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New South Wales Government's Financial Distribution Policy Since Its Inception and Is Fully Committed to Endeavouring to Return an Adequate Return to the Shareholder

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New South Wales Government's Financial Distribution Policy Since Its Inception and Is Fully Committed to Endeavouring to Return an Adequate Return to the Shareholder Attachment One STATEMENT OF CORPORATE INTENT YEAR ENDING 30 JUNE 2005 The attached Statement of Corporate Intent comprises: Part 1 BUSINESS OPERATIONS Part 2 FINANCIAL PERFORMANCE TARGETS Part 3 CAPITAL WORKS PROGRAM Part 4 ASSET AND LIABILITY MANAGEMENT Part 5 NETWORK SERVICE QUALITY Part 6 RISK MANAGEMENT Part 7 INFORMATION DISCLOSURE Part 8 APPENDICES This Statement of Corporate Intent has been agreed between: Mr Philip Higginson The Hon Michael Egan, MLC Chairman Treasurer of New South Wales TransGrid Mr David Croft The Hon John Della Bosca, MLC Chief Executive Special Minister of State TransGrid Dated: ISO 14001 Lic 0052 Standards Australia PART 1 – BUSINESS OPERATIONS 1.1 Objectives of Corporation TransGrid's broadly defined aim is to provide a safe, reliable environmentally effective and economic bulk electricity network service to our customers and the community by: . developing, maintaining and operating the electricity transmission system to world's best practice; . improving the skills and practices of organisational work teams to enhance safety, productivity and job satisfaction; . applying a total quality approach to technical excellence, commercial rigour and environmental sensitivity; and . seeking commercial opportunities to grow the organisation‟s commercial activities by leveraging off key competencies. TransGrid has adopted Quality as an integral theme within its business operations. TransGrid has certification from Standards Australia to ISO 9001:2000, which provides assurance that TransGrid has quality systems in place to deliver its services to customers. TransGrid also has certification to ISO 14001, which provides assurance of the organisation's commitment to environmental management. 1.2 Nature and Scope of Operations TransGrid is the owner, operator and manager of the high voltage electricity transmission network between generators, distributors and directly connected end users in New South Wales as well as interconnections with Queensland and Victoria. TransGrid was formed as part of the structural changes to the NSW Electricity Industry on 1st February 1995 as the NSW Electricity Transmission Authority. TransGrid was corporatised on 14th December 1998. TransGrid‟s core business is to carry out: . the management, operation, control and maintenance of TransGrid's electricity transmission network; . the enlargement of TransGrid's transmission system in response to present and expected future demand for electricity and generally for the purpose of increasing the availability of electricity to foster competition in the evolving National Electricity Market; and Statement of Corporate Intent – 2004 – 2005 Page 1 . the investigation of and planning for future needs in relation to the transmission of electricity within its own network and between transmission networks. 1.3 Strategic Direction On an annual basis, TransGrid prepares a detailed Corporate Plan setting out its strategic direction which becomes the basis for individual Business Unit plans. TransGrid‟s Corporate Plan defines the key objectives, strategic initiatives and performance targets to measure achievement. The Corporate Plan highlights four complementary strategic objectives: To provide accessible, efficient, safe and reliable facilities for the transmission of electricity To be commercially successful To be environmentally and socially responsible To identify the optimum solutions to provide reliable electricity supply A key strategy for the organisation is the maintenance of the assets which form its core business. TransGrid has developed a Network Management Plan to ensure its reliability and quality service standards are met. In addition, TransGrid is continuing to ensure the demand requirements of the State are being met through its Jurisdictional Planning responsibility. To meet the reliability criteria required for a State as dynamic as New South Wales, TransGrid has a significant network enhancement program in progress. A key issue for TransGrid is its operating environment. As a New South Wales State Owned Enterprise, it must operate with the boundaries set by relevant State legislation such as the State Owned Corporations Act, 1989, the Electricity Supply Act, 1995 and the Public Finance and Audit Act, 1983. In addition, it is bound by the National Electricity Law and the National Electricity Code. All these operating requirements add complexities to TransGrid‟s operations and associated compliance resources and costs. The vast majority of TransGrid‟s revenue is subject to regulation by the Australian Consumer and Competition