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
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. 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.
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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)
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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.
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The ACCC have not made any allowance within the draft determination for the growth in assets over the past five years and in relation to the continuing growth in assets over the next five years.
In addition, the ACCC will introduce incentives and penalties for a set of mandated Service Standards. Achievement of these Service Standards will be difficult in the face of reduced Operating and Maintenance expenditure.
TransGrid has prepared a report, in July 2004, in response to the Draft Decision and expects recover additional revenue in the Final Decision.
Given that the regulator has differing views on TransGrid‟s commercial operations to those proposed by the organisation, this places the organisation at a disadvantage to private sector companies, which have a greater degree of control over their own future.
2.2 Financial Performance Measurement
TransGrid has set challenging cost reduction targets since its inception and has met or exceeded these targets without impacting service delivery. Controllable operating and maintenance costs have been reduced by over 40% in real terms since 1995. However, costs are reaching levels where further reductions are difficult to achieve without the potential to impact on reliability and security standards. In addition, the substantial growth in assets (around 50% over the next 5 years) will add related financing, depreciation and maintenance costs.
TransGrid is committed to continuing to put pressure on its cost structures. However, further significant reductions in controllable costs are becoming more difficult to identify.
TransGrid has been subject to the 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.
The future year targets set out below in Exhibit 2.1 are based on the draft ACCC Revenue Determination issued in May 2004. While it is anticipated revenues will be increased in the final determination, this scenario has been used so that the Shareholder (NSW Government) do not overestimate returns from its investment in TransGrid and make decisions on revenue receipts which are over-inflated.
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Exhibit 2.1 – Financial Performance Targets
2003/04 2003/04 2004/05 2005/06 2006/07 2007/08 SCI Target Actual Estimate Estimate Estimate Estimate $M $M $M $M $M $M E.B.I.T. 186.0 203.5 203.5 214.5 228.1 242.4 Operating Profit before Tax 90.3 115.0 96.1 102.3 108.1 117.0
Target Distribution 60.0 70.0 49.4 52.6 55.7 60.4
Return on Assets (%) 6.39% 6.57% 5.94% 6.07% 6.18% 6.20% Return on Equity (%) 5.4% 6.30% 4.02% 4.18% 4.31% 4.55%
On an annual basis, an independent actuarial review is undertaken to ascertain TransGrid‟s financial position in relation to superannuation commitments on behalf of its employees. TransGrid has funds held by the Energy Industries Superannuation Scheme currently in excess of its liability and these funds are treated as a prepayment of superannuation contributions.
Investment Performance of the Energy Industries Superannuation Scheme is outside TransGrid‟s control and is essentially reliant on the performance of the world-wide Investment Market. Over recent years, investment performance has been erratic resulting in major shifts in the level of TransGrid‟s liability prepayment. Annual outcomes are determined by actuarial advice and can have a significant bearing on TransGrid‟s ultimate financial performance for a year.
As investment market movements are outside TransGrid‟s sphere of influence, in these financial projects no allowance has been made for superannuation investment performance. Actuarial advice indicates that investment returns of 7.5% are required each year for the liability to remain constant. Returns above or below this level will result in a surplus or deficit in fund earnings and will have a resultant effect on TransGrid‟s financial performance.
A key driver over the next few years will be TransGrid's debt level which will increase as a result of the need to finance:
strengthening of the supply of electricity into Western Sydney and the north coast of New South Wales; and
construction of a series of other electricity transmission assets vital to the reliability and security of supply from TransGrid‟s network.
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PART 3 - CAPITAL WORKS PROGRAM
3.1 Introduction
Future non-recurring capital expenditure is required both to provide for additions to the network to meet the growth in demand for electricity and to replace existing assets, which have reached the end of their useful lives.
The condition of all TransGrid's assets is continuously monitored for critical life factors so as to determine when asset replacement is necessary. In some instances, such as with communication equipment and other high level technology equipment such as protection, control and metering equipment, changing technology, and the scarcity of spare parts, forces the early replacement of plant which can be generally physically sound but no longer able to be economically maintained. The timing of asset replacements is determined by plant condition data and economic analysis.
The National Electricity Code requires Network Service Providers to carry out a “Regulatory Test” analysis of proposed options for network development. The analysis must have regard to alternative solutions such as Demand Side Management, alternative projects, timings and market development scenarios. Due to this regulatory process for network augmentations, the planning for projects must make an additional allowance of between 12 - 24 months to expected construction lead times.
Also given the sensitive nature of all TransGrid developments, a detailed community consultation process precedes each project which, depending on feedback from the community and other interested parties, may extend the time frame for development beyond that envisaged at the time the project is planned.
3.2 Capital Projects
Exhibit 3.1 below summarises the major capital projects commenced or planned for commencement in the next three years. The total costs, the need for each project, and the expected timing of expenditure for each project are included in the table.
It is TransGrid's policy to internally fund all Capital Works wherever possible. However, as this is subject to cash flows arising from regulatory determinations, TransGrid‟s capital program over the next few years cannot be fully internally funded and it will be necessary to raise additional debt.
