The Australian Energy Regulator today issued its final decision approving the Directlink Joint Venturers' application for conversion of the Directlink electricity transmission line to a regulated network service.
Directlink currently operates as a market network service and earns revenues based on the spot price differential between the New South Wales and Queensland electricity regions.
"Directlink meets the requirements under the National Electricity Rules and should therefore be allowed to convert", AER Chairman, Mr Steve Edwell, said.
"The AER has determined that there are benefits to the National Electricity Market from having Directlink operate as a regulated service".
Having decided to convert Directlink, the AER has established an initial asset value for Directlink and in turn determined the maximum allowed revenues for Directlink's service.
"The process of valuing Directlink, as a 'sunk' asset, has presented a range of challenging issues. Our approach provides an asset value for Directlink that is consistent with the level of benefits Directlink provides to the market", Mr Edwell said.
The AER proposes to set maximum allowed revenues for Directlink over a 10 year period, ranging from $11.75 million in 2005–06 to $13.59 million in 2014 15. This is, on average, around 25 per cent less than the requested allowance of $16.50 million to $18.10 million. The revenue cap is based on a post-tax nominal return on equity of 11.32 per cent and an opening asset value of $116.68 million.
The AER considered submissions to the draft decision, released on 8 November 2005, in finalising its decision.
"The appropriate maximum allowed revenue for DJV is based on judgements about Directlink's likely market benefits. In establishing the asset value of Directlink, consideration also had to be given to incentives for investment in the NEM", Mr Edwell said.
A copy of the final decision can be found on the AER's website.
Directlink is a 63 kilometre electricity network asset that runs between Mullumbimby and Terranora in NSW. It forms one of the links between the NSW and Queensland electricity regions in the National Electricity Market.
Directlink began operation on 25 July 2000 as a market network service under clause 2.5.2 of the National Electricity Code. It has a nominal capacity of 180 MW and is owned by Emmlink Pty Ltd (a wholly owned subsidiary of Country Energy) and HQI Australia Ltd Partnership. These two entities are referred to as the Directlink Joint Venturers (DJV).
In an application to the AER, DJV sought to convert Directlink's status from a market network service to a prescribed service (that is, a transmission network service to which a revenue cap applies) in accordance with the code. DJV also requested that they receive a maximum allowed revenue for the provision of prescribed services from the date of the AER's final decision to 30 June 2015.
Under clause 2.5.2(c) of the code, the AER has the discretion to determine whether a market network service should be converted to a prescribed service. It also has the discretion to determine an appropriate value for the regulated asset base and maximum allowed revenue in accordance with chapter 6 of the code.