Regulation of Snowy Mountains Hydro-electric Authority Transmission Assets

Issues paper for Australian Competition and Consumer Commission

28 July 1999

Authors: M Talbot, J Simpson, K Kapuruge

Table of Contents

1.	Executive Summary	1
2.	Overview	2
2.1.	Scope of the Submission	2
3.	The nature of the Snowy Mountains Hydro-electric Authority Transmission Network.	3
4.	Initial Asset Valuation	4
4.1.	Optimal Deprival Valuation for Transmission assets	4
4.2.	Past Valuations	5
4.3.	CPI Adjustment	7
4.4.	Acquisitions and Disposals	7
4.5.	Construction Cost	7
4.6.	Optimisation	8
4.7.	Easements	9
4.8.	Land and Buildings	10
4.9.	Future revaluations	10
4.10.	Summary	10
5.	Written Down Asset Value	11
6.	Return of Capital	12
6.1.	Standard vs remaining life of assets	12
7.	Cost of Capital	12
7.1.	Estimate of the risk free interest rate	13
7.2.	Expected inflation rate	14
7.3.	Cost of debt	14
7.4.	The market risk premium	14
7.5.	Value of franking credits	14
7.6.	Beta	15
7.7.	Treatment of taxation	15
7.8.	Real, nominal, pre and post tax WACC	15
7.9.	Summary	16
8.	Capital Expenditure	17
8.1.	Criteria for including Capital Expenditure	17
8.2.	Future capital requirements	17
Service standards	18
9.1.	Current Standards Used by the Snowy	18
9.1.1.	System Availability	18
9.1.2.	System Reliability	18
9.2.	Proposed Service Standards	18
9.2.1.	System Minutes	19
9.2.2.	Circuit Availability	19
9.2.3.	Market Performance Indicators	20
10.	Operation and Maintenance	20
10.1.	Customer requirements	20
10.2.	Definition of O&M expenditure	20
10.3.	Productivity Improvements	21

10.4.	Forecast O&M.	21
10.4.1.	Circuit Breaker Replacement	22
10.4.2.	Emerging Costs	22
10.5.	Operational Projects	23
10.6.	Summary	24
10.7.	Benchmark indicators	24
Attachment 1 - Capital Project Summaries	
Attachment 2 - Operational Project Summaries	
Attachment 3 - Risk Position of Transmission Assets	

Index of Tables

Table 1.  Snowy Transmission Asset Valuations	6
Table 2. Asset Adjustment Factors ($000)	11
Table 3. Capital Projects Program ($000)	18
Table 4. Historical Network Availability Data for Interconnectors	19
Table 5. O&M 1995/96 - 1999/00 ($000)	21
Table 6.  Circuit Breaker Replacement Program	22
Table 7.  Operational Projects Program	23
Table 8. O&M Adjustments ($000)	24
Table 9.  Benchmark Performance Indicators	25

1.	Executive Summary

The Snowy Mountains Hydro-electric Authority welcomes the opportunity to contribute to the process being followed by the Australian Consumer and competition Commission in determining the maximum allowable revenue cap for the Snowy’s transmission assets.

While the Snowy is generally supportive of the approach being followed by the ACCC specified in the Principles for Regulation of Transmission Revenues dated 27 May 1999, the Snowy believes that there are a number of areas which may warrant specific consideration in respect of the Snowy's transmission system.  Briefly, these areas are as follows:

•	Section 3 highlights the criticality of the Snowy’s transmission assets as the key point of interconnection between New South Wales and Victoria.  Given that criticality, it can be argued that the deprival value of the assets is very high and that the required service standards of those assets is greater than for transmission assets generally.  This is essential in terms of fostering efficient cross-border trading of electricity through the national electricity market.

•	Section 4 discusses factors which the Snowy believes should be considered in determining the initial asset valuation.  In particular, the location of the Snowy's assets inside Australia’s premier alpine national park means that environmental considerations impact on the construction, operation and maintenance of the transmission assets.

•	Section 5 raises issues regarding the manner in which useful lives are determined for the Snowy's transmission assets.  In particular, the Snowy contends that specific consideration needs to be given to the current condition of the assets in determining their remaining useful life.  Use of standard asset lives may result in an inadvertent value shift if, for example, the past maintenance practices in respect of the assets means that the assets have a shorter or longer remaining life than would otherwise be expected.

•	Section 7 discusses issues relevant to determination of an appropriate WACC.  While the Snowy supports the approach by the Commission, the Snowy believes there are a number of parametric changes needed to appropriately reflect the Snowy's unique circumstances.

The Snowy has made significant efficiency gains in the operation of its transmission business over the past 10 years.  This conclusion is supported by benchmark comparisons against other transmission businesses.  It should however be noted that, given the legislative environment governing the Snowy's operations, the efficiency gains which it has delivered have been provided directly to the entitlement holders of the Scheme’s energy production.  None of the efficiency gains have been retained by the Snowy.

2.	
Overview

The Australian Competition and Consumer Commission (ACCC) has been requested to conduct an inquiry to determine the maximum allowed revenue cap to apply to the non-contestable elements of the Snowy Mountains Hydro-electric Authority (Snowy) Transmission Assets in accordance with Chapter 6 of the National Electricity Code. 

Assuming that a competitively neutral outcome is the objective, appropriate recognition needs to be given to the significant functional, terrain and economies of scale differences applying to the Snowy transmission assets as distinct from other TNSPs within the interconnected system.  Therefore the Snowy supports the use of an approach consistent with that taken in respect of TransGrid, with parametric allowances made where appropriate to recognise the particular characteristics of the Snowy's transmission assets.

The ACCC has adopted in its Principles for Regulation of Transmission Revenues 27 May 1999, an accrual building block approach to calculate the maximum allowable revenue (MAR).  MAR is calculated as:

MAR = return on capital + return of capital +O&M

Return on capital = weighted average cost of capital (WACC) * written down value of asset base.
Return of capital = depreciation allowance and
O&M = Operation and maintenance expenditure including administrative costs.

2.1.	Scope of the Submission
The purpose of this submission is to raise technical, environmental and customer related issues relevant to the regulation of services from the Snowy Mountains Hydro-electric Authority Transmission Assets and to respond to requests for information from the ACCC in its meeting with the Snowy on 26 May 1999 and letter of 22 June 1999.

It is also understood that, in terms of competitive neutrality, the draft decision on the Snowy Mountains Hydro-electric Authority Transmission Assets will be based on the NSW and ACT Transmission Network Revenue Caps 1999/00-2003/04 Draft Decision of 12 May 1999.

The Snowy Mountains Hydro-electric Authority has received assistance in the formulation of this submission from Moy and Associates in relation to Cost of Capital and WM Mercer in relation to future liability risks.

3.	
The nature of the Snowy Mountains Hydro-electric Authority Transmission Network.

The Snowy, a Commonwealth Government Business Enterprise, owns the majority of the assets of the main interconnector between NSW and Victoria.  Significant efficiency gains and restructuring have been achieved in the past five years as a result of restructuring for improved productivity and moves towards corporatisation. 

As a TNSP the Snowy is unusual in that its assets consist of a triangle of three 330 Kv switching stations connected by 210 km of 330 kV lines, together with 61 km of 132 kV lines 1 switching station at 132kV. Scheme energy enters the national electicity market through the Snowy transmission network.  

These assets are mainly within the boundaries of the Kosciuszko National Park and state forests, in highly sensitive environmental areas, mountainous terrain and are subject to extreme weather conditions.  The assets form the main interconnection between NSW & Victoria and the configuration delivers the high level of service essential for interconnection assets.

