Ausgrid’s Regulatory Proposal 1 JULY 2019 TO 30 JUNE 2024 b Ausgrid’s Regulatory Proposal 2019–2024 Table of contents 01 ABOUT THIS PROPOSAL 6 06 OPERATING EXPENDITURE 110 1.1 Overview 8 6.1 Overview 114 1.2 Our regulatory obligations 8 6.2 Performance in the 2014 to 2019 period 118 1.3 Feedback on this Proposal 9 6.3 Responding to customer feedback 126 1.4 How to read our Proposal 10 6.4 Forecasting methodology 129 6.5 Summary of operational expenditure forecast 137 02 AUSGRID AND OUR CUSTOMERS 14 6.6 National Energy Rules compliance 138 6.7 Material to support our opex proposal 139 2.1 Background 18 2.2 Consultation with our customers 07 RATE OF RETURN 140 and stakeholders 21 2.3 Key issues for customers and stakeholders 27 7.1 Our approach 144 7.2 Overall rate of return 145 03 OUR ROLE IN A CHANGING MARKET 36 7.3 Return on equity 148 7.4 Return on debt 153 3.1 The policy environment is changing 40 7.5 The value of imputation tax credits 156 3.2 The technology landscape is changing 40 7.6 Expected inflation 157 3.3 The way we manage the network is changing 42 08 ALTERNATIVE CONTROL SERVICES 158 3.4 Electricity Network Transformation Roadmap 44 8.1 Public lighting 162 3.5 Ausgrid’s innovation portfolio 45 8.2 Metering services 164 8.3 Ancillary network services 164 04 ANNUAL REVENUE REQUIREMENT 46 09 INCENTIVE SCHEMES AND PASS 4.1 Overview of our building block proposal 50 THROUGH 166 4.2 Regulatory asset base 52 4.3 Rate of return 54 9.1 Efficiency Benefit Sharing Scheme 170 4.4 Regulatory depreciation (return of capital) 55 9.2 Capital Expenditure Sharing Scheme 171 4.5 Other proposed revenue adjustments 57 9.3 Service Target Performance Incentive Scheme 173 4.6 Proposed revenue requirements 59 9.4 Demand Management Incentive Scheme and Innovation Allowance 175 05 CAPITAL EXPENDITURE 62 9.5 Small-scale incentive scheme 178 9.6 Pass through events 178 5.1 Overview 66 5.2 Network performance 69 10 PRICING STRUCTURES AND POLICIES 180 5.3 Decision-making for network capital expenditure program and forecast 76 10.1 Background 184 5.4 Proposed replacement capital expenditure 10.2 Proposed changes to our network prices 186 program 82 10.3 How we will manage transitional 5.5 Proposed growth capex forecast 88 customer bill impacts 193 5.6 Delivering the proposed network capital 10.4 How we assign customers to network expenditure program 96 price structures 199 5.7 Information, Communication and Technology, and Innovation 98 11 CLASSIFICATION OF SERVICES AND 5.8 Property 101 NEGOTIATION FRAMEWORK 200 5.9 Fleet and plant 104 5.10 Capital program support costs 106 11.1 Ausgrid’s classification proposal 203 5.11 National Energy Rules compliance 108 11.2 Negotiation framework and criteria 207 5.12 Material to support our capital expenditure proposal 109 APPENDIX A: GLOSSARY 208 Ausgrid’s Regulatory Proposal 2019–2024 1 CEO Foreword It is with pleasure that we submit the Ausgrid 2019–2024 Regulatory Proposal (the Proposal) to the Australian Energy Regulator (AER). Ausgrid is the largest distributor of electricity on Australia’s east coast. We bring power to 1.7 million households and businesses across 22,275 square kilometres covering Sydney, the Central Coast and the Hunter Valley. Ausgrid plays a key economic role both nationally and in New South Wales (NSW), with our distribution network supplying electricity that powers the creation of 20% of our national and 59% of NSW’s Gross Domestic Product. 2 Ausgrid’s Regulatory Proposal 2019–2024 I believe our Proposal captures the significant progress Ausgrid has made so far to become a more customer centric organisation. Our customers want Ausgrid to provide network services which are affordable, reliable and sustainable. I want to recognise and thank our customers and stakeholders who have contributed both time and effort to helping the development of this proposal over the past two years. Your input has been influential in determining the final approach to our strategy, investment and the programs that are incorporated in the Proposal. Close engagement with our customers has underscored that affordable energy is particularly important. We understand that high energy prices are negatively impacting households and businesses alike. We have made inroads in addressing this and by 1 July 2018, Ausgrid’s network component of our customer’s bills will have reduced by 30% since July 2013. Specifically in relation to affordable energy supply, our Proposal will result in: y lower prices, with a 6% reduction in our prices within the network component of residential customer bills by 1 July 2019; y fairer prices, with changes to pricing that reflect the actual costs of network usage and measures to protect vulnerable customers; and y zero real growth in the value of the assets we use to provide our services on a per customer basis. This is only the start, as we will continue to keep downward pressure on our costs to support lower prices for customers. We are also committed to maintaining a reliable service to customers, whilst recognising that customers are often struggling under cost of living pressures. We will