Attachment 13-2	Response to Draft Decision: Demand Forecasts

This attachment sets out:

amendments made by Envestra consequential to the Draft Decision; and

where the AER has set out required amendments that Envestra does not accept, this attachment sets out the reasoning for the rejection of the AER’s amendments.

Introduction

In its Draft Decision, the AER has accepted the methodology used by Envestra and its expert advisor, the National Institute of Economic and Industry Research (NIEIR), to develop its demand forecasts for both residential and non residential customers. The AER has however rejected key inputs into the model and, as a result, rejected the demand forecasts.

During the review process issues with regard to the allocation of customers between commercial/industrial and residential segments of the volume market became apparent. Envestra provided the AER with a revised history and forecast in December 2010. Both the revised history and forecast were not accepted by the AER, who continued to use the information as originally submitted.

AER accepted Envestra’s originally proposed residential customer numbers. The AER has also set the average rate of decline at 1.5% per annum, which rate is well below the rate of 3% proposed by Envestra but consistent with its view of the long term decline in average consumption. The AER has however accepted the non residential forecasts on the basis that the economic drivers underpinning those forecasts were reasonable.

Response to AER Draft Decision

Envestra has not applied the AER demand forecasts in its revised Access Arrangement proposal, instead applying a forecast based on the revised history. Envestra has sought to address the issues raised by the AER and its consultant, ACIL Tasman, regarding the demand forecasts and history in arriving at its revised forecasts.

Further, NIEIR have updated the economic forecast to account for the impact of the Queensland floods and cyclones.

Revised History

In Queensland, residential and commercial and industrial (C&I) customers that consume less than 10TJ per year have historically being assigned to a single volume tariff. This causes some difficulty when it comes to forecasting demand, which forecasts are prepared separately for residential and C&I customers. It is therefore important that each customer is assigned correctly to either a residential or C&I customer group.

During the review process, the AER alerted Envestra to issues with regard to the allocation of customers between the residential and C&I customer groups. This resulted in Envestra providing the AER with a revised history and new forecast. Both the revised history and forecast were not accepted by the AER as it was not sufficiently substantiated by Envestra.

In response, Envestra has engaged PKF to undertake an independent verification of the revised data provided to the AER. This review found that the revised data was, in all material respects, consistent with the stated approach of Envestra to defining residential and C&I customers (see attachment 13-3). Envestra therefore considers that the revised history is the appropriate data to use to forecast residential and commercial/industrial volumes.

Revised Residential Demand Forecast

This section describes Envestra’s revised residential customer numbers and average consumption forecasts that are used in forecasting residential volumes.

4.1	Residential Customer Numbers

NIEIR’s residential customer number projection is the same as that submitted in December 2010 and accepted by the AER in its Draft Decision. The implied average customer growth rate over the regulatory period is 2.5%.

Table 13.1 Final Revised Residential Forecast – Customer Numbers

2011-12	2012-13	2013-14	2014-15	2015-16
Customer Numbers	82,921	85,180	87,459	89,576	91,752

4.2	Average Residential Consumption

The revised data show that average residential consumption has fallen by 2.5% per year over the 2005/06 to 2009/10 period, the period for which consistent data are available. Declining average consumption is primarily driven by an increasing focus of government policy on energy efficiency and appliance efficiency along with an observed trend for consumers to reduce energy consumption.

Envestra therefore considers that a more appropriate trend rate of decline in average consumption to adopt going forward is 2.5%.

Despite this, Envestra has as a starting point prepared its revised forecasts based on the 1.5% rate of decline in average residential consumption used by the AER in its Draft Decision. Envestra has then adjusted this 1.5% average annual rate of decline to reflect certain (and obvious) changes over the next regulatory period, including to allow for:

the introduction of a carbon price by the Commonwealth Government, which is scheduled to apply from 1 July 2012; and

the impact of the increase in network prices will have on demand.

This section discusses the impact of the above factors on the revised residential demand forecasts.

Envestra notes that it has not accepted the advice of NIEIR to further adjust the historic trend rate of decline for other known policy changes that will commence in the next Access Arrangement period, particularly the impact of MEPS for Gas Hot Water appliances and Mandatory Reporting of Dwelling Energy Efficiency.

4.2.1	Carbon Price

On 24 February 2011, the Australian Prime Minister announced that the government intended to introduce a price on carbon that would be effective from 1 July 2012. The announcement confirms Envestra’s, NIEIR’s and ACIL Tasman’s expectations that some form of carbon price would apply during the forecast period. As ACIL Tasman stated in their report to the AER:

ACIL Tasman considers that the quantum and timing of the forecast gas price impacts are reasonable, bearing in mind the current uncertainty regarding the timing of the introduction of carbon a carbon price mechanism, and the future carbon price trajectory.

It is worth noting that the uncertainty has been removed with the Prime Minister’s announcement.