Interconnectors are a major component of the design of the National Electricity Market, and are essential to fostering competition and delivering lower prices to consumers.  The availability and reliability of interconnection assets is essential to maintain cross border competition in both pool bidding and hedging contracts in the NEM.  Without the levelling effect of the interconnection between NSW and Victoria, many market players would be hesitant to expose themselves to regional differences risk.  

In February 1997 the Queensland and New South Wales Governments engaged London Economics (Aust) Pty Ltd to undertake an analysis of the economic costs and benefits of the proposed interconnection of the Queensland and New South Wales electricity grids.  The report concluded that net benefits of interconnectors are substantial.  The types of quantified benefits included:

•	Avoided cost of new generating plant
•	Avoided cost of grid reinforcement and
•	Energy trading benefits.

In addition London Economics outlined a number of unquantified costs and benefits including:

•	benefits from shared ancillary services; 
•	regional development opportunities; and
•	competitive benefits from interconnection which reduces the potential for generators to exercise market power.

Further information can be found in the report on the ACCC web site. Whilst that project specifically targeted the Queensland NSW interconnector,  these benefits are generic to any interconnector in the National Electricity Market providing the interconnector maintains a high level of reliability and availability.
4.	Initial Asset Valuation

The Snowy supports the ACCC in engaging a consultant to audit available valuations of the Snowy's Transmission Assets.  The terms of reference include the need to:

	Inform the Commission on
•	The appropriateness of the assumptions, methodologies and findings of the most recent valuation of SMHEA's transmission asset base in terms of meeting the requirements of the Code;
•	Provide advice on such other matters as are necessary to enable the Commission to make a code-compliant valuation of the non-contestable assets of SMHEA expected to be in service on 1 July 1999.

In addition, the consultant was asked to address the following criteria:

•	Modern engineering equivalents
•	Standard replacement costs
•	Engineering and service standards
•	Depreciation (including the treatment of standard economic, useful and remaining lives)
•	Reconciliation of variations between past and revised ODRC valuations and the current valuation and
•	The appropriateness of the findings and this is to include, where relevant, making recommendations concerning changes to the asset values, depreciation adjustments and optimisation adjustments contained in the report.

To assist the Commission in undertaking its code obligations, in particular the need to have regard to the provision of a fair and reasonable risk-adjusted cash flow rate of return on efficient investment including sunk assets, and in relation to the above objectives, the Snowy provides the following comments.
4.1.	Optimal Deprival Valuation for Transmission assets
Under Chapter 6, section 6.2.3 of the National Electricity Code, the Commission must have regard to the agreement of the Council of Australian Governments of 19 August 1994, that deprival value should be the preferred approach to valuing network assets

If the national electricity market were deprived of Snowy transmission assets, there would be little effective interconnection between NSW and Victoria.  With no basis on which to form a South East Australian market. This would mean that only jurisdictional markets would exist (like Queensland), with very limited levels of competition.

The deprival value of SMHEA Transmission network, could be argued to be equivalent or largely proportional to the benefits derived by end users resulting from reductions in energy prices achieved through the introduction of the competitive electricity market. Economic theory would propose that wise investors would be willing to invest just below this amount of money to reap the savings.  This roughly equates to a reduction in 20% on pre-competition energy prices, which in dollar terms equates to approximately $800 million / per annum. 

As listed in section 3 above, additional benefits accrue to end users through interconnection assets from:

•	sharing of surplus generating capacity and reserves between NSW and Victoria
•	avoided cost of new generation plant (Victorian requirements for peak capacity satisfied by NSW generation)
•	sharing of benefits of ancillary services and increased network reliability

In short, the deprival value of SMHEA Transmission assets to end users, through its contribution to facilitating the National Electricity Market, by allowing interconnection between the two biggest state markets, must be a substantial proportion of the ‘benefits of competition’.  This could be argued to be in the quantum of hundreds of millions of dollars per annum.
4.2.	Past Valuations
A number of valuations of the Snowy's Transmission assets have been undertaken over the past 10 years.  These valuations reflect differing methodologies and scope.  The ACCC has indicated in the Statement of Principles for the regulation of Transmission Revenues that a depreciated optimised replacement cost (ODRC) valuation should be adopted for any initial valuation.  The Commission is also required by the NEC to give consideration to the Optimised Deprival value (ODV) methodology and ensure that the ODV is not exceeded in any valuation.

Previous valuations of the Snowy Assets are listed in Table 1 below:

Table 1.  Snowy Transmission Asset Valuations
Company	Date	Objective	Valuation Methodology	Result	
GHD B&V	June 1991	Engaged by the  Commonwealth to value  whole of Snowy Scheme
	Written down replacement cost.
Snowy asset lives.	$  127.3 M	
TransGrid	1995	Internal TransGrid valuation for transfer of assets upon corporatisation.
	Optimised Deprival Value. Some extended asset lives.	$   39.4 M	
Sinclar Knight Merz	April 1997	Engaged by DGJ projects for regulatory and pricing purposes and for transfer price upon corporatisation.	Replacement cost	$ 155.2 M
	
			Optimised depreciated Replacement Cost. 
Estimated remaining lives of assets.
	$   77.2 M	
			Optimised depreciated replacement cost. 
Standard remaining life of assets.
	$   46.2 M	
Worley International Ltd Consortium	Feb 1999

Value at 30 June 1998	Engaged by NSW Treasury as part of response to IPART regulation of electricity network charges.	Replacement cost.
Standard TransGrid lives and 1995 Treasury  guidelines.	$   137.8 M	
			Optimised depreciated replacement cost.
Standard TransGrid lives and 1995 Treasury  guidelines.	$   43.7 M	

Valuations undertaken under the ODRC methodology therefore are the latter two by Sinclar Knight Merz (SKM) and Worley Consortium (WC).  The SKM valuation recommended that the appropriate ODRC valuation was $ 77.2 M taking into account that the physical condition of the assets reflected industry best practice maintenance.   The 1999 valuation by WC was undertaken with modern equivalent replacement cost, standard NSW Treasury guidelines and Snowy valuations with TransGrid asset lives.   The use of standard costs is discussed in section 4.5 below.
4.3.	CPI Adjustment
As the Code requires a valuation to be determined by jurisdictional regulators at the start of each regulatory period, it is necessary to adjust past valuations to account for the time since initial valuation and any additions or disposals of assets since that date.  Hence, as a minimum adjustment, past asset values should be inflated for the intervening time period.  

A variety of valuation references were used by both consultants, SKM and WC, however the major component was valued using December 1995 NSW Treasury Guidelines. The Snowy requires the  CPI indexes, published by the Australian Bureau of Statistics, be used to adjust those standard rates from December 1995 to June 1999.  The rate of 3.6% was used to inflate the values. This is deemed minimal as the GHD valuation of TransGrid used an increase of between two and five per cent (most by four percent) to reflect costs movements since 1996.

The WC valuation however also relied on asset values from the Snowy Mountains Hydro-electric Authority Asset register.  These values were based on a 1991 valuation by GHD and have not been revalued since that time.  These 1991 values should be inflated to 1999 values using CPI and results in an adjustment of $2.0 M. Thus these two factors result in an upward adjustment for SKM of $ 5.6 M and WC of $ 6.5 M.
4.4.	Acquisitions and Disposals
The only disposals of assets since these valuations were carried out are replacement of air blast circuit breakers with SF6 breakers.  As the use of SF6 breaker costs were used in the optimisation process of the valuation these disposals do not change the valuation.  The asset base was increased by  $ 0.5 M  in 1998/99 with the installation of Revenue meters.  This additional has not been included in either SKM or WC valuations.
4.5.	Construction Cost 
Construction in the remote and rugged terrain of the Kosciuszko National Park involves additional cost.  This is in the form of both access, restricted building methods and increased structural requirements.