Due to lead time requirements a number of these projects remain in early stages of scope definement and development. As such project totals are indicative amounts based on current stage of planning.
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Exhibit 3.1 – Major Capital Projects
Development Project Need Total Cost - Expenditure $M Timing 1. Supply to West and Central Meet increasing loads in 84 2002 – 2008 West of New South Wales Central West region of NSW.
2. Reinforce North Coast of New Increase security of supply 72 2003 – 2009 South Wales to Port Macquarie area.
3. Yass – Wagga 330kV Maintain adequate 100 2003-2009 Transmission Line reliability of supply to the Wagga area. The system augmentation is driven by growth of NSW loads in the Wagga, Jindera and Buronga section of the main system, and increasing requirements in exports to Victoria.
4. Holroyd – Mason Park 330kV Meet load growth in the 116 2003 – 2010 Cable western areas of Sydney.
5. Kemps Creek – Sydney South Reinforcement of supply for 103 2004 – 2010 Transmission line Sydney.
6. Holroyd 330/132kV Substation Relieve loading on Sydney 72 2004 - 2010 and associated Transmission West 330/132kV Substation Line Diversions to improve security and reliability.
7. Wagga – Darlington Point 330kV A second 330kV 85 2005 - 2008 Transmission Line transmission line expected to be required to meet the needs of the south western area of NSW.
The above projects represent the long-term plans of the organisation with many of the projects still in the initial development phase. Each project must progress through the detailed planning stage, out-rank any alternative options such as local generation or demand-side options, pass the ACCC-defined Regulatory Test and TransGrid‟s internal approval processes before it becomes a committed project.
In addition, at the regulatory approval stage, projects defined as “Projects of State Significance” including those with a total cost exceeding $100 million will be submitted to the Budget Committee of Cabinet for approval in accordance with the requirements of the shareholder. However, given the long lead times associated with electricity transmission projects, this stage may not be reached for a number of years after the project need is identified.
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PART 4 - ASSET AND LIABILITY MANAGEMENT
4.1 Management Policy
The Corporate Treasury functions of TransGrid are performed within:
. specific policy guidelines and limits approved by TransGrid's Board,
. the TransGrid‟s Treasury Policy Document,
. the Public Authorities (Financial Arrangements) Act 1987,
. the Treasury Circulars listed in Appendix 1 and the following requirements (where applicable):
- Treasury Circular 03/09: Guidelines on reporting of Investment and Liability Management;
- Treasury Circular 01/07: Limitation on Investment Powers of Certain Authorities under the Public Authorities (Financial Arrangements) Act;
- Treasury Circular 98/7: Structured Finance; and
- Working with Government – Guidelines for Privately Financed Projects, 2001.
TransGrid‟s Treasury Policy Document establishes a prudential framework within which TransGrid's treasury objectives are stated, the financial risks to be managed are defined, and policy developed to ensure appropriate controls and reporting systems are in place.
4.2 Debt and Investment Levels
TransGrid's debt will range between $1,500 million and $2,000 million during the period to 2006/07 depending on cash flow requirements and the actual timing of approval of individual Capital Works projects. TransGrid's interest payments represent around one-third of existing total expenditure.
It is not expected TransGrid will have any cash investments during this period as any excess cash will be applied to finance the capital works program. It may however, be necessary from time to time to build up short term cash reserves to meet short term future commitments such as Dividend, Interest or Corporate Tax payments.
The current debt allocation places TransGrid on the lowest acceptable Credit Rating level set by NSW Treasury in their Capital Structure Policy.
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Exhibit 4.1 - Liability Budget/Benchmarks
INDICATOR 2004/05 BUDGET/BENCHMARK Interest Cost (after Capitalised Interest) $107.4 million Modified Duration of Benchmark Portfolio 3.53 years Investment Income $0.8 million Rate of Return on Investments n.a. Foreign Currency exposure AUD $5.7 million
TransGrid has no Unfunded Superannuation liabilities.
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PART 5 – NETWORK SERVICE QUALITY
5.1 Introduction
The prime role of a transmission network is to transport bulk electricity from generators to distribution networks. The majority of end use customers are supplied from distribution networks, although some large industrial customers can be directly supplied from the transmission grid.
TransGrid is the owner, operator and manager of the high voltage transmission capability between generators, distributors and directly connected end users in New South Wales as well as interconnections with Queensland and Victoria. The system is a major part of one of the most extensive systems in the world comprising of 81 substations and switching stations and over 12,400 kilometres of transmission lines.
The system, which has a replacement value of more than $4 billion, operates at voltage levels of 500kV, 330kV, 220kV and 132kV. The substations are located on land owned by TransGrid and the transmission lines of steel tower, concrete or wood pole construction are generally located on easements acquired across private or public land.
TransGrid has staff based strategically at locations throughout New South Wales in order to meet the day-to-day operation and maintenance requirements as well as being able to provide emergency response.
There has been an increasing focus by TransGrid shareholders, regulators and customers on the performance of transmission and distribution companies and in particular on reliability and availability of supply. This has been reinforced through the New South Wales Electricity Supply (Safety and Network) Regulation 2002 that requires Network Operators to develop Network Management Plans and to report annually on the performance of the network.
