex projectsoutlinedin TableBabovewereincludedin the PowerNetworksCapitalExpenditure WorksProgramprior to theCasuarinaincident(refertothe2008/09StatementofCorporate Intent(SCI) Power NetworksCapitalExpenditureForecastsatAttachment6).
Thejustificationagainst theDaviesReviewrecommendationsforeachofthecapexprojectsin Table B isoutlinedbelow.
RestorationofCasuarinaZoneSubstation(PXD39311)
ProjectDescription- Replace the 11kVswitchboard
InSeptemberandOctober2008anumberofswitchboardfailuresresultedinwidespread powerdisruptiontoDarwin’snorthernsuburbs.MervynDaviesrecommendedthe immediate replacementofthisswitchboard.7 PriortotheDaviesReviewthisswitchboardreplacement wasnotincludedinthe 2008/09 SCI.
RebuildSnellStZoneSubstation(PRD39541)
ProjectDescription- Replace allassetsatSnellSt Zone Substation
SnellStZoneSubstationassets,aspartoftheremedialprogramofworks(asrecommended bytheDaviesReview),wereassessedasbeinginaverypoor stateandrequiringimmediate replacement.8 Thisprojectwasincludedin2008/09SCI,butat$12.5M.Theoptionof replacingassetsinsituwasdeemedunsafe forpersonnel,andthe originalscope expandedto includetheuseofadjacentlandthatwasnot large enoughtoaccommodatealowercost outdoorswitchyard.Thereforemoreexpensiveindoor66kVgasinsulatedswitchgearwas
7Davies,IndependentEnquiryintoCasuarinaSubstationEventsandSubstationMaintenanceacrossDarwin, FinalReport,4February2009,pg.14.
8Ibid.,pg.41.TheDaviesReviewnoteda priorrecommendationoftheMehtaReviewwastoreplaceoilfilled switchgearandthat PowerandWaterhadincludedSnellStreet, stating“Thedecisiontowidentheretrofit programmebeyondtheMehtarecommendationswasan appropriatelyprudentstepinminimisingtheoil hazard.”
required.Additionally,tomitigateagainstfailure ofthe11kVswitchboardandzonesubstation transformersatemporaryswitchboard andtransformerwasinstalled. Theactualcapital expenditure of the projectwas$46.05M,howeveronlythe additionalamountof $33.5Mdue tothe expandedscope of the projecthasbeen includedin Table B.
ReplaceManton 22kVSwitchboard(PRD39501)
ProjectDescription- Replace the 22kVYSF6Yorkshire switchboardatManton Zone Substation Anoutcomeofimprovedassetmanagementpracticesandassetconditionassessment(as
recommendedbytheDaviesReview9)wasgainingabetterunderstandingofnetworkassets.
Thisprojectwasnot onthe2008/09SCIatthetime duetolimitedunderstandingoftheasset conditionandfailuremodes.Thistypeofswitchgearwasfoundtohavepartialdischarge issuesthatresultedinanumberofswitchgearfailuresatMantonZoneSubstation. Theasset was deemed to be at the end of its serviceable life, with immediate replacement recommended.
ReinforceWinnellie–Berrimah11kVNetwork(PRD39712)
ProjectDescription - Installhigh capacity11kVcablesbetween BerrimahandSnellStZone Substations
SnellStZoneSubstationassets,aspartofthe remedialprogramofworks,wereassessedas beinginaverypoorstaterequiringimmediatereplacement.Asitwouldtake3to4 yearsto constructanewzonesubstation,anumberofprojectswereundertakentomitigateagainst thelossofsupplyfromthiszonesubstation.Thisprojectprovidedbackupsupplycapability fromBerrimahZoneSubstationtocustomersnormallyfedfromSnell StZoneSubstationto enable the worksrecommendedbythe DaviesReviewtobe undertakenwhilstpreserving acceptable levelsof securityandreliability.
Purchasesparezonesubstationtransformers (PRD39703,PRD39707,PXD39713)
ProjectDescription - Purchase spare zone substation power transformerstomitigateagainst anyfailures.