Access restrictions are many and varied including the need to airlift in workers and supplies to remote locations with difficult access, or to construct access roads where necessary.  WC did not include any value for access roads in their 1999 valuation.  All TNSPs face restrictions in summer access and equipment use in bushfire season for work in forested terrain. However the Snowy also faces access limits in winter due to harsh climatic conditions.  This results in significant limitations and additional costs faced by the Snowy not faced by other TNSPs.  Difficult terrain also requires specialised equipment for construction, as large efficient equipment is often not transportable to the site or the use of such equipment is deemed too destructive for use by the National Park.

As many of the assets are within the boundaries of the National Park they are subject to stringent environmental planning, negotiation and construction limitations.  Whilst other TSNPs face similar restrictions for a small portion of their assets the majority of the Snowy assets are subject to thee limitations adding significantly to planning and feasibility costs.  A number of the transmission assets are on the edge of wilderness areas.  There are currently plans to extend wilderness areas within the National Park.  This further restricts the nature of construction and the type of equipment that may be used, resulting in additional expenditure to that of standard modern equivalent construction costs.  These environmental requirements are likely to be more restrictive and prescriptive in future as environmental legislation develops and community expectations change. A valuation based on modern day equivalent construction cost should take account of these factors.

Access tracks are not included in the valuation by WC and are embedded in the transmission line costs.  Access tracks are imperative for maintenance as severe weather conditions restrict the use of helicopters when crisis management is required.  The construction of access tracks in remote and often rugged terrain further supports the use of a high terrain factor.

These factors indicate why standard asset costs or equivalent replacement costs require additional multiplication factors to equate to the replacement cost of Snowy assets.  The SKM valuation of 1997 included a terrain multiplier factor of 1.4 whereas the WC valuation did not specify a terrain factor, but imputed to be about 1.2. This results in a difference of $ 40,000  per kilometre of 330 kv lines, an additional $ 8.4 M.  

An additional multiplier of 1.4 was added to short lines between power stations and switching stations in the SKM valuation due to the high proportion of angle /tension structures resulting in a multiplication factor of 2 for these lines over base Treasury guidelines.  The WC valuation does not address this issue.  These Group Lines are probably the most challenging lines in the Snowy for  access and construction.  The total group line length is calculated to be 57 km.  This results in an additional $ 8.0 M to the WC valuation.
4.6.	Optimisation
The Snowy is aware of the optimisation undertaken in both SKM and WC asset valuations and does not contest the result.

In the Statement of Principles for the Regulation of Transmission Revenues service providers are to nominate any assets that are subject to by-pass risk and will be subject to accelerated depreciation prior to removal to allow a return of investment to the service provider.  

Construction of a NSW-SA interconnector could however reduce the line requirement of the Snowy interconnector.  As this may in future result in an optimisation of Snowy asset values to a lower capacity requirement then this risk must be included in the risk profile of the business.  The rapidly changing environment for transmission and energy with the addition of new players and new technology brings with it high risks for long life, high cost sunk capital investments.  The public, as shareholders, for these investments should be compensated for the political change in risk structure. 

The Snowy believes that its transmission assets are not subject to direct by-pass risk within the 5 year timeframe of the revenue cap, however increased business risk environment requires recognition in the asset beta of the company.
4.7.	Easements
The Snowy agrees with the ACCC in the NSW and ACT draft determination where in relation to easement valuations it is stated:

The issue will become an increasingly important one as the values attributed to easements are likely to continue to rise at rates in excess of the general inflation rate.

In the Draft Statement of Principles for the Regulation of Transmission Revenues the ACCC supports the use of the ODRC methodology.  This methodology is based on the philosophy of an ongoing business.  Therefore to maintain economic viability and to allocate appropriate expenses over the life of the business, assets are to be valued at the replacement cost.  In the Supplementary Papers to the Statement of Principles, section 7 of the Commission's working papers states:

In a competitive environment this would correspond to asset values being depreciated in line with changes in replacement costs, and pricing of services being independent of the vintage of the assets which provide those services.  In other words the revenues will assume a time profile which is closely related to the replacement cost of assets or alternative technologies where these exist.   …   In effect the approach is one where the asset base is based on a continuously updated DORC valuation, at least conceptually.

Thus the asset valuation question on easements is not, as SKM stated, the recovery of the book value but the value of replacing that asset.  As the ongoing business is valued in perpetuity then all assets may eventually have to be replaced.  Thus a commitment to ODRC should include all assets of a business necessary to continue the business. 

Easements, like other assets should be subject to optimisation, thus resulting in a lower cost if a more economic method or route can be found.

In relation to Snowy Transmission assets, both SKM and WC valuations included an amount of $ 99 k for easements outside of the National Park.  Neither valuation included values for easements within the National Park nor State Forests.  The Snowy has calculated that 174 km of 330 kv line easements and 57 km of 132 kv line easements all within the National Park or State Forests.  This represents 94% of total easements owned by the Snowy (parallel lines counted as one easement).

The Snowy supports the ACCC in its investigation of an appropriate method of valuing easements which provides a suitable balance between network owners and consumers.  The Snowy considers that the valuation of easements in the National Park and State Forests is an important and material issue and seeks more time to research an appropriate and transparent method of valuation by investigating other jurisdictions and overseas experiences.
4.8.	 Land and Buildings
The SKM valuation did not include values for the Lower Tumut Switching Station (LTSS) Group Control Centre, but did include an allowance for building sheds at each site ($ 350 k).  Since 1997, it has been agreed that the LTSS Control Centre shall pass to the new owner of the transmission assets and therefore should be included in the valuation.  Each Group Control Centre holds protection and control equipment for the Transmission Business and therefore arrangements would have to be made at the other two sites. WC placed a value of $ 3,880 k on the building.  The Snowy is aware that this is the only administrative building included in the asset base and therefore would operate as the workshop, control and administrative complex for the business.  No allowance has been made in O&M for rental of office space or the additional two Control Centres space.

The two Consultants valuations do not include any value for land inside the National Park.  The Upper Tumut Switching Station is wholly within the bounds of the park and therefore appears in neither valuation.  The Snowy is willing to forgo a valuation of this land on materiality grounds.
4.9.	Future revaluations
The reference modern equivalent replacement costs for the Snowy Mountains Hydro-electric Authority Transmission assets  valuations have not included Sales Tax in the replacement costs.  It is understood by the Snowy that replacement cost adjustments will be made when a GST is introduced.

As part of corporatisation principles the Snowy is required to divest itself of all transmission assets.  This process may establish a market value of the assets which may be required to be considered by ACCC in light of regulatory requirements.

4.10.	Summary
In summary the following table illustrates the adjustments necessary to ensure a realistic and competitively neutral asset valuation for the Snowy Mountains Hydro-electric Authority Transmission Assets

Table 2. Asset Adjustment Factors ($000)
Adjustment Factor
($000)	Sinclar Knight Merz
April 1997	Worley International Ltd
June 1998	
Replacement Cost Valuation	155,200	 137,800	
CPI Adjustment	5,600	6,500	
Acquisitions	500	500	
Terrain Factor	0	16,400	
Land and Buildings	3,530	0	
Easements	TBA	TBA	

Total Replacement Cost	
164,830	
161,200	
5.	Written Down Asset Value

The SKM preferred valuation of $77.2 M is due to the assessed high standard of asset condition.  The valuers extended the asset lives by 20 years as they believed that industry best practice maintenance had been undertaken. In part this high service level is necessary as forced outages on interconnection assets are likely to have a severe impact on the National Electricity Market. 