TransGrid‟s customers expect predictable long-term service and network charges. The optimal network management strategy TransGrid has in place includes:
sound maintenance practices as part of a long term asset management plan;
sound long term asset replacement/refurbishment policy;
judicious design philosophies without excessive network redundancy.
These requirements lead to network performance levels, which have realistic upper and lower levels of acceptability.
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5.2 Network Management Plan
TransGrid has in place a Network Management Plan which provides a focus for ongoing analysis of the network assets within TransGrid and continually improving the management of the transmission system. It also provides a formal method for information dissemination to customers, shareholders and regulators.
TransGrid‟s corporate objectives for electricity supply, safety, quality and the environment are achieved primarily through the strategies in this Plan. The Plan describes the model used to manage and develop assets and the asset management strategies for network enhancement, maintenance and disposal. These strategies are integrated with non-asset strategies such as human resources, finance, information technology and procurement.
Where network additions or augmentation are involved, the need for such work is driven directly by customer needs and requirements. The Plan has been developed in parallel with an Annual Planning Review conducted by TransGrid as the Jurisdictional Planning Body for New South Wales and therefore it is, by necessity, a living document that will change in response to feedback from customers and market participants.
The objective of the Network Management Plan is to provide a systematic approach to managing assets thus ensuring that the condition and performance of the transmission and associated network assets is being effectively monitored, maintained and developed to meet customer and stakeholder expectations.
5.3 Structure of the Network Management Plan
The Plan specifically describes and details the planning and service delivery strategies and standards and the resulting capital investment strategy. It also details the asset management strategies including the various policies, strategies and standards. It lists the programs for each of the asset categories detailing specific issues and the strategy for dealing with the issues. It also details the different measures used to determine the performance of the assets including technical performance assessments, quarterly asset performance reviews and benchmarking studies.
Asset disposal strategies are also included in the Network Management Plan.
5.4 TransGrid’s Network Management Model
The Model shown below provides a framework for the strategic planning and management of TransGrid‟s physical asset resources and is based on the New South Wales Government‟s Total Asset Management (TAM) Model.
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Exhibit 5.1 - Network Management Model
Government/Shareholder
S TransGrid Board A F Regulator, E Customers, T TransGrid Corporate Plan Community, Y and Market Participants Planning and Service Delivery Strategies Q U A Non-Asset L Strategies I Asset Strategies T Y (Finance) (H.R) Capital Maintenance (I.T) Disposal Investment & Operating (Procurement) E Strategies Strategies Strategies N V I R O Acquire or
N Build New Maintain, Dispose of M Assets Operate and E Refurbish Surplus N Assets T Existing Renew and Assets Adapt Assets
5.5 External Benchmarking
Since 1995, TransGrid has been a participant in the International Transmission Operating and Maintenance Study (ITOMS) that benchmarks maintenance activities performed by high voltage transmission utilities. The study involves up to twenty transmission organisations from Australia, New Zealand, USA, Europe, Britain and Scandinavia.
The results from ITOMS2003 confirmed the success of TransGrid‟s policies, ranking TransGrid as one of the leading performers in asset management and
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provided data for further policy revisions in other maintenance areas. The ITOMS results are used by TransGrid as a basis to carry out a detailed review of the various maintenance policies and strategies being adopted by not only overseas utilities but also most of the Australian utilities.
5.6 Service Standards
For TransGrid, its service standards or performance measures have been defined and set in consultation with the ACCC and the Ministry of Energy, Utilities and Sustainability based upon past performance and benchmarking of performance against other comparable utilities.
On 12 November 2003, the ACCC released its Service Standards Guidelines. The Guidelines explain the ACCC‟s approach to setting performance incentives within the transmission revenue cap process; and outline the ACCC‟s information requirements to implement the service standards performance incentive scheme.
The service standard target, or Performance Incentive scheme, is designed to provide an incentive for TNSPs to reduce their costs below the forecast level set by the ACCC‟s revenue cap, as well as provide an incentive to improve service quality.
The Performance Incentive scheme is based on five performance indicators:
• Transmission circuit availability;
• Average outage duration;
• Frequency of “off-supply” events;
• Inter-regional constraints; and
• Intra-regional constraints.
The definitions of these performance measures are provided in the ACCC‟s Service Standards Guidelines.
The ACCC aims to create a service standard incentive by linking each TNSP's revenue cap to its performance, or service standards. TNSPs are rewarded for improvements over performance targets and penalised for deteriorations.
The maximum reward is 1 per cent of the annual revenue. Overall the scheme is designed to have an expected value to TransGrid of zero.
The TNSP's average performance during the previous three to five years is generally set as the performance target. However, some adjustments to targets may be made taking into account factors affecting future performance.
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Proposed Performance Incentive Scheme
The Service Standards set out above have been proposed in the ACCC‟s Draft Revenue Determination and are subject to negotiation. Final Service Standard targets will not be finalised until the Final Revenue Determination is issued by the ACCC in late April 2005.
Network assets are performing satisfactorily and this has contributed to TransGrid providing a network that was very reliable and had a high availability level over the last 5 years.