Partof implementingbetter assetmanagementpractices (as recommendedbythe Davies Review)wastoimplementasparepartspolicy thatlookednotonlyatpartsrequiredfor maintenance butalsoessentialsparestomitigate forequipmentfailure.10Large power transformers are individually designed and constructed and the acquisition of a zone substationtransformernormallytakesayearormore.PowerNetworkshadveryfewspare zonesubstationtransformersandwasthereforeexposedtooperating thenetworkinan insecureconditionforalongperiodof timeintheeventofthefailureof certaintransformers. Due toinadequate assetmanagementpracticesatthe time,these purchaseshadnotbeen includedin the 2008/09SCI.
Purchasetwomobilesubstationsandswitchboards(PRD39738,PRD39534)
ProjectDescription - Purchase twoNomadmobile 66/22/11kVsubstations,andpurchase two mobile 11/22kVswitchboards.
9Ibid,pg.58,83,84.TheDaviesReviewrecommendedfurtherinvestigationtoremovetheassetcondition risk associatedwithYorkshireswitchgear.Thiswasundertakenaspartoftheremedialprogramthatwasa majorrecommendationofthereport.
10Ibid,pg.56.TheDaviesReviewnotedandendorsedthefindingofa previousreview byBlanch,whichwas thatPowerandWater’ssparepartsholdingswereinadequate.
AspartoftheRAMPprogramofassessingassetcondition11,anumberofzonesubstations wereidentifiedwheretheassetshaddeterioratedtosuchanextentthatacompleterebuild wasnecessary.Asthisreplacementprogramwouldtake6to7years,itwasrecommended thatmobilesubstationsandswitchboardsbeprocuredtomitigateagainstcatastrophicfailure of zone substation transformers and switchgear. Again the lack of knowledge of asset condition prior tothe DaviesReview meantthat no fundingwasincludedin the 2008/09 SCI.
RebuildWeddell–Archer66kVLine(PRD30002)
ProjectDescription- Constructnew 66kVWeddellto Archer transmission line
Thisline currentlyconnectsWeddell Power Station tothe greater Darwin area.In accordance with the Daviesrecommendations,PowerNetworksinstigateda condition assessmentof all assetsthrough the implementation of a robustpreventative maintenance regime basedon ‘objective need’oftheassets.Uponassessment,thisline wasfoundtobe inapoorcondition withsevere cross-armcorrosionproblems.Additionallyariskassessmentrecommendeda completerebuild,asthecurrentlineisdesignedtoonlysurviveaCategory1cycloneevent. The lack of knowledge of asset condition at the time coupled with inadequate risk managementprocessesresultedin thisprojectnotbeingincludedin the 2008/09 SCI.
Replace22kVKatherineSwitchboard(PXK32080)
ProjectDescription- Replace the 22kVYSF6Yorkshire switchboardatKatherine
An outcome of improvedassetmanagementpractices andassetcondition assessment(as recommendedbytheDaviesReview12) wasgainingabetterunderstandingofnetworkassets. Thisprojectwasnot onthe2008/09SCIatthetime duetolimitedunderstandingoftheasset condition andassetfailure modes. Thistype of switchgear (same asManton above) isnow knowntohavepartial dischargeissuesresultinginanunacceptablenumberofswitchgear failuresatKatherine.Thisswitchboardwasinsuch apoorstate thatadehumidifierwas installedtoreduce the levelsofsurfacepartialdischarge andsafetyrestrictionsinstigatedfor personnelenteringthisswitchroom.
CAPITALANDOPERATINGEXPENDITURE SHORTFALL
Power andWater requeststhatthe Commission consider thefullamountof Power Networks’ expenditurethathasexceededthatallowedfor bytheCommissioninits2009NPD,andnot limitthe costpassthrough amounttotheoperating andcapital expenditure describedabove.
Thefulloperatingand capitalexpenditureshortfallwasapprovedbytheNTGovernment throughtheStatement ofCorporateIntentprocess.ItisreflectiveoftheGovernment’s requirementtoimprove thesecurityandreliabilityof electricitysupplyintheTerritory.Asa consequence,substantialenhancementsweremadetoPowerNetworks’assetmanagement regime with theembeddingof an improvedmaintenancecycleculture within Power Networks, asespousedintheDaviesReviewrecommendations.Theincreasedcostsassociatedwith thesechangesaredifficulttoisolateandquantify.Forexample,increasedcostsassociated with improving policy and procedure documentation, maintenance reporting and works program development.