Commission. Given TransGrid‟s regulated environment, the organisation is seeking to exploit other commercial opportunities to increase income levels from non-regulated activities. TransGrid intends to continue to maximise the level of non-regulated income, which it can generate with additional income already being derived from the provision of specialist services both in Australia and Overseas. Statement of Corporate Intent – 2004 – 2005 Page 2 TransGrid presents a business case to its Board for approval before proceeding into activities that are expected to generate non-regulated income. For significant projects that involve capital expenditure in non-regulated activities or increase TransGrid's risk exposure, TransGrid also seeks the approval of the shareholders before committing to non-regulated projects. TransGrid does not propose to participate in any form of Energy Price Risk Management transactions during the currency of this Statement. TransGrid will not participate in any non-commercial activities in 2004/05. The Board and Management of TransGrid believe that the organisation has the capacity to achieve the goals and meet the financial performance targets set in its business plan. 1.4 Shareholder Directives The State Owned Corporations Act, 1989 requires: “The voting shareholders may, from time to time, by written notice to the board, direct the board to include in, or omit from, a statement of corporate intent any specified matters”1 Two Shareholder Directives are currently in place: o The inclusion of details of employment arrangements for TransGrid‟s Chief Executive in this Statement of Corporate Intent. The directive is complied with in Part 7 of this document. o Specific Reference to Treasury Circular TC03/02 will be included in this Statement of Corporate Intent. This directive is complied with in Appendix 1 of this document. No other Ministerial directives have been issued at this time. 1 State Owned Corporations Act 1989, Clause 21 (7) Statement of Corporate Intent – 2004 – 2005 Page 3 PART 2 - FINANCIAL PERFORMANCE TARGETS 2.1 Introduction In developing and reviewing TransGrid‟s Financial Performance targets, it is important to put into context the impact of the regulator on the organisation‟s commercial outcomes. Revenue levels for the five years to June 2004 have been indicated by the Australian Competition and Consumer Commission (ACCC), in the draft determination released in May 2004. The revenue determination process for the period to June 2009 continues with matters relating to forward capital expenditure as yet unresolved. This process is again being conducted with a policy vacuum with the ACCC reviewing and redeveloping the regulatory criteria at the same time as it is determining the regulatory outcome for the next 5 year period. This is creating substantial financial and operational risk for TransGrid without any guarantee of consideration of this risk in the ACCC‟s deliberations. The regulatory process creates a major risk for TransGrid as the process lacks structure and transparency. In 1999, TransGrid was the first electricity transmission organisation to enter the regulatory process being managed by the ACCC. At that time TransGrid was forced to develop its submission in a policy vacuum. TransGrid‟s Draft Regulatory Determination was issued on 12th May 1999. The ACCC‟s Draft Statement of Regulatory Principles was not issued until 27th May 1999. When TransGrid attempted to make changes to its submission, the ACCC rejected this request. This process is again being followed as part of TransGrid‟s 2004 submission. As indicated the ACCC is revising its Draft Statement of Regulatory Principles2 at the same time that it is reviewing TransGrid‟s regulatory submission and has indicated its regulatory determination will be based on these new regulatory principles, even though these have not yet been defined and TransGrid has had no opportunity to consider its position or provide information on its submission to align with the any new requirements which may be introduced. The ACCC has issued its Draft Determination in respect of TransGrid‟s revenues but will not deliver the final decision until at least the end of April 2005. The draft revenue for 2004/05 will be used by TransGrid as a revenue target until such time as a final decision is handed down. The draft revenue figure is well below expectations and results in returns well below commercial averages. In addition, the allowance for Operations and Maintenance is well below the figure sought by TransGrid and well below current levels of expenditure. The ACCC are proposing a real reduction in expenditure of around 10% over the period with an initial real reduction of over 6%. 2 The Statement of Regulatory Principles has never been issued in final form. Statement of Corporate Intent – 2004 – 2005 Page 4 The ACCC have not made any allowance within the draft determination for the growth in assets over the past five years and in relation
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