Assets are managed under a robust asset management process through which any plant performance issues are identified and strategies implemented to achieve satisfactory performance. These strategies may involve amended maintenance regimes, plant replacement or refurbishment or revised operating procedures. This is an ongoing process.
TransGrid is not aware of any network element that is not currently performing satisfactorily.
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PART 6 - RISK MANAGEMENT
TransGrid operates a framework which identifies and assesses key risks which have the potential to impact the achievement of objectives. This framework has identified a set of risks which could significantly impact future financial performance.
Exhibit 6.1 – Major Risks and Potential Impacts
Brief Description Risk Potential Proposed Risk of major risks Indicator Impact on SCI Management Action targets National Electricity High Lack of clarity Dedicated management Market or agreement team to evaluate and
Development on NEMMCO monitor impact of NEM responsibilities developments. Evolving market Inefficient or Regular reporting to responsibilities inequitable TransGrid executive of
of TNSP‟s Market rules developments.
Continual Submissions to NECA on Market Code proposed code changes development Active executive participation in market development
National Electricity High Reduced NEM compliance Market Operation distribution to framework under shareholder development Regulatory compliance Payments due Monitoring of TransGrid costs to poor objectives regarding service system reliability and NEM Liability standards availability
Regulation of High Inadequate Dedicated committee Market returns return to responsible for oversight shareholder of returns on assets. Revenue Regulation Failure to Program of liaison with recover Government and ACCC Transmission maximum Price Structures allowable revenue
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Brief Description Risk Potential Proposed Risk of major risks Indicator Impact on SCI Management Action targets Regulatory Test Delays in on new assets providing new infrastructure and meeting service standards.
Constraint High Delays in Comprehensive planning elimination and providing new infrastructure supply infrastructure Integrated project augmentation & meeting management and review service Completion of framework standards extensive Annual Planning capital works Reduced Statement, 5 Year and program on distribution to 20 Year Network time and within shareholder Management plans. budget Penalties due SNI appeal to failure to process meet NEM performance obligations
Use of Medium Non Negotiation with Telecommunication commercial Shareholder Facilities for Social returns Representatives Programs
Risks are managed by an extensive risk management process including dedicated resources; Executive Committees; external relationships and a detailed risk assessment and mitigation program.
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PART 7 – INFORMATION DISCLOSURE
7.1 Business Plan
TransGrid has in place a formal Corporate Planning and Budgeting process which . sets strategic direction and planning guidelines; . allows the determination of team planning and budgeting; . incorporates a detailed review phase; and . permits the integration of team business plans and budgets into a consolidated form to ensure alignment with strategic direction and performance monitoring.
TransGrid's Corporate Plan is developed as a co-operative consultative process between the Board and Executive. The Corporate Plan and Annual Budget are approved by the Board prior to implementation.
Copies of TransGrid‟s various planning documents and Network Management plans are available for perusal by Shareholding Ministers, NSW Treasury and other Government Agencies as required.
7.2 Statement Addressing Shareholders’ Issues
TransGrid is unaware of any Shareholder issues which have not been addressed.
7.3 TransGrid Chief Executive Officer
In accordance with Premier‟s Circular 2000-05 and the direction from the Shareholding Ministers under section 21(7) of the State Owned Corporations Act 1989, it is confirmed that:
the Chief Executive has in place an employment contract and a performance agreement;
the Chief Executive‟s performance is appraised on an annual basis by the Board Remuneration and Structure Committee and reviewed by the full Board in November each year;
the employment contract and performance agreement include:
the duties of the Chief Executive‟s position including major tasks and accountabilities;
monetary remuneration and employment benefits for the position; and
performance criteria for the purposes of annual reviews of performance.
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7.3 Representation and Commitment Statement
The Board of TransGrid confirm the following:
The performance targets within this SCI are based on and supported by the Corporation‟s Business Plan.
All relevant pre-planning requirements for capital and maintenance have been undertaken in accordance with TransGrid‟s Network Management Plan which is based on the NSW Government‟s Total Asset Management Manual
Projects of State Significance have been identified in accordance with the criteria set down in NSW Treasury‟s Guidelines on the Assessment of Projects of State Significance. In-principle approval from Budget Committee and final approval from Voting Shareholders has been received for Projects of State Significance planned to commence in 2004-05.
All the 'key risks' and the 'major emerging contingent liabilities' which could materially impact the current and future results of our organisation for the forthcoming year have been disclosed.
The requirements of NSW Treasury‟s Treasury Management Policy have been complied with and related party interests which may represent a possible conflict of interest for SOC Directors have been disclosed.
The Corporation‟s Board agrees to provide the Voting Shareholders with financial and other information on a quarterly basis to assess the performance against commitments in this SCI and to assess the value of the Shareholders‟ investment in the Corporation.
The Corporation will comply with the Treasury Circulars on accounting policy matters as detailed in Attachment 1 of NSW Treasury‟s Guidelines of the Preparation of the 2004-05 Statement of Corporate Intent.
The Corporation will meet its obligations under the State Owned Corporations Act 1989.
7.4 ACCC Requirements
To the extent that the ACCC information disclosure requirements exceed the above, all information made available to the ACCC will also be made available to the shareholder.