11Ibid,pg.84.TheDaviesReviewrecommended“aprogrammeofrigorousconditionassessmentofallZone Substationequipmentimmediately”.
12Ibid,pg.58,83,84.TheDaviesreportrecommendedfurtherinvestigationtoremovetheassetcondition risk associatedwithYorkshireswitchgear.Thiswasundertakenaspartoftheremedialprogramthatwasa majorrecommendationofthereport.
COSTPASS THROUGHAMOUNT
Please note thatthissection hasbeen updatedsince Power andWater’s2013-14 Cost Pass ThroughApplicationdated5February2013,to reflectupdated2008-09capexand2013-14 opex.
The requiredrevenue increase asaresultofthefullcapitalandoperatingcostincreaseshas been identified.
Inthe Commission’s2009NPD,the approachusedwas todetermine the base yearcostof service for2009/10andprojectaprice pathforthe remainingyearsofthe regulatorycontrol periodusinga form of TotalFactor Productivity(TFP) analysis. The Commission’sFinal Determination wasfor aCPI-X form of price control with X made upasfollows.
“4.89GHDMeyrickconcludedthat,assumingthatopexaccountsforone thirdofelectricitydistributioncostswhilecapital costsaccountforthe remainingtwothirds,itwasreasonabletoconsiderthatavailabledata producesanoverallinput pricedifferentialorX3componentestimate of1.1%.
…
4.114TheCommissiondeterminesthatthefollowingcomponentvaluesare tobeusedforthepurposesofcalculatingthevalueoftheXfactorto apply duringthethirdregulatoryperiod:
•X1=0.0%;
•X2=0.25%;and
•X3=1.1%where:
and
X1=thedifferencebetweentheTFPgrowth fortheelectricity distributionindustryinAustraliaandthatfortheeconomyasa whole;
X2=thedifferencebetweenthebestobservedoperating expenditurepartialproductivitylevelintheelectricitydistribution industryinAustraliaandPowerandWater’soperating expenditurepartialproductivitylevel;and
X3=thedifferencebetweentheinputpricegrowthforPower andWaterandthatfortheeconomyaswhole;
X=X1+X2–X3”13
AllowingfortheroundingofXfactorsintheFinalDetermination,thecomponentsofX3were thusasfollows:
X3=X3Opex– X3Capex
where:
X3Opex =1/3 X 0.9%=0.3% X3Capex =2/3 X 1.2%=0.8%14
13UtilitiesCommission,FinalDeterminationNetworksPricing:2009RegulatoryReset,March2009,pp.39,43- 44.
14UtilitiesCommission,PriceControlMechanism,FinalDecisionPaper:2009RegulatoryReset,May2008,
p.73.
The base year levelsof capexandopex of the Commission’sdecision were asfollows: Opex:$45.580 M15
Capex: $56.782 M16
The levelsofcapexandopexthatformedthe basis forthe Commission’sdecisionforthe third regulatorycontrolperiodare recreatedin thefollowingcalculation. The assumedvolume growth underpinning the decision is the assumed annual quantity growth used in Commission’smodellingforthe2009NPD,g=2.5%17.Thedecisionhasbeenadjustedfor out-turnCPI.TheimputedcapexandopexallowancesaresetoutinTable1.Alsoshownis the actualandforecastrevenue through prices.
Table1–OpexandcapexallowancesfromtheCommission’s2009 NPD($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / 2009-14CPI18 / 2.33% / 4.25% / 1.82% / 2.85% / 3.39% / 1.76% / -
Opexallowance19 / 45.6 / 48.7 / 50.9 / 53.7 / 56.9 / 59.4 / 315.1
Capexallowance20 / 56.8 / 61.2 / 64.3 / 68.4 / 73.0 / 76.8 / 400.5
Totalallowance / 102.4 / 109.9 / 115.2 / 122.0 / 129.9 / 136.2 / 715.6
Actual/forecast
revenue / 83.8 / 102.6 / 100.6 / 104.7 / 115.6 / 123.8 / 631.1
The extenttowhich thecapexandopexincurredbyPower andWater has,andisexpectedto, exceedregulatoryallowancesisshowninTable2and3,andsummarisedinTable4and Figure 1.
