Draft decisions 2011 -16 Access Arrangements for APT

Draft decisions 2011 -16 Access Arrangements for APT Allgas and Envestra (Qld) Warwick Anderson General Manager, Network Regulation 1 March 2011 Public forum

Housekeeping matters • Please sign the attendance sheet • A record of this meeting will be made 2

Purpose of the forum • Present the main features of the AER’s draft decision on the access arrangement proposals submitted by APT Allgas and Envestra • Inform parties intending to make submissions on the AER’s draft decision 3

Submissions • Submissions on the AER’s draft decision can be sent to QLDSAgas@aer. gov. au, until 21 April • The AER’s access arrangement guideline provides guidance on making submissions – available at www. AER. gov. au • Timeframes under the NGL and NGR limit the AER’s ability to accept late submissions 4

Revenues & Prices - APT Allgas • The AER has determined lower revenues & prices than those proposed by APT Allgas. • The main reductions are to the proposed WACC, forecast opex and tax allowance. • Tariffs for haulage services are expected to rise in real terms by about 3. 6 per cent per annum (on average) over the AA period. • The tariffs for ancillary services were revised and will increase each year only by the rate of change in CPI. 5

Haulage Tariffs – APT Allgas Real price index starts at $1 in 2005 -06 6

Total revenues (including ancillary services) - APT Allgas 7

Revenues & Prices - Envestra • The AER has determined lower revenues & prices than those proposed by Envestra. • The main reductions are to Envestra’s proposed WACC, forecast capex and forecast opex. • Tariffs for haulage services are expected to rise in real terms by about 2. 6 per cent per annum (on average) over the AA period. • The tariffs for ancillary services were revised and will increase each year only by the rate of change in CPI. 8

Haulage Tariffs - Envestra Real price index starts at $1 in 2005 -06 9

Total revenues (including ancillary services) Envestra 10

Key drivers of results • Key drivers: – Return on capital (asset base * cost of capital) – Return of capital (depreciation) – Capital expenditure forecasts – Operating expenditure forecasts – Demand forecasts - for converting revenues to prices. 11

Breakdown of revenues (2011 -16) – APT Allgas 12

Breakdown of revenues (2011 -16) – Envestra 13

Cost of capital (WACC) • The nominal cost of capital has increased significantly (see following table) • Debt risk premium, more than tripled since the earlier AA period. • The cost of equity has decreased, due mostly to a reduction in the equity beta. • The AER has set the market risk premium to its pre-GFC level of 6%. 14

WACC parameters Parameters (%) Earlier AA period APT Allgas proposal Envestra proposal AER draft decision Nominal risk free rate 5. 3 5. 1 5. 3 5. 7 Inflation forecast 2. 8 2. 5 2. 6 2. 5 Cost of equity 11. 3 12. 2 13. 0 10. 5 Equity beta 1. 1 0. 8 -1. 1 0. 8 Market risk premium 6 6. 5 -8. 0 6 Cost of debt 6. 6 8. 9 8. 7 9. 6 Debt risk premium 1. 3 3. 9 3. 4 3. 9 Gearing (D/(D+E)) 60 60 55 60 Nominal cost of capital 8. 7 10. 2 10. 6 10. 0 15

Revenues under different WACCs – APT Allgas 16

Revenues under different WACCs – Envestra 17

Regulatory asset base – APT Allgas 18

Capital expenditure – APT Allgas • AER accepted APT Allgas’s proposed capex. • AER identified a few issues with APT Allgas’s capex proposal. But the impact was not material. 19

Total capex – APT Allgas 20

Capex by purpose – APT Allgas Next AA period Earlier AA period (as proposed/accepted) (actual) 21

Regulatory asset base – Envestra 22

Capital expenditure - Envestra • Envestra proposed a 71% real increase in capex compared to the earlier AA period – due largely to Envestra’s proposed expansion of its mains replacement program. • The AER accepted most of the proposed capex. Adjustments for – – contingency amounts overhead costs real cost escalation and mains replacement in Brisbane. 23

Total capex - Envestra 24

Capex by purpose - Envestra 25

Mains replacement capex - Envestra 26

Return of capital • Both Envestra & APT Allgas proposed shorter asset lives than used previously. • The AER has accepted these asset lives – increased the rate of depreciation. • Return of capital has increased significantly. • The following graph shows the trend in regulatory depreciation. 27

Regulatory depreciation – APT Allgas 28

Regulatory depreciation - Envestra 29

Operating expenditure – APT Allgas • APT Allgas proposed a 23% real increase in opex compared to the earlier AA period, principally due to: – increased input costs – increased UAG costs, and – the need for various types of non-base year costs. • The AER amendments, including – input cost escalators – a reduction in the price assumptions for UAG – various proposed step changes. • The AER’s draft decision results in a 12% real increase in opex compared the earlier AA period. 30

Total opex – APT Allgas 31

Operating expenditure - Envestra • Envestra proposed a 16% real increase in opex compared to the earlier AA period, principally due to: – – increasing input costs increasing UAG costs increased network development, and the need for various non-base year costs. • The AER required a number of amendments, including: – – input cost escalation network development UAG expenditure and several of the proposed non base year costs. • The AER’s draft decision results in an 11% real reduction in opex compared to the earlier AA period. 32

Base year costs - Envestra 33

Total opex - Envestra 34

Demand forecast - APT Allgas • For the most part, the proposed demand forecasts are reasonable. • AER adjustments: – average gas usage for residential customers – lower growth in business customer numbers 35

APT Allgas residential customer numbers forecast 36

APT Allgas average residential consumption forecast 37

Demand forecast - Envestra • For the most part, the proposed demand forecasts are reasonable. • AER adjustments: – average gas usage for residential customers 38

Envestra residential customer numbers forecast 39

Envestra average residential consumption 40

Terms and conditions • Submissions: – overall terms and conditions were weighted too much in favour of the service providers. • The AER accepts most of the proposed terms and conditions for both service providers. • However, changes are required to provide a better balance between the service providers and customers 41

Consultant advice • • Cost of capital: Professor Kevin Davis Opex and capex forecasts: Wilson Cook Labour cost growth: Access Economics Demand forecasts: ACIL Tasman 42

Timeline Release of draft decisions 17 February 2011 Public forum on draft decisions 1 March 2011 Revised proposals to be submitted 23 March 2011 Submissions on draft decisions due 21 April 2011 Release of final decisions Late May 2011 43