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PART 8 - APPENDICES
The following appendices form part of this document:
1. Accounting Policies
2. Macro Economic Forecast
3. Transmission Planning and Development
4. Glossary of Terms
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APPENDIX 1 – Accounting Policies
TransGrid's accounting policies comply in all respects with Australian Accounting Standards. Financial Statements are prepared in accordance with Corporation's Law requirements and comply with the requirements of the Public Finance and Audit Act, 1983 (as amended) and the Public Finance and Audit (Statutory Bodies) Regulation, 1985.
All accounting processes comply with Treasurer's Directions and NSW Treasury Circulars as they apply to TransGrid.
Long-lived infrastructure assets are valued at deprival values in accordance with the NSW Treasury Guidelines for the valuation of Network and Distribution Assets including: Transmission lines are valued on the basis of estimates of the cost per kilometre to construct different types of lines categorised according to the various characteristics applicable to each line. Transformers are valued on the basis of estimates of the cost of replacement transformers. Substations are valued on the basis of estimates of the cost of replacement of component parts. Land and Buildings are valued at market value except for land under infrastructure assets which is reserved for transmission facility usage and is valued at net realisable value having due regard to the level of expenditure that would be required to convert the land into saleable condition. Easements are valued on a roll-forward basis representing fair value.
The carrying amounts of all non-current assets within TransGrid are reviewed at least annually to determine whether they are in excess of their recoverable amount. The Recoverable Amount Test includes the application of discounted cash flow analysis as the primary test where the forecasted free cash flows of TransGrid are discounted back to their present value to obtain an estimate of the value of the business. The basis of the analysis is TransGrid's forecast future revenue stream based on pricing determinations made by the ACCC.
The discounted cash flow procedure is also complemented through the use of a valuation based on a dividend yield methodology. Both approaches result in a recoverable amount which is above that of the established fair value of TransGrid's non-current assets.
The principles of accrual accounting are used throughout TransGrid in all its financial operations and in the preparation of financial statements.
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APPENDIX 1 – Accounting Policies
Depreciation of TransGrid's assets is calculated using the straight-line method based on the expected useful life of the assets. Depreciation commences from the time assets are brought into commercial operation and is provided on all completed assets with the exception of freehold land and easements.
The useful lives presently assigned to TransGrid's major assets are shown in the table below.
Transmission Lines - Overhead 50 years - Underground 45 years Substations and Transformers 40 years Buildings 30 years Radio and Communication Equipment 10 - 35 years Mobile Plant 10 years Miscellaneous Plant and Equipment 7 years Office Machines 5 years Computer Equipment 3 - 5 years
Inventories of Stores and Materials are valued at the average cost of items in store automatically adjusted at time of delivery of new items, separately determined for each location.
Income tax is brought to account using the liability method of tax effect accounting. Income tax expense is calculated on the operating profit adjusted for permanent differences between taxable and accounting income.
Treasury Circulars
TransGrid will comply with the Treasury accounting policies as indicated in the schedule below.
Title Treasury Description Circular Valuation of Non-Current Assets NSWTC Confirms the measurement basis for non-current (other than Physical Assets) 01/14 assets, other than physical assets
Contributions by Owners made NSWTC Provides guidelines to achieve a consistent to Wholly-Owned Public Sector 01/11 approach to accounting for contributions by Entities owners
Accounting for Dividends NSWTC Confirms that dividends must continue to be 03/02 recognised in the agencies‟ financial statements in the financial year to which they relate, until otherwise advised
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APPENDIX 1 – Accounting Policies
Title Treasury Description Circular Accounting for long-term leases NSWTC Requirement to account for long-term leases of land and other property 00/19 that involve lease premiums and prepayments of future lease rentals, as sales.
Guidelines for the Capitalisation NSWTC Accounting for asset expenditure, routine of Expenditure in the NSW 00/13 and maintenance and major periodic maintenance Public Sector1 TPP00-3
Accounting for Goods and NSWTC Disclosure of commitments and contingent Services Tax 00/09 assets in respect to the goods and services tax.
Reserve Accounting NSWTC Confirms that reserve accounts must only be 02/13 created if required by specific legislation or Australian Accounting Standards
Accounting for Superannuation NSWTC Outlines accounting treatment for 02/12 superannuation for all agencies
Valuation of Debt NSWTC Requires all agencies to value loans at Current 02/11 Capital Value in their annual audited financial statements
Guidelines for Valuation of TPP 03-02 Provides guidance for valuing physical non- Physical Non-Current Assets at current assets at fair value for general purpose Fair Value financial reporting.
(1). The capitalisation threshold test as set out in the “Guidelines for Capitalisation of Expenditure in the NSW Public Sector” is not mandatory and has been developed as guidance only. However agencies must clearly document and disclose their capitalisation policy.
Statement of Corporate Intent – 2004 – 2005 Page 23
APPENDIX 2 – Macro Economic Forecast
The following Macro Economic Forecasts have been provided by NSW Treasury.