Table2–Actualandforecastopexcomparedwiththeregulatoryallowance($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / TotalOpexactual/forecast / 84.3 / 78.5 / 93.0 / 101.1 / 97.8 / 93.9 / 548.6
Opexallowance / 45.6 / 48.7 / 50.9 / 53.7 / 56.9 / 59.4 / 315.1
IncrementalOpex / 38.7 / 29.8 / 42.1 / 47.5 / 40.9 / 34.5 / 233.4
Table3–Actualandforecastcapexcomparedwiththeregulatoryallowance($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / TotalCapexactual/forecast / 65.9 / 85.2 / 88.8 / 78.8 / 123.8 / 98.7 / 541.2
Capexallowance / 56.8 / 61.2 / 64.3 / 68.4 / 73.0 / 76.8 / 400.5
IncrementalCapex / 9.1 / 24.0 / 24.5 / 10.4 / 50.7 / 21.9 / 140.7
Table4–Totalincrement($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / TotalOpexactual/forecast / 84.3 / 78.5 / 93.0 / 101.1 / 97.8 / 93.9 / 548.6
Capexactual/forecast / 65.9 / 85.2 / 88.8 / 78.8 / 123.8 / 98.7 / 541.2
Incrementalopex / 38.7 / 29.8 / 42.1 / 47.5 / 40.9 / 34.5 / 233.4
Incrementalcapex / 9.1 / 24.0 / 24.5 / 10.4 / 50.7 / 21.9 / 140.7
Totalincrement / 47.8 / 53.8 / 66.6 / 57.9 / 91.6 / 56.4 / 374.1
15UtilitiesCommission,FinalDeterminationNetworksPricing:2009RegulatoryReset,March2009,p.79.
16Ibid.p.63.
17Ibid.Table3-2, p.23.
18AssumedCPIistaken astheCPIapprovedforeach annualNetworkTariff submission.
19Opexescalationiscalculatedas:(1+X3Opex)*(1- X2)*(1 +CPI)*(1+ g).
20Capexescalationis calculatedas:(1+X3Capex)* (1+CPI)* (1+ g).
Figure1–Actualandforecastopex,capexandrevenuecomparedwiththe regulatoryallowance($M)
175
150
125
100
75
50
25
0
2008-092009-102010-112011-122012-13
Forecast
2013-14
Forecast
PWCActualCapex2009NPDUCcapexallowancePWCActualOpexPWCActualRevenue
2009NPDUCOpexallowancePWCRequiredRevenue
ThetotalimpactonPowerandWaterofthisoverexpenditureduringthethirdregulatory controlperiodiscalculatedasat2013/14, asfollows:
•Incrementalcapitalexpenditureonsystemassets(withalifeof50 years)isrolled forwardto determinetheannualcostofsupportingit. Thisalso determinesthe incrementintheassetvaluethatwouldbecarriedforwardtothefourthregulatory controlperiod;and
•Incrementalcapexandopexamounts areescalatedto2013/14using thepre-taxreal WACC of 6.82%determinedbythe Commission21.
The capitalexpenditure rollforwardcalculation isshown in Table 5.
Table5–Incrementalcapitalexpenditurerollforward($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / 2014/15IncrementalRABcalculation
Openingassetbase / 0.0 / 9.1 / 33.3 / 57.8 / 68.7 / 120.4 / 142.0
Capex / 9.1 / 24.0 / 24.5 / 10.4 / 50.7 / 21.9
Depreciation / 0.0 / -0.2 / -0.7 / -1.2 / -1.4 / -2.4
Indexation / 0.0 / 0.4 / 0.6 / 1.6 / 2.3 / 2.1
Closingasset base / 9.1 / 33.3 / 57.8 / 68.7 / 120.4 / 142.0
Incrementalexpenditureoncapexcalculation
Returnonassets / 0.3 / 1.4 / 3.1 / 4.3 / 6.4 / 8.9
Depreciation(Returnof) / 0.0 / 0.2 / 0.7 / 1.2 / 1.4 / 2.4
Incrementalcapex(returnonandof) / 0.3 / 1.6 / 3.8 / 5.5 / 7.8 / 11.4
21UtilitiesCommission,FinalDeterminationNetworksPricing:2009RegulatoryReset,March2009,p.36.
