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An Independent Review of the Tasmanian Electricity Supply Industry

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An Independent Review of the Tasmanian Electricity Supply Industry Electricity Supply Industry Expert Panel An Independent Review of the Tasmanian Electricity Supply Industry Final Report Volume II March 2012 Table of Contents Glossary II Foreword VI Part A – Basslink: Decision making, expectations and outcomes 1 Part B – Tamar Valley Power Station: Development, acquisition and 71 operation Part C – A review of the efficiency and effectiveness of the State Owned 135 Electricity Businesses Part D – A review of the financial position of the State Owned Electricity 221 Businesses Part E – Governance: Issues and reforms 349 Page | II Glossary TERM MEANING AARR Aggregate Annual Revenue Requirement ACCC Australian Competition and Consumer Commission AEATM Alinta Energy Australia Trading and Marketing AEI Australian Energy International (Basslink) Consortium AEMC Australian Energy Market Commission AEMO Australian Energy Market Operator AER Australian Energy Regulator AETV Aurora Energy Tamar Valley Pty Ltd AGM Annual General Meeting ASX Australian Stock Exchange APV Annualised Present Value BBPS Bell Bay Power Station BBP Babcock and Brown Power BDA Basslink Development Agreement BDB Basslink Development Board BDSC Basslink Development Steering Committee BFF Basslink Facility Fee BOA Basslink Operations Agreement BSA Basslink Services Agreement CCGT Combined Cycle Gas Turbine CIGRE International Council on Large Electricity Systems CLP China Light and Power CPI Consumer Price Index CPs Conditions Precedent CSC Customer Service Centre CSO Community Service Obligation CY Calendar Year DC Direct Current DIER Department of Infrastructure Energy and Resources Page | III TERM MEANING DUOS Distribution use of System EBITDA Earnings Before Interest Tax and Depreciation EBSS Efficient Benefit Sharing Scheme ECAC Electricity Coordination and Advisory Committee EPC Engineering, Procurement & Construction FCAS Frequency Control Ancillary Services FRC Full Retail Contestability FTTP Fibre to the Premises FY Financial Year GBE Government Business Enterprise GSA Gas Supply Agreement GTA Gas Transport Agreement GW Giga Watt GWh Giga Watt Hours HEC Hydro Electric Corporation / Commission / Department HoA Heads of Agreement HVDC High Voltage Direct Current IBG Investment Banking Group IES Intelligent Energy Systems IRR Inter-Regional Revenue ITE Income Tax Equivalents ITOMS International Transmission Operation and Maintenance Study JAP Joint Advisory Panel JV Joint Venture LCW Lazard Carnegie Wylie LRMC Long Run Marginal Cost MAR Maximum Allowable Revenue MI Major Industrial Momentum Momentum Energy Pty Ltd MoU Memorandum of Understanding MRET Mandatory Renewable Energy Target MW Megawatt Page | IV TERM MEANING MWh Megawatt Hour (= 1 thousand kWh) NAB National Australia Bank NBN National Broadband Network NCP National Competition Policy NEM National Electricity Market NEMMCO National Electricity Market Management Company NGIL National Grid International Ltd NPV Net Present Value OCGT Open Cycle Gas Turbine OECD Organisation of the Economic Corporation Development OTTER Office of the Tasmanian Energy Regulator PAYG Pay As You Go PB Parson Brinkerhoff PCA Pipeline Capacity Agreement PD Price Determination Price Control Regulations Electricity Supply Industry Price Control Regulations 2003 PTS Prescribed Transmission Service PwC Price Waterhouse Coopers RAB Regulatory Asset Base RECs Renewable Energy Certificates ROA Return on Assets ROC Return on Capital SAIDI System Average Interruption Duration Index SAIFI System Average Interruption Frequency Index SEC State Electricity Commission of Victoria SCI Statement of Corporate Intent SOC State Owned Companies SOEB State Owned Electricity Businesses SPM Shareholder Policy and Markets Branch SPS System Protection Scheme STPIS Service Target Performance Incentive Scheme TEC Tasmanian Electricity Code Page | V TERM MEANING TER Tasmanian Economic Regulator / Tasmanian Energy Regulator TESI Tasmanian Electricity Supply Industry TNSP Transmission Network Service Provider TNGP Tasmanian Natural Gas Pipeline ToR Terms of Reference TPA Trade Practices Act TUOS Transmission use of System TVPS Tamar Valley Power Station WACC Weighted Average Cost of Capital Page | VI Foreword In June 2010, the Tasmanian Government announced that it would establish an independent expert panel to conduct an investigation into, and provide guidance to Parliament on, the current position and future development of Tasmania’s electricity industry. The Electricity Supply Industry Expert Panel was established under the Electricity Supply Industry Expert Panel Act 2010, and granted wide ranging information gathering powers to enable it to perform its intended function, as set out in its Terms of