MAIN ECONOMIC PARAMETERS (Annual average changes unless otherwise indicated)
Actual Actual Forecast Medium Term 01/02 02/03 03/04 04/05 Projections
National Economy Gross Non Farm 1.8% 2.7% 2.5% 2.0% 2.5% Product Deflator Commonwealth 5.9% 5.3% 5.7% 6.3% 6.5% 10-Year Bonds (avg level)
NSW Economy Gross State Product, 2.2% 2.2% 3.5% 3.3% 3.3% real Gross State Product, 5.6% 5.6% 7.1% 5.5% current prices Gross State Product 3.3% 3.3% 3.4% 2.1% 2.5% Deflator
Population 1.1% 0.8% 0.8% 0.9% 1.0%
Employment 0.8% 2.1% 1.6% 1.3% 1.25%
Wages Cost Index 3.3% 3.5% 3.8% 3.8% 3.5% (Ordinary time)
Prices (Sydney CPI) 3.0% 2.8% 2.0% 2.0% 2.5%
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APPENDIX 3 – Transmission Planning and Development
A3.1 TransGrid’s Obligations
TransGrid is responsible for the planning and development of transmission networks in New South Wales in two distinct but interrelated roles. Firstly it has been nominated by the NSW Minister for Energy to be the Jurisdictional Planning Body (JPB) for NSW. In this role it: Represents the NSW Jurisdiction on NEMMCO's Inter-regional Planning Committee (IRPC); Provides jurisdictional information to the IRPC to enable it to assist NEMMCO in producing its annual Statement of Opportunities; Reports to the Minister on matters arising from the Annual Planning Review; and Reports to the Minister on matters arising from the Statement of Opportunities. - Secondly it is registered with NEMMCO as a Transmission Network Service Provider (TNSP) in the NSW region of the National Electricity Market. In relation to a TNSP's responsibilities for planning and development of networks the National Electricity Code (the Code) requires a TNSP to: Analyse the future operation of its transmission network to determine the extent of any future network constraints; Conduct annual planning reviews with Distributors to determine the extent of any future constraints at points of connection between the TNSP's network and the Distributor's network; Carry out joint planning with Distributors to determine options for the relief of constraints that can be considered by Code Participants and interested parties; Coordinate a consultative process for consideration and economic analysis of the options in accordance with the ACCC's Regulatory Test if required; On the basis of the consultative process and economic analysis determine the recommended option; After resolution of any disputes concerning the recommended option arrange for its implementation in a timely manner; Prepare and publish an Annual Planning Report by June 30 of each year. This must include: - Results of annual planning reviews with Distributors during the current year;
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APPENDIX 3 – Transmission Planning and Development
- Load forecasts submitted by distributors; - Planning proposals for future connection points; - Forecast of constraints over 1, 3 and 5 years; - Summary information for proposed augmentations; - Consultation reports on proposed new small network assets (NSNA) Align the Annual Planning Report with a new document, Annual National Transmission Statement (ANTS) to be published annually by NEMMCO and to provide relevant input to the preparation of ANTS. This is a new requirement that has emerged in 2004. These obligations are described more fully in Chapter 5.6 of the Code and the ACCC's Regulatory Test.
A3.2 Transmission Planning Methodology
Development of TransGrid‟s network is undertaken in accordance with the National Electricity Code (the Code). The Code sets out the required processes and minimum performance requirements of the network and connections to the network. The Code places obligations on TransGrid to plan and develop the network in NSW to meet agreed service standards. In general TransGrid plans to develop its network so that it: . provides adequate power transmission capability; . provides electricity supply that is reliable to the extent required by the Code and network customers; . provides quality of electricity supply at least to Code requirements; . provides a standard of connection to individual customers determined by Connection Agreements; . ensures that connection of a customer has no adverse effect on other connected customers; . satisfies environmental constraints and obligations and minimises environmental impact; . maintains acceptable safety standards; and . is developed at the lowest cost possible whilst meeting the constraints imposed by all of the above. The network planning process is undertaken at three levels as follows: Development of Connection Points
Statement of Corporate Intent – 2004 – 2005 Page 26
APPENDIX 3 – Transmission Planning and Development
The formulation of Connection Agreements leads to a preliminary review of the capability of connections and further discussions are held with specific customers where there is a need for augmentation. Development of Networks within Regions The main 500 kV, 330 kV and 220 kV transmission system is developed in response to the overall load growth and generation requirements and may be influenced by interstate interconnection power transfers. Development follows from negotiation with affected NSW and interstate parties. The development of 132 kV systems requires joint planning with Distributors. This ensures that any project development is optimal with respect to both TransGrid and Distributor requirements leading to the lowest possible cost of transmission to the end customer. This is particularly important where the Distribution network operates in parallel to the Transmission network. Development of Interconnectors The development of interconnectors between regions has until recently been coordinated by NEMMCO. Under these arrangements TransGrid had been given approval to construct SNI as a regulated interconnector. Subsequent legal appeals have put this project in question. In future the development of interconnectors will, under new Code provisions, be carried out by transmission network service providers such as TransGrid. NEMMCO through its Inter-Regional Planning Committee (IRPC) will provide overall co-ordination of these developments. The IRPC will carry out an annual interconnector review in which options for interconnector developments are identified. The interconnector review will be included in NEMMCO‟s annual Statement of Opportunities.