Theincrementaloperatingexpendituresandincrementalreturnonandreturnofcapital expenditure are therefore asshown inTable 6.
Table6–Incrementalexpenditure($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / TotalIncrementalopex / 38.7 / 29.8 / 42.1 / 47.5 / 40.9 / 34.5 / 233.4
Incrementalcapex(returnonandof) / 0.3 / 1.6 / 3.8 / 5.5 / 7.8 / 11.4 / 30.4
Total / 39.0 / 31.4 / 45.9 / 52.9 / 48.7 / 45.8 / 263.8
RECOVERYOFTHECOSTPASS THROUGH
Thereisoneremainingyearoftheexistingregulatorycontrolperiodin whichtheproposed pass through amountcouldbe recovered,2013/14.Dependingon theCommission’s Final Decision,itmaynotbe possible torecover the whole amountof the passthrough in a single year,without an unacceptablylarge increase in networkprices.
PowerandWatertherefore proposesa three-stage approach torecoveringthe passthrough amountassociatedwith the implementation ofthe DaviesReview recommendations:
1)Theadditionalrevenuetoberecoveredin2013/14wouldbesetat$45.8 M.This representsan increase in the weightedaveragenetworkprice of approximately37%, andwouldalignthepriceinthefinalyearofthethirdregulatorycontrolperiodwith the revenue requiredto cover additionalcapitalandoperating costs.
2)Therevenueshortfallintheprioryearsto2013/14wouldbeindexed andcarried forwardtothe fourth regulatorycontrolperiod.ThisiscalculatedinTable7.
Table7–Recoveryofoverexpenditurepriorto2013/14($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2014/15Incrementalexpenditure / 39.0 / 31.4 / 45.9 / 52.9 / 48.7
Indexationto2014/15 / 1.4856 / 1.3908 / 1.3020 / 1.2189 / 1.1411
Indexedto2014/15 / 57.9 / 43.7 / 59.7 / 64.5 / 55.6 / 281.5
PowerandWaterproposesthattheamountof$281.5 Mberecoveredinthefourth regulatorycontrol period.Ifrecoveredasequalinstalments,this wouldrepresenta networkprice increase of approximately33%in 2014/15.
The mostconvenientwayofpermittingthissumtobe recovered,whilstallowingfor some flexibilityinthe annualrecovery,wouldbetouse the oversandundersprovision thatwillbeestablished bytheCommissionaspartoftherevenuecapformofprice controlin 2014/15.
3)TheRegulatory AssetBase(RAB)wouldbeincreasedbytherolledforwardvalueof capitaloverexpenditure,of$142 M,atthecommencementofthefourthregulatory controlperiod.
Inthisway,PowerandWaterwouldeventually recovertheadditionalcostsarisingfromthe implementationoftheDaviesReviewrecommendationsaspermittedbytheCommission’s 2009 Networks Price Determination.
AlternateApproach
IftheCommissiononlyacceptstheoperatingandcapitalexpenditureprojectsandstep changesthatcanbedirectlyattributed totheimplementationoftheDaviesReview recommendations,then Power andWater requestsa fullcostpassthrough in 2013-14 of the totalamount,$104.5M, asdetailedinTable 8below.
Table8–RecoveryofExpenditureattributedtoDavies($M)
Year / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / TOTALIncrementalopex / 15.3 / 6.4 / 10.0 / 9.8 / 14.3 / 9.3 / 65.1
Incrementalcapex(returnonandof) / 0.1 / 0.5 / 1.6 / 3.6 / 6.2 / 7.9 / 19.9
Indexationto2013/14 / 1.4856 / 1.3908 / 1.3020 / 1.2189 / 1.1411 / 0.0
Indexedto2013/14 / 22.9 / 9.6 / 15.1 / 16.3 / 23.4 / 17.2 / 104.55
If this is theCommission’s preferredapproach, Power andWater requeststhata reconciliation oftheactualexpenditureincurredbyPowerNetworksduringthethirdregulatorycontrol periodisundertakenas partofthe2014NetworkPriceDeterminationprocess,asitimpacts significantlyonPower Networkson-goingcommercial viability.