AER final decision approves increased investment in the NSW electricity distribution network

The Australian Energy Regulator today issued its final decision on the distribution determinations to apply to the electricity distribution networks in NSW, owned and operated by Country Energy, EnergyAustralia and Integral Energy, for the period 1 July 2009 to 30 June 2014.

The AER is the national regulator with responsibility for assessing the efficient costs of energy network businesses, and approving charges for their monopoly services. This process generally follows a five year cycle. These are the first determinations made by the AER for the three NSW distribution networks.

Each business plans to significantly increase its capital investment over the next five years. The AER's analysis confirms the need for, and efficiency of, an increased investment allowance, cognisant that this increased investment will result in higher user charges. These price increases are, however, less than those estimated in the AER's draft decision of last year, largely because the return on capital has been reduced to reflect lower interest costs and weaker economic conditions.

"The final decision approves $14 billion of capital investment across the three NSW electricity distribution networks over the next five years, which represents an increase of around 80 per cent from the current level of $8 billion for the past five years." AER Chairman, Mr Steve Edwell, said. "The three businesses have assured the AER that they have access to sufficient finance to deliver these investment commitments.

"Such a substantial increase in investment expenditure will result in higher distribution charges, however, due to the effect of recent global economic developments, the increases will be lower than expected in the draft decision," Mr Edwell said.

Impact on consumers

As a result of the final decision, the AER estimates that higher network charges will increase the average residential electricity bill for 2009–10 in nominal terms by around:

• $1.50 per week for Country Energy customers, compared to $1.96 per week in Country Energy's proposal*
• $1.49 per week for EnergyAustralia customers, compared to $2.00 per week in EnergyAustralia's proposal**
• $1.41 per week for Integral Energy customers, compared to $1.70 per week in Integral Energy's proposal***

Actual network charges will be determined by the AER in late May following further submissions from the businesses. Any retail price increases are likely to flow through to customers in the second half of 2009. Distribution charges represent about 40 per cent of the average cost of final delivered energy in NSW.  

Need for investment

The underlying need for the higher investment is different for each business:

• Country Energy has to augment its network, particularly in high growth corridors such as the NSW north coast. It must also comply with enhanced licence conditions, which will involve extensive network reinforcement to achieve N-1 redundancy in regional areas, which reduces the risk of supply interruptions, as well as remediation of poor performing individual feeders.
• As well as augmenting the network to meet growing demand in the Sydney CBD, EnergyAustralia needs to replace ageing and obsolete assets including 33kV gas filled and 132 kV oil filled sub–transmission cables and 11kV switchgear.  It also has to comply with enhanced licence conditions, which will require reinforcement of the Sydney CBD to achieve N-2 redundancy standards by 2014. This additional redundancy reduces the risk of supply interruptions.
• Integral Energy has to build new substations to meet local growth, particularly around the Liverpool, Parramatta and Blacktown areas of Western Sydney. It will also need to undertake a major program to replace aging transmission and zone substation equipment.  Integral Energy also needs to invest to achieve compliance with enhanced licence conditions, which will require construction or replacement of numerous zone substations and feeders.

"In part, the need for increased investment is being driven by a greater use of air conditioning," Mr Edwell said. "Expanding the network to keep air conditioners running on a few hot days makes the network more costly to build and operate as this capacity is then under utilised for much of the year."

"To help offset this inefficiency, the AER's decision supports the development of innovative responses to rising demand on the network, through the application of demand management incentive arrangements."

Demand management refers to strategies used by the businesses to slow growth in electricity consumption. These strategies may include providing incentives for customers to change their consumption patterns, energy efficiency initiatives or seeking agreements from large users to turn off equipment during times of very high network demand.

"These practices can provide an alternative to building new network, which keeps investment costs down," Mr Edwell said.

Impact of the economic downturn

Since the AER commenced its review of the NSW distribution businesses' regulatory proposals in June 2008, domestic and international economic conditions have deteriorated sharply.  This has led to revised projections of economic growth, labour and commodities prices as well as funding costs for network businesses.

"For the final decision, the AER reconsidered key aspects of its draft decision, taking into account recent changes in the economic outlook," Mr Edwell said.

The most significant development since the AER's draft decision in November 2008 is the reduction in the yield on Commonwealth Government 10-year bonds from 5.46 per cent to around 4.3 per cent in March 2009. This bond yield is the benchmark for determining the NSW distribution businesses' return on capital.

"The AER has carefully considered the impact of recent developments in financial markets and the economy more broadly, and considers that a marginally lower rate of return on capital for the NSW distribution businesses is appropriate. This means that their revenues for the next five years will be less than those determined in the draft decision.

"The economic downturn is also slowing growth in the cost of inputs such as labour and materials. The AER has undertaken a detailed analysis of forecast changes in these costs and, while they are still expected to rise over the next five years, the magnitude of these increases is now expected to be lower than previously anticipated. The AER's final decision for the NSW distribution businesses' regulated revenues for the next five years reflects these revised cost forecasts."

In response to the revised economic outlook, the NSW distribution businesses submitted revised global demand forecasts and made modest adjustments to their capital investment projections to account for a slightly slower expected growth in peak demand and new customer connections. Overall, growth in energy consumption in NSW is expected to be slower over the next five years than in recent times.

"Despite the revised economic outlook, there remains a need to build new network capacity to meet future customer demand in NSW. As a result, distribution charges in NSW are still forecast to rise during the next five year period, albeit more moderately than previously expected."

Public lighting

The AER received a large number of submissions from local government councils on the AER's proposed changes for public lighting.  The final decision has determined a charge for each public lighting customer which better reflects the condition of the assets. In addition, cost reflective prices for new energy efficient lights have also been approved.

In making its final decision, the AER took into account submissions from interested parties and advice from independent experts. These documents are available on the AER's website

*Country Energy has assumed an average customer consumes 6 MWh per annum, with 4 MWh consumed on a continuous supply and 2MWh off peak hot water.

**EnergyAustralia has assumed an average customer consumes 4.7 MWh per annum excluding controlled load.

***Integral Energy has assumed an average customer consumes 6,000 kWh per annum.