The effect of the carbon price will be to increase the price of gas. As gas consumption and gas price are inversely related, an increase in gas price will lead to a decrease in gas consumption. Clearly, the carbon price is a new scheme that has not applied in the past, and as such, can not be reflected in the historic trend rate of decline in average residential consumption. The impact of the carbon price therefore needs to be included into the revised demand forecasts.

For this revised forecast, NIEIR have utilised the same projected carbon price impact on the retail gas price as that used in the original forecast (refer Section 4.8 of Attachment 13.1). NIEIR have applied a price elasticity of -0.3, that is a 1% rise in price yields a 0.3% reduction in demand.

NIEIR has determined that the impact of the carbon price is to reduce, on average, residential demand by 0.3% per year. This therefore increases the average annual decline in residential consumption to 1.8%. The total impact on residential consumption is shown in table 13.2 below.

Table 13.2 Carbon Price Adjustment – Residential TJ

2011-12	2012-13	2013-14	2014-15	2015-16
Carbon Price	0	2.0	5.2	7.5	9.4

4.2.2	Change in Network Prices

Envestra has also sought to incorporate into its forecast residential volumes (and non residential volumes/demand for that matter) the impact of the expected change in retail gas prices resulting from Envestra’s revised Access Arrangement proposal. This is consistent with the methodology applied by the AER when the AER determined ETSA Utilities’ electricity sales forecasts over the 2010-15 forecast period.

Incorporating the exact change in network tariffs is difficult given that volumes are used to determine prices. Importantly, the network price impact is based on assessing the extent to which the price increase over the next regulatory period differs from changes in prices that have occurred over previous periods (such that only the impact of the incremental change in price on demand is captured).

Envestra has incorporated the impact of the change in network prices by following three steps:

produce an intermediate demand forecast based on retail gas price projections that exclude the impact of changes in network prices, but include the impacts of carbon price, expansion towns and network development; then

using the intermediate demand forecast and proposed revenue requirements as inputs into the PTRM to calculate the implied network price increases to apply from 1 July 2011; and then

re-running its demand forecast model to produce the final demand forecasts.

It is the demand forecasts produced in step 3 above that are used by Envestra in the PTRM for the purpose of setting tariffs. The impact of the network price effect on total residential volumes is shown in table 13.5.

Table 13.3 Network Price Adjustment – Residential

2011-12	2012-13	2013-14	2014-15	2015-16
Network Price	8.6	20.7	33.1	42.9	48.9

4.2.3	Revised Residential Forecasts

The below table details the build-up of Envestra’s revised residential demand forecasts (the revised residential customer number forecast were set out in table 13.1).

Table 13.4 Final Revised Residential Forecast – Demand

2011-12	2012-13	2013-14	2014-15	2015-16
Base Residential Volumes	655.8	663.5	671.0	676.9	683.0
Less Carbon Price	0	2.0	5.2	7.5	9.4
Intermediate Demand Forecast	655.8	661.5	665.8	669.3	673.6
Less Network Price	5.2	12.6	19.9	25.5	28.9
Final Revised Demand	650.6	649.0	645.9	644.0	644.6

Revised Commercial and Industrial Demand Forecast

Forecasting Approach to the Revised Forecast

NIEIR has applied the same econometric approach when developing the revised C&I forecast as that used in the original proposal. This approach was accepted by the AER as reasonable. The economic assumptions underpinning the revised forecast have however been updated to reflect the recent natural disasters that have occurred in Queensland.

Economic Forecast

NIEIR’s Queensland economic forecast used in the original proposal was accepted as reasonable by the AER. Since that time however Queensland has experienced major flooding and cyclone events, which has negatively impacted on the entire Queensland economy. NIEIR has therefore revised the economic forecast for Queensland to reflect these events. NIEIR’s adjustments are broadly in line with those applied by Queensland Treasury. The revised GSP forecast are presented below.

Table 13.5 NIEIR Economic Forecast – GSP Growth Rates

Year	March 2011	October 2010	Adjustment
2010-11	1.2	3.2	-2.0
2011-12	6.2	5.7	0.5
2012-13	4.6	4.1	0.5
2013-14	3.1	2.6	0.5
2014-15	3.7	3.2	0.5
2015-16	4.0	4.0	0.0

.

Carbon Price

As per the residential forecast above, NIEIR have utilised the same projected carbon price impact as that used in the original forecast when developing the revised C&I demand forecasts. The resultant adjustment to the C&I volume forecasts are shown in table 13.8.

Table 13.6 Carbon Price Adjustment – Commercial and Industrial

2011-12	2012-13	2013-14	2014-15	2015-16
Carbon Price	0	7.2	32.5	62.1	80.5

Network Price

As advised above, Envestra has sought to include the impact of the change in retail gas prices resulting from Envestra’s revised Access Arrangement proposal. The same methodology was applied as that applied in determining the residential volume forecasts (refer section 4.2.2 above).

