AER releases NSW draft decision

The Australian Energy Regulator has released a draft revenue determination for the NSW electricity distributors Ausgrid, Endeavour Energy, and Essential Energy, for a five year period through to June 2019.

This draft determination is a preliminary step to allow the network businesses and the community to make further submissions to the AER before a final regulatory determination is made by 1 May 2015.

In its draft determination, the AER has proposed retrospectively reducing revenue allowances by $6.5 billion or 27 per cent over the five year period to 2019 based on reduced cost of capital, reduced operating expenditure, and more than a 60 per cent real reduction in the capital investment program compared to the previous five years.

“The NSW electricity distributors will give careful consideration to the AER’s draft proposals and will continue to give priority to the provision of a safe, reliable, and affordable electricity network for NSW families and businesses,” said Vince Graham, Chief Executive Officer of Ausgrid, Endeavour Energy, and Essential Energy.

“Since July 2012, Ausgrid, Endeavour Energy, and Essential Energy have been undertaking sweeping reforms aimed at improving the operating and capital efficiency of the NSW network businesses.”

“The NSW Government’s Reform Program started over two years ago, already delivering $2.8bn of capital and operating savings, with a total of $5.4bn to be removed from capital and operating budgets through to June 2016. Employment reductions of more than 2,300 have been achieved since July 2012 across the state through a recruitment freeze, natural attrition, and targeted voluntary redundancy programs. Overtime has reduced by $90m per annum.”

“These reforms mean the double digit annual increases in network charges evident from July 2009 to July 2012 have been contained at less than CPI for both July 2013 and July 2014.”

“While a lot has been done, much remains to be done. The networks must continue with the reforms already underway,” Mr Graham said.

“Our customers have told us they want affordable, safe, and reliable electricity, and our AER proposals reflected these priorities. We proposed a 40% cut in capital expenditure over the next five years which would see significant reductions in electricity charges for families and businesses.”

As part of the draft decision, the AER proposes retrospectively reducing, from 1 July 2014, the networks’ operating expenditure by $2.3billion (or 35 per cent) in real terms largely based on a new AER benchmarking model. The outcomes of this model are yet to be discussed or tested with the industry.

Mr Graham states that the AER draft determinations would mean, if implemented:

• Immediate job reductions of 4,600 employees (38%) across NSW (Ausgrid 2,400, Endeavour Energy 700 and Essential Energy 1,500);
• An inability to place 750 apprentices, currently in training, when they graduate to trade over the next four years;
• A likely reduction of $460m in vegetation management programs over the next four years; and
• Deterioration in the time taken for electricity networks to restore electricity supply to communities after major storm events.

“The AER is placing significant emphasis on a new econometric model which it has adopted to benchmark the operating performance of the thirteen Australian distributors in QLD, NSW, VIC, TAS and S.A.,” Mr Graham said.

“The AER was subject to a legal requirement to publish the first benchmarking report by 30 September 2014. It did not meet this obligation, preventing proper public examination of the AER’s processes and conclusions that underlie a major regulatory initiative. This fails both the public interest and procedural fairness tests.”

“Surprisingly, in a new regulatory initiative, the AER is proposing to reduce network maintenance costs and argues customers should accept more local blackouts and be later compensated. These local blackouts would inevitably occur on the hottest summer days of the year.”

In the draft determinations the AER has not yet provided for any transitionary period to implement the significant job reductions driven by the large cuts to operating and capital expenditure.

“The AER is yet to confirm that it has undertaken any risk assessment of its unprecedented and retrospective adjustments to operating expenditure, including in areas around service reliability,” Mr Graham said.

“We would expect that the AER has undertaken its own thorough risk assessment prior to publishing the draft determinations. Networks NSW will not compromise on the safety of the public and our employees being our number one priority.”

“There is a compelling case that the NSW publicly owned networks must continue with the reform already underway. We share the AER’s objective to meet consumers’ long term interests by improving our capital and operating efficiency to contain increases in network charges. However the AER’s draft retrospective proposals are not practical, possible or legal,” Mr Graham said.

“Over the months ahead we will continue to advocate for a safe, more balanced, and sensible transition that would enable us to deliver lower network charges for families and businesses in NSW and continue to reduce employee numbers within a considered and structured program.”