Reference. Volume 2 provides further background analysis to the findings presented in the main body of the Final Report. Specifically, it contains significant additional detail on the Panel’s key findings with regard to a number of its Terms of Reference, including: Terms of Reference 1, which required the Panel to examine the current efficiency and effectiveness of the Tasmanian energy industry with particular reference to the existing regulatory framework and the cost and operation of the energy industry elsewhere in Australia; Terms of Reference 2, which required the Panel to investigate and report on major infrastructure development decisions affecting the electricity sector and the impact that those decisions have had on Tasmanian electricity prices; and Terms of Reference 4, which required the Panel to assess the financial position of the state-owned energy businesses: Transend Networks, Hydro Tasmania and Aurora Energy. Effectively, each of the parts contained in Volume 2 corresponds with one of the five substantive Supporting Volumes that were released with the Panel’s Draft Report on 15 December 2011, namely: Basslink: Decision Making, Expectations and Outcomes; Tamar Valley Power Station: Development, Acquisition and Operation; A Review of the Efficiency and Effectiveness of the State-owned Energy Businesses; A Review of the Financial Position of the State-owned Energy Businesses; and Governance: Issues and Reforms The Basslink and TVPS parts examine, respectively, the development of the Basslink interconnector and Aurora Energy’s acquisition of the TVPS and the outcomes that both of these projects have delivered relative to expectations, including the impact (if any) on electricity prices and the financial position of the SOEBs Page | VII Taken together, the Efficiency and Effectiveness and Financial parts provide a detailed analysis of both the technical and financial performance of Tasmania’s SOEBs between 2004 and 2010. And, finally, the Governance part discusses the evidence that the Panel has obtained in relation to how well current governance arrangements are meeting good practice principles and explains the Panel’s recommended reforms. The analysis that the Panel has undertaken on all of the above matters has significantly informed the identification of issues on which the Panel’s reform recommendations have been based, particularly with regard to further improving oversight of the SOEBs. The Panel drew on the expertise of external consultants to assist in undertaking this significant part of its work program. Wilson Cook and Ernst and Young were engaged with regard to investigating the efficiency and effectiveness and financial performance of the SOEBs, respectively. In its analysis, the Panel has also drawn on a wide range of information, including briefings from senior representatives from both the Government and the SOEBs. The Panel has also used its extensive information gathering powers to access a wide range of otherwise confidential documents, including relevant Cabinet materials, internal briefing notes and advice and SOEB board papers and meeting minutes. While issues of Cabinet confidentiality and commercial sensitivity preclude the release of much of this source material, the Tasmanian community should be confident that the Panel has been able to arrive at its own, independent understanding of key decisions and actions based on this information. Part A Basslink: Decision making, expectation and outcomes Page | 2 Table of Contents Executive Summary 3 1. The case for interconnection 9 2. The search for a developer 12 3. Hydro Tasmania’s business case for Basslink 22 4. Basslink’s performance – physical 34 5. Basslink’s performance – financial 42 6. Are regulated customers paying for Basslink? 56 7. Conclusion 58 Basslink: Decision making, expectations and outcomes Page | 3 Executive summary When the Rundle Liberal Government announced in 1997 its intention to proceed with the development of an undersea interconnector linking the Tasmanian and Victorian electricity grids, the idea of a submarine cable across Bass Strait was not new. The economic and technical feasibility of interconnection had been considered numerous times by the Hydro-Electric Commission (HEC) and others over the preceding 50 years, but never managed to gain the support needed for it to become a reality. However, the end of large-scale hydro-electric development in Tasmania and the need to secure the next electricity supply option for the State, along with the long-standing issue of hydrological risk management and the development of the National Electricity Market, led the Rundle Government to seek expressions of interest through a competitive selection process for a private sector party to develop Basslink, and to progress the project as a Project of State Significance. Basslink was to form a central element
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