Table 13.7 Network Price Adjustment – Commercial and Industrial TJ

2011-12	2012-13	2013-14	2014-15	2015-16
Network Price	2.5	12.0	24.1	32.7	37.9

Commercial and Industrial Revised Forecasts

The below tables detail the build-up to Envestra’s revised residential demand and customer number forecast for volume.

Table 13.8 Final Revised Commercial and Industrial Forecast – TJ

2011-12	2012-13	2013-14	2014-15	2015-16
Base C & I Volumes	1,373.5	1,421.3	1,450.1	1,492.2	1,537.2
Less Carbon Price	0	7.2	32.5	62.1	80.5
Intermediate Demand Forecast	1,373.5	1,414.0	1,418.4	1,430.1	1,456.8
Less Network Price	2.5	12.0	24.1	32.7	37.9
Final Revised Demand	1,371.0	1,402.0	1,394.3	1,397.4	1,418.9

Table 13.9 Final Revised Commercial and Industrial Forecast – Customer Numbers

2011-12	2012-13	2013-14	2014-15	2015-16
Customer Numbers	4,557	4,641	4,649	4,672	4,726

Revised Demand Customer Forecast

Forecasting Approach to the Revised Forecast

NIEIR has applied the same econometric approach used for C&I customers when developing the revised demand customer forecast. The same economy forecast was also used.

Carbon Price

As per the residential and C&I volume forecasts above, NIEIR has utilised the same projected carbon price impact as that used in the original forecast when developing the revised Tariff D demand forecast.

Table 13.10 Carbon Price Adjustment – Tariff D

2011-12	2012-13	2013-14	2014-15	2015-16
Carbon Price	0	59	260	491	633

Network Price

Envestra has also sought to include the impact of the change in retail gas prices resulting from Envestra’s revised Access Arrangement proposal. The same methodology was applied as that for residential and C&I above.

Table 13.11 Network Price Adjustment – Tariff D

2011-12	2012-13	2013-14	2014-15	2015-16
Network Price	34	155	305	429	512

Tariff D Final Revised Forecasts

The below tables detail the build-up to Envestra’s revised residential demand and customer number forecast for volume.

Table 13.12 Final Revised Tariff D Forecast – Demand GJ MDQ

2011-12	2012-13	2013-14	2014-15	2015-16
Tariff D Base	20,576	21,025	21,118	21,406	21,902
Less Carbon Price	0	59	260	491	633
Intermediate Demand Forecast	20,576	20,966	20,858	20,915	21,268
Less Network Price	20	98	195	262	303
Final Revised Demand	20,556	20,868	20,663	20,653	20,965

Table 13.13 Final Revised Tariff D Forecast – Customer Numbers

2011-12	2012-13	2013-14	2014-15	2015-16
Customer Numbers	72	73	73	73	74

Summary of Revised Demand Forecast

The tables below summarise the customer number and demand forecasts used in Envestra’s revised Access Arrangement proposal.

Table 13.14 Final Revised Residential Forecast – Summary

2009-10	2010-11	2011-12	2012-13	2013-14	2014-15	2015-16
Volume TJ	647.5	650.3	650.6	649.0	645.9	644.0	644.6
Customer Numbers	79,431	81,007	82,921	85,180	87,459	89,576	91,752
Average	8.2	8.0	7.8	7.6	7.4	7.2	7.0

Table 13.15 Final Revised Commercial and Industrial Forecast – Summary

2009-10	2010-11	2011-12	2012-13	2013-14	2014-15	2015-16
Volume TJ	1,294.1	1,302.6	1,371.0	1,402.0	1,394.3	1,397.4	1,418.9
Customer Numbers	4,395	4,407	4,557	4,641	4,649	4,672	4,726

Table 13.16 Final Revised Tariff D Forecast – Summary

2009-10	2010-11	2011-12	2012-13	2013-14	2014-15	2015-16
Capacity TJ MDQ	19.9	19.9	20.6	20.9	20.7	20.7	21.0
Customer Numbers	66	68	72	73	73	73	74

Billing quantities

The forecasts were converted into the associated charging parameters following the same methodology as per the original proposal. Envestra was however required to amend the methodology used to derive the C&I block forecasts.

The proportions used to convert the commercial and industrial forecasts in the original proposal were predicated on the old Tariff V which included residential block volumes. The revised proposal uses proportions implied from historic block volumes excluding residential. The residential block forecasts are unaffected by this issue.

Transcript of Joint Press Conference, http://www.pm.gov.au/press-office/transcript-joint-press-conference-canberra, site accessed 16 March 2011.

Page 11, Review of Demand Forecasts for Envestra Queensland, ACIL Tasman, 31 December 2010

Sections 6.5.2.6 and 6.6, AER Final Decision South Australia Distribution Determination 2010-11 to 2014-15, May 2010

Page 164, Section 10.6.1 of the AER Queensland Gas Network Draft Decision

2010-11 Mid-Year Economic Review – http://www.treasury.qld.gov.au/office/knowledge/docs/mid-year-review/index.shtml - accessed 19 March 2011