The alternative assumption of standard asset lives is unsuitable in this case as the application of unrealistic parameters often creates value shifts and inappropriate outcomes. The use of standard asset lives may be acceptable for transmission network components whose remaining and standard asset lives are similar, but not in an instance where the disparity is as great as it is in the case of the Snowy assets.
Asset lives are a notional parameter the specification of which can detract from the real information which determines an asset’s value, namely its condition. It is nonsensical to suggest that an asset is in excellent condition and therefore worth “X”, and then to argue that this rational valuation basis should be ignored because the asset was expected, at the time is was constructed, to have a shorter asset life.

The application of an artificially reduced asset life in fact generates an arbitrage opportunity for the next (or subsequent) owner of the asset, as follows:

•	The asset judged to be worth X due to its good condition is allocated a value of Y, (where Y<X), and a revenue stream is calculated according to the applicable rate of return;
•	The asset is transferred after a number of years have elapsed, at a price of (Y-D), where D = depreciation on the lower asset value;
•	The asset is depreciated by the new owner according to the standard asset life basis until it is (notionally) worthless.
•	At this point, assuming that the new owner (TransGrid or other) has maintained the assets to similar standards as the Snowy, the new owner will have several alternatives, among them the following:
1.	Remove the assets and sell them to a third party at an absolute minimum of scrap value (effectively putting a floor under their value which is greater than zero), which would require the assets to be replaced (either by the current owner or a third party); or

2.	Cite the above option as a credible threat to force a re-valuation of the assets to reflect their true value at that time (of (X-D’), where D’ = depreciation on the higher starting value of X at a lower rate appropriate to the remaining lives of the assets), and earn an appropriate rate of return.

•	Either value under 1 or 2 above would represent a windfall gain to the owner at the date of the notional value falling to zero, and a corresponding value shift away from the Snowy at the time of transfer. Only one option removes this threat and facilitates appropriate capital and maintenance expenditure and, in time, replacement of the capital assets, namely valuation at the realistic value of X. 

The only situation where the above outcome does not occur is if the assets were maintained in inferior condition. This option would create significant operational risk for the Victoria / NSW interconnect.  The Snowy maintains that a real, economic evaluation of remaining asset lives be used to determine the Written Down Replacement Cost for the Snowy Transmission Assets.
6.	Return of Capital
6.1.	Standard vs remaining life of assets
As discussed above, Snowy transmission asset condition represents industry best practice and therefore recognition of the real remaining useful life of the asset should be the governing factor rather than standard asset lives.  This ensures that investment in a good maintenance philosophy is rewarded and that inappropriate capital investment decisions are not encouraged.  If well maintained but old assets were in operation this would restrict the available MAR due to a reduction in both depreciation allowance and asset valuation and therefore encourage the replacement of written off assets for the sake of resetting MAR rather than  from technical necessity.  Such a driver would not support the efficient and cost effective use of public resources.

The Snowy agrees with the ACCC in the use of straight line depreciation as being easily understood and transparent and will assist the ACCC in its calculation of depreciation when an asset value and asset lives are agreed.

Therefore in support of economic efficiency the Snowy strongly recommends a valuation and depreciation allowance based on real remaining asset lives as supporting economic efficiency. 
7.	Cost of Capital
The Snowy Mountains Hydro-electric Authority supports the use of the Weighted Average Cost of Capital (WACC) framework detailed in Section 2 of the Commission’s draft decision “NSW  and ACT Transmission Network Revenue Caps 1999/00 – 2003/04” of 12 May, 1999 (“the Draft Decision”).

The Snowy proposes minor parametric changes to those proposed in the Draft Decision, as detailed below.
7.1.	Estimate of the risk free interest rate 
As TransGrid and NSW Treasury have noted, fluctuations in the risk free rate observed in the market at any time should be smoothed to prevent volatile tariffs from one regulatory period to the next. 

Figure 1 Commonwealth Government Bond Yields

While smoothing interest rates is no doubt part of the solution to delivering stable tariffs, it is also important to note the general direction of interest rates. It is apparent that the trend of spot 10-year Commonwealth Government Bond yields has reversed from being generally downwards in the four years to the end of 1998, to being generally upwards thereafter. The following graph illustrates this information.

Without attempting to predict the duration or severity of peaks and troughs in the economic cycle, viewing this interest rate trend in the context of Australia’s current economic fundamentals in terms of unemployment, inflation, the balance of trade etc, it is difficult to see the recent upwards trend being reversed in the near to medium term.

Taking a retrospective average is therefore likely to underestimate the prospective 10-year Commonwealth Government Bond yield and lead to significant estimation errors between regulatory resets.

The Commission’s proposed risk-free rate of 5.5% is around 75 basis points below the current (mid-July) market rate. This discrepancy is more likely to grow than to reduce over the first regulatory period. This is quite likely to produce the unwelcome outcome of having to substantially increase interest rates and tariffs at the next regulatory reset date.

The Snowy therefore proposes a risk-free rate in the range 6.25% to 6.50%.
7.2.	Expected inflation rate
The Snowy supports the use of the differential between nominal and inflation-indexed bonds as an indicator of the prospective inflation rate. However, this proxy is not an unbiased estimator of the actual inflation rate, since indexed bonds are priced at an illiquidity premium to nominal bonds. While this premium is difficult to estimate, it is probably in the order of 10 to 20 basis points.

Analogous comments to those made above in relation to interest rates also apply with respect to inflation. The calculation of an inflation rate to apply during the regulatory period must reflect not only recent inflationary experience but also the direction of the CPI in the context of the state of the domestic and international economies.

In view of the above factors, the Snowy proposes a minimum inflation rate of 2.25%, noting that a significant probability remains that this rate will turn out (in five years’ time) to have been on the low side.
7.3.	Cost of debt
The Snowy agrees with the general framework proposed by the Commission. In terms of the quantum of risk margin added to the risk free rate, it is important to be cognisant of the development of the Australian market for debt securities since the time of the financing relating to the purchases of the Victorian electricity supply entities. The most important change has been the en-masse withdrawal of most of the Japanese banks previously active in the debt market. This contraction of supply (arguably in response to unrealistically competitive margins and unacceptably low profits) has allowed the remaining debt providers to charge higher (arguably more prudent) margins.

A relatively small entity such as the Snowy is unlikely to be able to raise debt finance at the same rates as companies of the size and stature as TransGrid, whose debt requirements would be viewed by financiers as “prize deals” offering prestige and economies of scale (and are therefore likely to attract more competitive bids).

The Snowy suggests that a margin in the order of 125 basis points would be appropriate, resulting in a total cost of debt on a nominal basis of 7.5% to 7.75%.
7.4.	The market risk premium
The Snowy supports the use of a market risk premium of 6.0%.
7.5.	Value of franking credits
The Snowy supports the use of a franking credits utilisation ratio of 50%.
7.6.	Beta
The Snowy supports the use of the Commission’s framework in determining an appropriate asset beta. In setting this parameter for the Snowy’s transmission assets, it is important to note the differences between the systemic risk faced by  business other than transmission and secondly TransGrid compared to that borne by the Snowy. 

