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The Australian Energy Regulator has released its final decisions on the price reviews for the three Victorian gas distribution service providers SP AusNet, Envestra and Multinet and the gas transmission service provider, APA GasNet. The AER’s decision will determine prices for use of the Victorian gas distribution and transmission networks, and the Albury distribution network, for the next five years.

The release of the AER’s final decision follows a thirteen month process of assessing the businesses’ spending proposals for the development, operation and maintenance of their networks. The AER undertook extensive consultation and sought the views of a number of stakeholders throughout this process, including consumer groups.

“The AER’s final decision will result in a slight reduction in rates charged by all businesses except Envestra,” AER Chairman Andrew Reeves said.

“This reduction could translate to lower residential gas bills if passed on by the gas retail businesses.”
A typical residential gas bill is made up of network charges (approximately one third for distribution charges and 7 per cent for transmission), a charge for the wholesale cost of gas and a retail margin. If the reduction in allowed revenue from the AER’s decision is passed through to consumers, the impact on a typical residential bill (in nominal terms) could be as follows:

  • Multinet – prices are not expected to change from 1 July 2013
  • SP AusNet – prices could be expected to fall by approximately $5 each year
  • Envestra Victoria – prices could be expected to increase by approximately $16 each year
  • APA GasNet – prices could be expected to fall by approximately $5 each year (on top of the change in distribution charges).

The final decision cuts $1.1 billion ($nominal) from the four network businesses’ initial proposals, which represents a 26 per cent reduction.

The AER’s decisions on the rate of return accounts for most of the difference between the AER’s decisions and the businesses’ proposals. The AER also rejected the businesses’ proposals particularly where proposed capital and operating expenditure is well above historical levels or not justified.

The AER’s decision allows for a rate of return similar to that in recent decisions. However, it is lower than the rate of return from decisions made several years ago.

Over the past couple of years, interest rates have fallen by around 2 per cent. This means that businesses like the Victorian gas businesses can now source funding at lower rates in previous years. This decision passes the benefit of those lower funding costs back to customers.

“In this decision we have allowed a rate of return of around 7 per cent. In the current economic circumstances we think that is sufficient for these businesses to attract the funding they need. This rate also reflects that these are utility businesses that face less risk than most listed businesses,” Mr Reeves said.

The AER rejected elements of the businesses’ capital expenditure proposals and, in particular, the distribution businesses’ asset replacement proposals. The distribution businesses proposed a large increase in mains replacement, which replaces old low pressure cast iron pipes with new high pressure pipes.

The gas distribution businesses spent significantly less on their mains replacement program than the allowance provided for in the 2008–12 period. In one case a business replaced less than half of the kilometres of pipes previously approved by the regulator. This underspend meant that consumers, through the prices charged by the businesses, paid for pipeline replacement that was never delivered.

The AER’s decisions provide for mains replacement programs to progress at the same rate as the previous regulatory period. However, the AER’s decision accommodates additional mains replacement if the businesses spend the allowance provided and can demonstrate to the AER that more investment is required. The AER’s approach means consumers will only pay for mains replacements that are justified and which are delivered.

Opex covers the ongoing costs of operating and maintaining the network. The AER has forecast opex needs that are largely consistent with historical levels. Where there has been an increase, this is largely due to rising labour costs, network growth, and circumstances that are outside the businesses’ control—such as new regulatory requirements.
The AER also substantially reduced APA GasNet’s depreciation allowance.

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