keep investment to a minimum, by only replacing ageing assets where there is no alternative and only augment to support targeted growth areas. We will continue to support growth in our economy with targeted infrastructure investment, for example in the Rozelle area to support transport growth and in Macquarie Park to support growth in the Information and Communication Technology sector. Additionally, rather than simply planning for more network infrastructure, we are looking first at where new technology, innovation (including demand management) and partnering with other companies and our customers will deliver supply at a lower cost. Our customers have also told us that they are interested in adopting more sustainable sources of energy and expect us to take action to facilitate the transition to a lower carbon economy. In response, our Proposal includes investments in a new technology platform that will support the transformation of our network from a passive one way distribution network to a smart grid that will more easily allow us to incorporate distributed energy resources and deliver the tools to better operate the network in real-time. I look forward to continuing to drive the company to achieve its vision over the coming regulatory period to be ‘a leading energy solutions provider, recognised both locally and globally’ and commit Ausgrid to continuing to work with our customers and stakeholders to deliver on this vision. We know from experience that we can only achieve our goals and purpose by working closely together. Your feedback on our Proposal is very welcome. Yours sincerely, Richard Gross Chief Executive Officer Ausgrid Ausgrid’s Regulatory Proposal 2019–2024 3 Ausgrid’s Proposal at a glance Meeting our customers’ needs AFFORDABLE RELIABLE SUSTAINABLE Lower prices Replacing ageing assets Flexible network 6% $ m reduction in our component of network $335m pa 58 costs in residential bills from 1 July 2019 to deliver the ‘future grid’ investment in sooner by trialling renewing the grid technologies that enable sustainable customer choices Fairer Updated price structures + Smart More efficient Operating cost savings (pa) Investing in technology $41m $100m additional investment in an Advanced Distribution Benefit per customer $43m pa Management System following an initial including cyber security investment of $35m $76pa in the current period Powering our economic growth 4 Ausgrid’s Regulatory Proposal 2019–2024 Our electricity supply chain The different cost components of a typical customer bill. STATE AND AUSGRID FEDERAL GENERATION TRANSMISSION RETAILER GOVERNMENT NETWORK ENVIRONMENTAL Distribution and dual POLICIES function assets 48% 5% 33% 9% 5% Source: Ausgrid analysis for FY17/18, based on standing offer in Ausgrid’s network, Ausgrid’s network charges (including NSW Government Climate Change Fund costs) and Australian Energy Market Commission data for wholesale generation costs and other Federal and State Government Environmental policies. Reliability and growth investment Replacement investment Total investment Growth investment $1,673m $3.08b $241m Non- network Macquarie Park Rozelle substation Including: 18% investment investment • Fluid and gas • Overhead cables conductors $28.1m $17.5m • Service lines • Switchboards 54% 8% increasing increasing capacity • Overhead poles • Transformers capacity for new for anticipated • Low voltage cables • Monitoring and data centre and growth in the • Control and control systems telecommunication area including protection • Substation assets 20% customers, together transport systems • Reactive program with potential projects such Capital expansion of as WestConnex. program education facilities. support Ausgrid’s Regulatory Proposal 2019–2024 5 01 About this Proposal 6 Ausgrid’s Regulatory Proposal 2019–2024 Ausgrid’s Regulatory Proposal 2019–2024 7 01 About this Proposal 1.1 Overview 1.2 Our regulatory obligations Ausgrid is the largest distributor of electricity In our role as a Distribution Network Service Provider on Australia’s east coast, providing electricity (DNSP), we provide our customers with a range to 1.7 million connected customers. Our core of electricity distribution services, which are regulated business is to provide distribution network services. by the AER under the National Electricity Rules (NER We do this by building and operating assets and or the Rules). Periodically, the AER assesses the delivering non-network solutions to ensure our efficiency of our proposed expenditure plans as well customers have safe and reliable access to electricity as the proposed structure of our prices. at an efficient and reasonable price. Our current regulatory period ends on 30 June 2019. This 2019–2024 Regulatory Proposal (the Proposal) Ausgrid proposes that the next regulatory control is prepared for the Australian Energy Regulator period be for a term of five years, commencing on (AER), and outlines how Ausgrid will achieve these 1 July 2019 and ending on 30 June 2024 (the 2019–24 customer outcomes for the five-year period from regulatory period or next regulatory period).