As discussed in the W M Mercer report, attached, transmission entities have protection through the NEC for liability resulting from a failure to supply electricity.  However this protection is due to cease in December 1999.  Major transmission failures can and do occur resulting in significant losses.  Customers can not usually be protected from these failures except by alternative circuits unlike say the failure of a bakery which may have stockpiled products. Customer losses are immediate and include flow-on effects and expose the transmission entities to significant potential liabilities.  

Whereas TransGrid’s network contains a mixture of high- and medium-voltage lines with local impact for failure, the Snowy's transmission assets as an interconnector and generator connection point have potential two or three state-wide impact for failure. Many generators including the Snowy generator could potentially be constrained off the market and exposed to inter-regional risks it would wish to claim from the Snowy.  The cover available under the NEC is not clear. The operational and revenue-generating risk associated with these lines is therefore significantly greater than that faced by TransGrid’s transmission line portfolio. This risk, which would be borne out in a “transmission market” by greater revenue volatility, provides justification for a higher asset beta for the Snowy's transmission network. 

An entity exposed to asymmetric revenue risks will not receive its expected cost of capital unless an allowance for these risks is included as an adjustment to the level of WACC used to determine the appropriate return on capital.

While it is difficult, in the absence of market-based evidence, to propose a single estimate with any degree of confidence, an asset beta in the order of 0.55 would appear to be intuitively reasonable.
7.7.	Treatment of taxation
The Snowy supports the use of the statutory tax rate of 36%.
7.8.	Real, nominal, pre and post tax WACC
The Snowy acknowledges the problems associated with the use of a pre-tax WACC, noting that the use of a post-tax nominal WACC avoids conversion problems and facilitates the most transparent analysis of the cashflows most relevant to any organisation: those expressed in nominal terms, after deducting company tax.  We also note that, in practice, not all cashflows escalate at the same inflation rate, a phenomenon that can only be correctly allowed for by using a simple WACC formula and incorporating inflation, tax and imputation effects in the cashflows.

The conversion of a post-tax nominal WACC into a pre-tax real equivalent adjusting first for taxation and then for inflation can be shown to be algebraically incorrect. Adjusting first for inflation provides a correct pre-tax real WACC for simplistic cashflows which omit realistic tax depreciation allowances etc. WACC calculations using cashflows of comparable complexity to those found in an entity’s actual cashflow schedules over time have been found to yield a WACC which typically falls between the two conversion methodologies.

We note also that the formulae on pages 10 (Section 2.1) and 21 (Section 2.11) of the Draft Decision are inconsistent; the formula on page 21 being incorrect. If RE is defined as “the required rate of return on equity (after company tax)”, as per page 10, then the pre-tax WACC formula is, as stated, 

The post-tax formula on page 21, however, states:

implying RE = RE (1 – T), which is clearly incorrect. All calculations in the Snowy’s submission calculate the post-tax WACC according to the formula:

using parameters as defined on page 10 of the Draft Decision. This formula is the correct analogue to the post-tax WACC formula expressed on page 10.
7.9.	Summary
Using the parameters outlined in this document produces a post-tax nominal rate of return to equity of between 13.3% and 13.5%. 

Using gearing of 60%, this translates to a post-tax nominal WACC of between 8.2% and 8.4%.

Note that these results were obtained using the Monkhouse conversion formula from asset beta to equity beta, which allows for a debt beta of 0.12. This formula, and the use of a debt beta greater than zero, may be justifiable on theoretical grounds, but only on the basis that the volatility of the beta estimates (for both debt and equity) is such that a wide range of numbers can be derived depending on such factors as the length of measurement interval, the financial instruments used as the basis for the calculations (derivatives or physicals), the size of the time-steps and the methodology used for allowing for data outliers. However, in practice the formula:

E = A  (1 + (1 – T  ( 1 - ))  )

which omits any reference to the beta of debt is more commonly used by the market.

The use of this equity beta conversion formula yields a post-tax rate of return to equity of between 13.6 and 13.9%.

Again using gearing of 60%, this results in a post-tax nominal WACC of between 8.3% and 8.5%.

A post-tax nominal WACC in the range 8.2% to 8.5% translates to a pre-tax real WACC (using the parameters proposed in this document and the Commission’s conversion methodology) in the range 8.7 % to 9.2%.

Therefore the Snowy supports a value of 8.9% as the appropriate pre-tax real WACC for the Snowy's Transmission Assets.
8.	Capital Expenditure
8.1.	Criteria for including Capital Expenditure
The Commission must form a view on the prudence of the Snowy’s proposed capital expenditure and the balance between Operating expenditures and Capital investments.  These expected capital expenditures should be recognised in the regulated asset base at the time of the start of the delivery of benefits irrespective of the timing of the regulatory reset period.  To restrict return until the next review period would penalise investors and create a lumpy investment profile just before a regulatory reset date.   

The Snowy agrees that only prudent asset capital expenditures should be included in the asset base.  This concurs with the optimisation process which would remove gold plating should that occur.
8.2.	Future capital requirements
The Snowy’s proposed capital project expenditures are shown in table 3 below. The total five-year capital program consists of replacements and some upgrades of existing equipment and does not include any major replacements or augmentations. The Snowy is currently undertaking a study of fault levels which will be used to highlight future capital requirements.   

The main replacement program consists of replacing Air blast circuit breakers with SF6 breakers.  This is in line with the optimisation of circuit breakers to new technology and is an opportunity to reduce operating costs as a cost of electricity for energising transformers will now be incurred.

The capital program also includes sewage treatment works for the Group Control Centres necessary to comply with current NSW legislation.  Greater detail of the programs is included as Attachment 1.

This $10.5 M program, over 5 years, reflects the current good condition of the transmission assets and the commitment to efficient operations. 
9.	
Table 3. Capital Projects Program 1999/00 - 2003/04 ($000 uninflated)

Service standards
9.1.	Current Standards Used by the Snowy

At present, the Snowy has two high-level performance indicators to measure its service standards, namely:

•	System Availability
•	System Reliability
9.1.1.	System Availability
The switching station availability is calculated by summing actual terminal hours available for all transmission circuits connected to a switching station (for all voltages and for all outage causes) and dividing this total by the sum of possible terminal hours available.  Performance target for switching station availability is 97%.  The Snowy calculates switching station availability based on a method developed by the Canadian Electrical Association.
9.1.2.	System Reliability
In measuring overall system reliability the internationally recognised approach considers the energy not transported to or from customers (MW hours) due to unplanned outages.

The “System Minute” concept is applied as a measure of the Snowy's Transmission service to its Generator customers (Snowy Hydro) ie; those seeking Grid access.  Based on Snowy’s installed capacity of 3600 MW (as directly related to the interconnected 330kV system) one system minute is defined as 3600 MW lost for 1 minute.  Performance target for system minutes lost is 5 minutes per annum.
9.2.	Proposed Service Standards
To ensure competitive neutrality a consistent approach to that undertaken with TransGrid should be adopted and therefore Snowy Transmission is proposing to adopt service standards that have been used for TransGrid’s revenue cap decision.
The two indicators are:
9.2.1.	System Minutes

System minutes is based on unplanned outages for forced or fault events for all Snowy’s connection assets in Snowy Transmission network.  It is calculated by summing annual undelivered energy to the market place for Snowy Hydro due to unplanned outages and dividing by installed capacity of Generation.
9.2.2.	Circuit Availability

Circuit availability is determined by summing all circuit hours available for all transmission network elements and dividing by total possible circuit hours available.  The measure includes planned (maintenance or construction) and unplanned (forced or fault) outages.