A3.3 Load Forecasts
One major driver in the development of the network is the forecast of electricity demand and energy consumption. Load forecasts may be used to identify possible future generation shortfalls and to determine transmission system adequacy. Sources of Load Forecast Information The 2004 NSW Load Forecast was developed as part of TransGrid‟s 2004 Annual Planning Review and will also be presented for inclusion in NEMMCO‟s 2004 Statement of Opportunities. This load forecast was developed using empirical models that identify statistical relationships between electrical usage and observable economic and weather variables. The NSW load forecast includes projections of annual energy (measured in GWh) as well as winter and summer coincident peak demands (measured in MW) for NSW as a whole.
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APPENDIX 3 – Transmission Planning and Development
Forecasts of winter and summer peak demand (measured in both MW and MVAr) are also available for individual supply points in NSW. The supply point load forecasts are developed in consultation with distributors and are detailed in TransGrid‟s 2004 Annual Planning Review.
2004 NSW Energy Forecast Total actual and projected yearly energy is shown on the basis of four different measures in Exhibit A3.1. End-Use Consumption includes retail sales of residential, industrial and other sectors as published by ESAA3 for New South Wales and the Australian Capital Territory. Energy Generated is the net contribution to End-Use Consumption that is supplied by scheduled NSW generators, plus generation originating in other NEM Regions and supplied via interconnectors. Energy Generated includes all network losses and consumption of energy by the major power stations. Two intermediate measures of energy are also shown in Exhibit A3.1. NSW load forecasts have traditionally been provided on a „sent out‟ basis. Energy Sent Out is less than Energy Generated because it excludes consumption by power station auxiliaries. Meanwhile, TransGrid System Supplied, which also excludes transmission losses, is the sum of customers connected at TransGrid supply points. The latter include Distributors and a handful of major industrial loads that are directly connected to the high voltage network. The strong association between electricity consumption and real income is expected to be the main determinant of future load growth. Since future income growth is uncertain, three economic scenarios are used to project a range of plausible load growth outcomes. These economic scenarios were developed by NIEIR4 on a consistent NEM-wide basis. In the last 10 years, the average growth of NSW Energy Sent Out was 2.7 per cent a year. Projected yearly average growth in Energy Sent Out to 2013/14 is 2.3 per cent for the Medium scenario, 2.9 per cent for the High scenario and 1.7 per cent under the Low scenario.
2004 NSW Peak Demand Forecasts NSW Peak Demands are shown in Exhibits A3.2 and A3.3 for winter and summer, respectively. Peak Demand measures the output of scheduled generators, either in New South Wales or in other Regions of the NEM and supplying NSW via interconnectors, that is needed to fulfil the highest half- hourly power demand during a given season. Peak Demand is measured „as generated‟ and therefore includes transmission losses as well as power station auxiliary loads.
3 ESAA, (2003), Electricity Australia 2003, Electricity Supply Association of Australia. 4 NIEIR, , The Economic Outlook for the NEM States to 2013/14, A Report for NEMMCO, April 2004.
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APPENDIX 3 – Transmission Planning and Development
Standard Weather Peak Demands are derived using each of three reference temperatures, giving respectively a 10 per cent, 50 per cent and 90 per cent probability of the demand being exceeded. Average growth in Standard Weather Peak Demand over the last 10 years has been 2.5 per cent a year for winter and 3.7 per cent a year for summer. Projected yearly average growth rates for winter are 2.0 per cent for the Medium, 2.6 per cent for the High and 1.4 per cent for the Low scenarios. The equivalent projected growth rates for summer are 3.0 per cent, 3.6 per cent and 2.4 per cent respectively.
Development of the 2004 NSW Load Forecast The NSW load forecast is developed in a three-stage process. In the first stage, monthly forecasts of end-use electricity consumption are developed using an econometric model. This model takes into account the long run impact of changes in electricity and natural gas prices, real income and population; as well as the short run impact of temperature and seasonal variables. In the second stage, forecasts of energy requirements at various points in the electricity production and supply chain are derived from the forecast end-use consumption. This requires projections of major industrial loads, new distributed generation and network losses. These are derived from a variety of source material including, NIEIR projections5, historical trends, and third party advice. Summer and Winter Peak Demand forecasts are derived in the third stage of load forecast development. Although underlying growth in demand occurs for similar reasons as growth in energy, additional large variations in demands are observed as a result of variations in weather patterns. In order to isolate the uncertainty associated with the weather, the actual Peak Demand series are adjusted to standard reference temperatures in order to develop Standard Weather Peak Demand series. Projections of Standard Weather Peak Demands are then derived from models that relate peak seasonal electrical demand to the projected energy for the equivalent season. The above process was followed to develop a load forecast for each of the three economic scenarios (Medium, High and Low) provided by NEMMCO for the preparation of the 2004 Statement of Opportunities. Prior to 2003 in NSW, winter Peak Demand had always exceeded summer Peak Demand. Stronger summer peak demand growth in recent years has resulted in winter and summer peak demands converging, such that, demand in New South Wales has reached a stage where yearly Peak Demand could occur in either
5 NIEIR, Projections of cogenerations and renewable generation in NEM regions, A report for NEMMCO, April 2004
Statement of Corporate Intent – 2004 – 2005 Page 29
APPENDIX 3 – Transmission Planning and Development winter or summer for a number of years hence. A NSW summer peak is likely to be the predominant pattern by the end of the decade. Projected higher growth of NSW summer Peak Demand, relative to energy, implies an increasingly peaky power system, which in turn provides additional challenges for providers of either demand or supply side solutions to future network constraints.
