Energy Users Association Australia (21 Feb 2001) From: Reichel [reichel@r150.aone.net.au] Sent: Wednesday, 21 February 2001 4:31 PM To: john.bastick@accc.gov.au Subject: EUAA Submssion to ACCC on Review of EAPL Moomba to Sydney Pipeline Access Arrangements Energy Users Association of Australia Suite 1, level 2 19 - 23 Prospect Street Box Hill VIC 3128 19th February 2001 Ms Kanwaljit Kaur Acting General Manager Regulatory Affairs - Gas PO Box 1199 Dickson ACT 2602 ACCC Review of Access Arrangements for the Moomba to Sydney Pipeline System The Energy Users Association of Australia is pleased to comment on the Commission's draft report on access arrangements for the Moomba to Sydney pipeline system. The Energy Users Association of Australia was formed on the 1st January 2001 by amalgamating the existing Australian Gas Users Group and the Energy Users Group of Australia. Interest in participating in the Commission's review was previously registered by the Australian Gas Users Group and an initial submission was forwarded to the Commission on 19th July 1999. The Energy Users Association of Australia is an association of major energy users (electricity and gas) formed to represent the interests of its members on a range of energy policy, regulatory, customer and industry issues. We have been unable to comply with the Commission's request for submissions by 9th February but trust that the following comments will be considered by the Commission and assist in arriving at a fair and equitable final decision on this matter. We would be happy to discuss any of the issues addressed with your staff if this is considered appropriate and look forward to the Commission's final decision when it is available. 1. INITIAL CAPITAL BASE In our earlier submission we stated a strong preference for use of the Depreciated Actual Cost (DAC)methodology for the determination of the initial capital base for the assets under review and commented at length on the flawed nature of the Depreciated Optimised Replacement Cost (DORC) methodology. The intervening time has not caused us to alter our views on this critical issue. A number of reviews conducted by regulators into both gas and electricity assets have demonstrated the difficulty in determining a hard (verifiable) number for DORC valuations. We wholeheartedly agree with the Commission's comments on the critical nature of the initial capital base in the assessment of an access arrangement - Section 2.2.4, para 1 - and the importance of an accurate figure. In the case of this review we have a large number of estimates for the initial capital base ranging from $100 million to $3.1 billion including several DORC estimates from EAPL of $667 million and $900 million. The single accurate hard number is the DAC number of $100 million and is considerably different from either of the DORC estimates. We do not see any reason for the Commission to draw comfort from the comment in the press release accompanying the draft decision referring to an asset base value of $502 million being broadly consistent with the sale price of $534 million paid by EAPL for the pipeline assets in 1994. The experience of gas and electricity asset sales in Victoria demonstrates quite adequately that there is no relationship between asset base and prices that buyers are prepared to pay for those assets. As stated in our previous submission, in cases where the historical cost information is not readiliy available it behoves the regulator to use means of arriving at an acceptable valuation other than DORC now that it has been shown to be quite seriously flawed and thereby discreditied as an asset valuation methodology. in the case of the EAPL access arrangement we would strongly recommend that as the historical cost information is available that it be used as the basis of the initial asset valuation and any allowances considered necessary in this particular instance are applied to this 'hard figure'. We are opposed to the inclusion of the applicant's costs, in respect of the review, being included in the initial capital base. A large number of organisations have incurred significant costs in participating in the review and these are not refundable. The same principle should apply to all parties to the review. 2. RATE OF RETURN We have previously argued the case for a real pre tax rate of return of less than 5% as appropriate to the level of risk assumed by EAPL for the assets under review and remain disappointed that the Commission has arrived at 7.0% as an appropriate real pre-tax rate. Nevertheless, we are encouraged by the Commission's approach to the market risk premium where a rate of 6.0% has been used and an acknowledgment that the final figure to be used is likely to be somewhat lower. The interest rate environment has changed significantly since the draft report was released and an update of this prior to the Commission's final decision could result in a lowering of the allowable rate of return to a figure more reflective of current market conditions. The other critical factor in determining an appropriate rate of return is the effective tax rate and we would urge the Commission to give further consideration to this. We note that the Commission has not accepted the EAPL proposal to allow for a tax rate of 36% and has allowed 34% for 2000/2001 and the Ralph report rate of 30% thereafter. The actual rate of tax paid by the applicant since purchasing the business in 1994 and forecast tax rates for at least the next five years would provide a solid basis for determination of an appropriate allowance for the taxation parameter and we would urge the Commission to pursue this matter. 3. TERM AND REVIEW The Energy Users Association of Australia is in agreement with the Commission in respect of the proposed amendment A3.15. Yours sincerely Alan J Reichel Director - Gas Markets Energy Users Association of Australia