Snowy is in agreement with the target levels proposed by TransGrid for the above performance indicators given the high reliability of Snowy assets.

Snowy recognises and agrees with the additional performance indicators proposed by ACCC for supply point performance and market performance.  Snowy believes its system minute performance indicator on system reliability does report supply (connection) point performance.  However, target levels for supply point performance indicators will have to be developed.

The following historical network availability data for interconnectors are provided on a best endeavours basis for the development of market performance indicators by ACCC.  We understand that this indicator is used by OFFER in UK to measure non-availability of national market region interconnectors.

Table 4. Historical Network Availability Data for Interconnectors
Inter-connector	1998/99 		1997/98		1996/97		
	Availability %	Forced Outage Rate %	Availability %	Forced Outage Rate %	Availability %	Forced Outage Rate %	
UTSS-LTSS	99.32	0	100	0	99.87	0	
LTSS-MSS	98.50	0	99.02	0.02	99.71	0	
MSS-UTSS	98.67	0	99.05	0.11	99.35	0.08	

9.2.3.	Market Performance Indicators
The Snowy strongly disagrees with the use of a market performance indicator being progressed as an appropriate service measure for TNSPs.  Transmission Service providers are not responsible for optimising market performance.  The market place is the appropriate venue for optimisation of transmission unavailability if appropriate information is supplied.  Thus TNSPs responsibility is to inform the market of availability restrictions and adherence to that plan. A market performance  driver on transmission operation and maintenance would result in unrealistic costs in maintenance limitations and recall plans and force transmission businesses to become adept at market forecasting.  This deviation from core business would not be efficient.
10.	Operation and Maintenance

One of the building blocks of the MAR is an allowance for Operating and Maintenance Expenditure. The Snowy agrees that the ACCC must promote efficient and cost effective use of assets in which there is a sharing of efficiency gains between network users and owners.  The balance between a reasonable level of operational and maintenance expenditure and the removal of monopoly rents is difficult.  If the revenue is too low the ACCC runs the risk of promoting poor standards of service, an unsafe working environment and a running down of asset condition to be rectified by future generations in substantial capital or catch-up maintenance expenditure.  Alternatively, if the revenue is too high, consumers are disadvantaged and efficiency benefits are not shared. Significant efficiency gains have been achieved  by the Snowy in the past 10 years. 

The Snowy agrees with the ACCC that a consistent approach must be taken with competing entities where possible.  Thus it is necessary to recognise the Snowy's Transmission Business as a separate entity from the generating business and ensure that full operation and maintenance expenditures are included in the Transmission business and that cross subsidisation from the generating business does not occur.  
10.1.	Customer requirements
The Snowy as a TNSP must have regard to the level of services expected by its customers.  As the Snowy is an interconnector in effect its customers are all market participants in the National Electricity Market.  The Snowy will face significant risk if poor maintenance and operating practices can be shown to have adversely affected another participant's returns.  Multiple participant losses could be envisaged.  Therefore a low forced outage rate is essential.
10.2.	Definition of O&M expenditure
The definition of O&M expenditure is deemed to exclude depreciation and interest costs.  Snowy collects direct costs attributable to the functions of Transmission including labour overhead costs for direct labour.  To make this expenditure comparable with TransGrid and an independent entity the Snowy has added an administration overhead to cover all support, planning, supply, computing, management, contract supervision, inventory costs etc that is not directly charged to the Transmission function.  
10.3.	Productivity Improvements
The Snowy has achieved significant efficiency gains in the past 10 years as part of increased productivity of the industry and as preparation for coporatisation.  As an integrated generation and transmission entity the Snowy has reduced operational expenditure from  $ 69.5 M to $ 47.6 M, a 32% decrease in real terms.  This has largely been achieved by a reduction in permanent staff from 913 in 1989 to 350 in 1999/00.  The Snowy Mountains Hydro-electric Authority Transmission Assets were ringfenced in 1995 and separate asset and direct account records are kept. 

Due to restrictions in the legislative environment governing the Snowy's operations, these savings have been provided direct to the entitlement holders of the Schemes energy production.  None of the efficiency gains have been retained by the Snowy.

A review of the past four years of Transmission operating costs, with a projection to 1999/00 shows a reduction from $3.9 M in 1995/96 ($ 4.2 M inflated to 1999/00  $) to $ 2.0 M projected for 1999/2000.  This is a decrease of 52%, or 13% per annum.  This shows a significant commitment to efficiency savings and brings O&M expenditure to a minimum prudent level.  

Table 5. O&M 1995/96 - 1999/00

Table 5 shows past significant efficiency gains which position the Snowy as industry best practice. As the Snowy cannot take advantage of economies of scale available to other TNSPs future significant efficiency gains are unlikely.

The Snowy has appropriate capitalisation policies and we note that other participants are considering similar actions as part of their O&M reduction methodologies.

10.4.	Forecast O&M.
A forecast of Operation & Maintenance costs are summarised in Table 8 below.  This plan has been formulated on the following factors. 
10.4.1.	Circuit Breaker Replacement
Asset management planning has identified that efficiency gains will be achieved from the introduction of SF6 circuit breakers.  There are three types of high voltage circuit breakers in use in the Snowy's Transmission’s network: air blast, small oil volume and SF6.  TransGrid are well into a replacement program for their air blast circuit breakers.

Both the air blast and small oil volume (SOV) circuit breakers are now considered to be obsolete technology due to their complicated design and the large number of parts that are no longer available.  Maintenance costs for these two types of circuit breakers (including air systems for air blast) are high, and a substantial level of maintenance knowledge and effort is required to ensure continued reliability of the circuit breakers.  Savings in maintenance are expected to be $ 7,500 per year per circuit breaker.  Additional benefits will accrue to the generating business from the avoidance of transformer energisation.  This is estimated at $0.3 M per annum.  The replacement program as listed below has been used to estimate maintenance savings.

Table 6.  Circuit Breaker Replacement Program

Project	Quantity	Timeframe	
MSS Group Line CB’s	8	1999/00 - 2000/01	
GPS - Munyang Line CB	1	2000/01	
LTSS Group Line CB’s	6	2001/02	
UTSS Tie line/
Interconnector CB’s	5	2002/03	
MSS Tie line/
Interconnector CB’s	5	2003/04	
MSS Tie line/ Interconnector CB’s	5	2004/05	
LTSS Tie line/ Interconnector CB’s	10	2005/06 - 2006/07	

10.4.2.	Emerging Costs
A number of increased costs are emerging in the process of corporatisation and market development which have not yet been included in past O&M expenditures.  These include insurance cover, working capital, compliance and reporting costs, licensing and access fees etc.  It is necessary to ensure that an appropriate proportion is allocated to the Transmission business.

Allocation of insurances for Directors and Officers, Travel, Public and Property Liability to the Transmission business has been based on a proportional O&M expenditure basis.  Therefore at a total current cost of $1,400 k per annum for insurances policies, the amount attributed to Transmission is $ 25 k.  The Snowy does not currently insure its transmission lines as previous estimates of premiums were considered too high.  Therefore the Snowy has been self insuring this ISR risk.  The attached W M Mercer report indicates that the premium for a deductible of around $500 k would be in the vicinity of $500 k -$700 k.  The Snowy would consider it appropriate to include an amount of  $250 k for transmission line insurance.  This allowance is independent of the actual insurance cover undertaken, as its objective is to compensate shareholders appropriately for the risk profile of the particular business.   Decisions on the type of insurance vehicle, explicit or self-insured, are immaterial.  

Negotiations with the Kosciuszko National Park in relation to access fees and Road Maintenance payments have included the amount of $ 31 k per annum for Transmission Line access.  The developing national market, and corporatisation will expose Snowy to an uncertain cashflow profile, unlike past experience and therefore an increase in working capital costs will result.  As a regulated Transmission entity, the Snowy will be entering into a new control regime and this will result in increased costs of compliance reporting, monitoring of industry developments, legislative updates etc.  These three commercial business costs are anticipated to add $100 k per year to O&M.

Taxation costs associated with either sales tax or GST have not been included in the forecast O&M as this requirement is uncalculated and uncertain at this point in time. 
10.5.	Operational Projects
The following table indicated the Operational projects to be added to base expenditure forecast for the next 5 years.

Table 7 Operational Projects Program ($000 uninflated)

10.6.	Summary
Table 8 summaries the above productivity gains and increased expenses.

Table 8. O&M Adjustments ($000)
Adjustment	1999/00	2000/01	2001/02	2002/03	2003/04	

Base O&M
	
1,993.9	
1,993.9	
1,993.9	
1,993.9	
1,993.9	

Operational Projects	
210.0	
350.0	
300.0	
330.0	
400.0
	
Circuit Breaker Maintenance	
	
(30.0)	
(67.5)	
(112.5)	
(150.0)	

Current Insurances	
25.0 	
25.0	
25.0	
25.0	
25.0	

Increased Liability	
250.0	
250.0	
250.0	
250.0	
250.0
	
Access, Fees, Working Capital, Reporting etc	
100.0	
100.0	
100.0	
100.0	
100.0	

Total Forecast	
2,578.9
	
2,688.9	
2,601.4	
2,586.4	
2618.9	
Percent savings per year	
0.0	
4.3	
93.30	
(0.6)	
1.3	

$ per km	
9,516	
9,922	
9,599	
9,543	
9,664	

$ per MWh
Based on 5129 GWh	

0.50	

0.52	

0.51	

0.50	

0.51	
10.7.	Benchmark indicators
As discussed in Construction Costs of assets in section 7 above, many of the Snowy Mountains Hydro-electric Authority Transmission Assets are contained within the Kosciuszko National Park in mountainous and remote terrain subject to strict environmental requirements.  This adds to the cost of maintenance in terms of planning, access, equipment requirements and additional costs for harsh weather conditions.  For example transmission personnel have to be trained in remote area safety, snow survival, and endangered species identification. The Snowy has a company wide environmental management program which places high standards on all maintenance work.  Transmission line maintenance is especially subject to these requirements as the lines are in remote and generally undisturbed environments. As the easements are situated in forested areas, with a predominance of eucalyptus trees, they are also subject to a higher than average regrowth rate and consequent easement clearing.

Negotiation and site visits with National Parks staff are a normal course of business for Snowy maintenance work.  Investigations to identify environmentally sensitive areas including habitats for endangered species and environmental impact statements are required even on routine maintenance work.  Only limited clearing is allowed and chemicals are especially restricted in use.  Personnel often have to be airlifted to remote sites to ensure the least disruption to surrounding fauna and flora. 

A comparison of benchmark performance measures from ESAA and from TransGrid Operation and Maintenance Expenditure Review 2 April 1999 is included in Table 9 below.

Table 9.  Benchmark Performance Indicators
Indicator	TransGrid	Snowy	Range	
Opex $ per MWh	2.0 - 1.5 	0.51 - 0.50	2.5 - 1.0	
$ per km	10,000 - 9,000	9,900 - 9,500	6,000 - 11,000	

The Snowy uses a labour overhead cost of 43% compared with 55% in the Treasury guidelines of 1995 and an overhead allocation at 15% of direct costs which compares favourably with the Indirect Cost Capitalisation Factor in the NSW Treasury guidelines of 17%.

The results support the contention that significant efficiency gains have already been achieved despite the high cost maintenance environment in which the Snowy operates and a concentration of 330 kV switching stations in the asset base.  The O&M forecast above maintains current real cost despite an increasing operational requirement and increasing market and reporting requirements. Benchmark figures show that Snowy compares favourably with its competitors in terms of operating efficiency.

 London Economics www.accc.gov.au/docs/elecgrid/qnsub12.htm
2 Consultancy Terms of Reference Snowy Mountains Hydro-electric Authority Transmission Asset Base Review June 1999.
3 Draft Determination section 3.7.1

Attachment 1 - Capital Project Summaries

CIRCUIT BREAKER REPLACEMENT PROGRAM

There are three types of high voltage circuit breakers in use on Snowy's Transmission network: air blast, small oil volume and SF6.

Both the air blast and small oil volume (SOV) circuit breakers are now considered to be obsolete technology due to their complicated design and the large number of parts that are no longer available.  Maintenance costs for these two types of circuit breakers (including air systems for air blast) are high, and a substantial level of maintenance knowledge and effort are required to ensure continued reliability of the circuit breakers.  Significant economic savings can be made by the generating business from the replacement allowing the operation of generator group line circuit breakers for switching and saving the cost of energy for transformers.

Poor performance on air blast and SOV circuit breakers usually relates to timing problems with the breakers operating either slowly or with greater than acceptable phase discrepancies. 

Subject to an economic evaluation in each case, a program of phasing out of air blast and small oil volume (SOV) circuit breakers within SMHEA commenced in 1993.  In particular there are specific strategies for replacement of the following circuit breakers:
	REPLACEMENT PROGRAM

Project	
Quantity	
Voltage/Type	
Timeframe	

MSS Group Line CB's	
8	
330kV/Air Blast	
1999/00 - 2000/01	

GPS - Munyang Line CB	
1	
132kV/S0V	
2000/01	

LTSS Group Line CB's	
6	
330kV/Air Blast	
2001/02	

UTSS Tie line/
Interconnector CB's	
5	
330kV/Air Blast	
2002/03	

MSS Tie line/
Interconnector CB's	
5	
330kV/Air Blast	
2003/04	

MSS Tie line/ Interconnector CB's	
5	
330kv/Air Blast	
2004/05	

LTSS Tie line/ Interconnector CB's	
10	
330kV/Air Blast	
2005/06 - 2006/07	

SURGE ARRESTER REPLACEMENT PROGRAM

There are two main types of high voltage surge arresters in use on Snowy's network viz, Gapped type (Silicon Carbide) and Gapless (Metal Oxide).

Gapped type surge arresters are now considered to be obsolete technology and manufacturers have recommended a 30 year life.  Most of the gapped type surge arresters do not have explosion vents for over pressure relief and the final failure of the arresters will most likely lead to an explosion.  Failure of the existing surge arresters is inevitable, with the only question when. 

A survey conducted by ESAA/CIGRE in 1994 obtained 41 responses from a wide range of organisation with regard to surge arrester failure (gapped).  Seventy percent of users reported failures in the past five years prior to the survey.

There is no accurate method of testing 330kV surge arresters.  Numerous studies on arresters reveal that the majority of failures occurred due to water entry following seal failure and/or corrosion due to electrolytic action between dissimilar metals.  Once water entry occurs, HV corona and tracking is initiated.  Generating ozone, which being chemically active, combines with the trapped water to produce nitric acid.  Ozone also attacks nitrile rubber used in some seals and further accelerates the process of deterioration.

In 1994 Thermographic survey results of our 330kV surge arresters installed at Murray Switching Station had indicated possible seal failure and moisture ingress on three (3) surge arresters.

The 330kV Dederang surge arresters were dismantled and inspected in November 1996.  Evidence of pure sulphur was found in them.  Under discharge activity sulphur in an oxygen atmosphere forms sulphuric acid which could lead to excessive surface tracking and breakdown.  These arresters have since been replaced.

Objective of the replacement program for 330kv Group line surge arresters at Power Stations is as follows:

Prevent damage to 330kV main transformers and cables at power stations which could occur through failure on an existing surge arrester to prevent a surge.

Prevent damage to other equipment such as 330kV cable end bushings in the cable yard which could occur on explosive failure of an existing gapped type surge arrester.

Prevent harm to personnel which could occur on explosive failure of surge arresters.

	REPLACEMENT PROGRAM

Project	
Quantity	
System Voltage/Type	
Timeframe	

T1/T2 Cableyard Arresters	
14	
330kV/Gapped	
1990/00 	

T3 Power Station Arresters	
9	
330kV/Gapped	
2002/03	

M1/M2 Power station Arresters 	
21	
330kV/Gapped	
2003/04	

MSS-KHANCOBAN SUBSTATION SWITCHGEAR REPLACEMENT

The fault ratings for 330kV CTs and 330kV isolator at Khancoban Substation are 25kA and 26kA respectively.  TransGrid Fault Level Studies indicate the present fault level of 26.7kA at MSS.  The technical life of CT and isolator has been reached and uprating is inevitable.  An oil spillage from an exploding CT is a fire hazard and can cause environmental pollution.  There is also a possibility of spurious trip on through faults or delayed tripping on internal faults due to CT saturation problem.  The CTs should be redesigned, keeping in mind the protection relaying requirements.

The importance of 132kV Khancoban-Guthega supply should not be underestimated, as it is the supply point for pumping energy for Jindabyne pumps and is also the alternate source for Munyang and the snowfields should the Cooma supply fail.

	PROJECT PROGRAM

Project	
Timeframe	

MSS-Khancoban Sub Switchgear Replacement	
2000/01	

UPGRADE SEWAGE TREATMENT FACILITIES AT GROUP CONTROL CENTRES

Existing sewage treatment facilities at Upper Tumut, Lower Tumut and Murray Group Control Centres are individual septic tanks..

The following projects will be undertaken to upgrade sewage treatment facilities at Group Control Centres to meet present effluent discharge standards set by EPA.

Existing Septic Tanks need new sewage treatment processes or hooking up to the township sewage treatment plants.

	PROJECT PROGRAM

Project	
Timeframe	

MGCC - Upgrade Sewage Treatment Facilities	
1999/00	

UTGCC - Upgrade Sewage Treatment Facilities	
2000/01	

LTGCC - Upgrade Sewage Treatment Facilities	
2001/02	

GROUP CONTROL CENTRES (GCC) AND SWITCHYARDS FIRE PROTECTION SYSTEMS UPGRADE

Existing fire protection systems at Group Control Centres and Switchyards are over 30 years old and some equipment is obsolete or unreliable.  This project is directed at investigating the existing fire protection systems and implementing action as appropriate.  This will ensure that fire protection systems adequately protect personnel and assets.

Project	
Timeframe	

GCC and Switchyard - Replacement of Fire Protection Systems	
2000/01	

INSTALLATION OF DIRECTIONAL EARTH FAULT COMPARISON (DEFC) PROTECTION FOR THE DEDERANG 1 AND DEDERANG 2 LINES AT MSS

Directional Earth Fault (DEF) Protection will provide line protection to sensitive high resistance earth faults and lessen the likelihood of bushfires resulting from such uncleared or difficult to detect faults.

Direction Earth Fault Comparison (DEFC) Schemes are installed on all 330kV TransGrid Tie lines and the Snowy interconnectors.  GPU PowerNet, Victoria, have indicated their preparedness to implement DEFC protection on the MSS-Dederang Tie lines in the future and are presently examining protection and communication system options.

Project	
Timeframe	

MSS - Install DEFC Protection for Dederang lines	
2000/01	

330kV LINE RATINGS UPGRADE   (MSS-LTSS/MSS-UTSS LINES)

20 kilometre sections in both these lines are thought to have thermal ratings of 490C not the 670C on which the current line ratings are based.  Acceptance of the lower temperature rating will have significant impact on limits to levels of interstate power transfer.  In addition, the disparity in ratings raises questions as to conductor performance (sag, clearances) during heavy load conditions.  Conductor sag could result in a hazardous situation particularly during periods of high summer ambient temperatures and high line loading in addition to a breach of regulations.

The problems with conductor ground clearance were identified in the past and resulted in re-profiling certain high sections of ground, in agreement with the National Parks and Wild Life Service (NPWS), as an interim solution.

TransGrid carried out an initial check of line ratings using statistical methods.  Preliminary results suggest a rating problem exists eg; the continuous July day time rating is 1500A (not 1800A according to present Snowy Operating instructions).

The long term permanent solution to this problem is a complete re-appraisal of the 330kV line profiles and a re-calculation of the necessary line tensions and conductor sag.  Tower modification and/or reconductoring of the affected line sections may also be considered a possible solution.

Project	
Timeframe	

Review reappraisal of the 330kV line profiles and re-calculation of the necessary line tensions and conductor sag	
2000/01	

Implementation of possible reconducting	
2002/03 - 2003/04	

Attachment 2 - Operational Project Summaries

REVIEW OF 330 KV TOWER DESIGN ADEQUACY/ STRENGTHENING

ABB EPT Construction Pty Ltd were commissioned to perform a detailed structural analysis of a few representative transmission towers on one 330 KV Group Line between Murray Switching Station and Murray 1 Power Station. This was required as part of a review of options for implementing an optical fibre link to Murray 1 Power Station.

The capacities of tower members under axial loads were determined using ASCE manuals and reports on Engineering Practice number 52 "Guide for Design of Steel Transmission Towers "prepared by ASCE and which is an accepted standard in the industry.

It has been found that some 330 KV towers need strengthening to satisfy current design standards as per ASCE manuals and guidelines.

The following strategy will be adopted to address this issue:

All towers should be checked for compliance with design and construction drawings to ensure that the available design information represents the 'as built' condition.

Carry out comprehensive design check on all types of towers taking into account the earlier design standards as well as the current industry practice.

Identify potential weaknesses and develop designs for appropriate modifications where justified.

PROGRAM

Project	
Timeframe	

Tower design accuracy review	
2002/03	

Carry out appropriate modification where justified	
2003/04	

MSS INTERBUS TRANSFORMER NUMBER 2 - BUSHING REPLACEMENT

330kV/132kV/11kV Interbus transformers are situated in Murray Switching Station. The132kV side of the Interbus transformers are connected to Guthega Power Station via a 132kV transmission line and the 330kV side is connected to the Murray Switching Station. Interbus transformers are taking an important role in the Snowy scheme by transmitting Guthega Power Station generation loads and providing pumping energy to Jindabyne Pumping Station pumps.

Recent Pacific Power and the Snowy high voltage tests indicated that high Dielectric Dissipation Factors (DDF) of all 330kV and 132kV bushings. Both Pacific Power and TransGrid policy is to replace SRBP bushings once they get to around 10mW/VAR reading. 

Loss of generation at Guthega Power Station and loss of supply to Jindabyne Pumping Station can cause significant economic and operational impact for the scheme.

Therefore it is recommended that the 330kV and 132kV Synthetic Resin Bonded paper Bushings (SRBP) be replaced with oil impregnated paper type condenser bushings.

PROJECT PROGRAM

Project	
Timeframe	

Replacement of No. 2 Interbus transformer bushings	
2000/01	

Attachment 3 - Risk Position of Transmission Assets