Statement of Corporate Intent – 2004 – 2005 Page 30
APPENDIX 3 – Transmission Planning and Development
Exhibit A3.1: NSW Load Forecast 2004 – Energy ACTUAL: GENERATED SENT OUT TRANSGRID SUPPLIED END-USE GWh GWh GWh GWh 1993/94 56 531 53 947 52 300 50 639 1994/95 58 091 55 700 53 937 51 920 1995/96 59 885 57 339 55 311 53 698 1996/97 61 260 59 053 56 601 55 980 1997/98 63 894 60 212 57 398 58 713 1998/99 65 420 62 566 59 236 59 544 1999/00 67 569 63 655 61 128 60 949 2000/01 69 353 65 834 63 030 62 897 2001/02 70 289 66 283 63 336 63 329 2002/03 71 687 67 744 64 846 64 580 * 2003/04 73 800 * 69 710 * 66 730 * 66 460 * Average increase 1 727 1 576 1 443 1 582 Average growth rate 2.8% 2.7% 2.6% 2.7%
PROJECTIONS: GENERATED SENT OUT TRANSGRID SUPPLIED END-USE HIGH MEDIUM LOW HIGH MEDIUM LOW HIGH MEDIUM LOW HIGH MEDIUM LOW GWh GWh GWh GWh GWh GWh GWh GWh GWh GWh GWh GWh 2004/05 76 220 75 720 74 830 72 030 71 560 70 730 68 990 68 530 67 720 69 020 68 580 67 790 2005/06 78 250 77 460 76 490 73 950 73 210 72 290 70 840 70 110 69 210 70 940 70 240 69 380 2006/07 80 440 79 150 77 820 76 020 74 800 73 540 72 840 71 660 70 440 72 920 71 780 70 610 2007/08 82 630 80 510 79 110 78 090 76 090 74 770 74 830 72 880 71 600 74 910 73 040 71 800 2008/09 85 200 82 250 80 140 80 520 77 730 75 740 77 130 74 410 72 480 77 220 74 610 72 740 2009/10 87 530 84 160 80 890 82 720 79 530 76 450 79 260 76 170 73 170 79 400 76 420 73 530 2010/11 90 110 86 280 82 230 85 160 81 540 77 720 81 570 78 050 74 330 81 710 78 320 74 740 2011/12 92 930 88 080 83 850 87 820 83 240 79 250 84 150 79 700 75 820 84 240 79 950 76 220 2012/13 95 580 89 870 85 060 90 330 84 930 80 390 86 590 81 350 76 930 86 620 81 560 77 310 2013/14 98 530 91 920 86 000 93 120 86 870 81 280 89 270 83 190 77 750 89 330 83 480 78 240 Average increase 2 470 1 810 1 220 2 340 1 720 1 160 2 250 1 650 1 100 2 290 1 700 1 180 Average growth rate 2.9% 2.3% 1.7% 2.9% 2.3% 1.7% 2.9% 2.3% 1.7% 3.0% 2.4% 1.8% * Estimated prior to full year data availability.
Statement of Corporate Intent – 2003 – 2004 Page 31
APPENDIX 3 – Transmission Planning and Development
Exhibit A3.2: NSW Load Forecast 2004 - Winter Maximum Demand*
ACTUAL TEMPERATURE CORRECTED (10%) TEMPERATURE CORRECTED (50%) TEMPERATURE CORRECTED (90%) MW MW MW MW 1993 9 888 10 092 9 793 9 560 1994 9 815 10 240 9 930 9 690 1995 10 613 10 556 10 256 10 021 1996 10 564 10 653 10 363 10 137 1997 10 401 10 904 10 620 10 399 1998 11 156 11 272 10 972 10 739 1999 11 324 11 718 11 393 11 139 2000 11 900 12 211 11 867 11 599 2001 11 760 12 277 11 958 11 710 2002 12 156 12 648 12 327 12 077 2003 12 476 12 850 12 503 12 233 Average increase 259 276 271 267 Average growth rate 2.4 2.5 2.5 2.5
PROJECTIONS: 10% PROBABILITY OF EXCEEDANCE 50% PROBABILITY OF EXCEEDANCE 90% PROBABILITY OF EXCEEDANCE HIGH MEDIUM LOW HIGH MEDIUM LOW HIGH MEDIUM LOW MW MW MW MW MW MW MW MW MW 2004 13 180 13 170 13 160 12 840 12 830 12 820 12 580 12 570 12 550 2005 13 530 13 470 13 390 13 180 13 120 13 050 12 920 12 860 12 780 2006 13 800 13 650 13 480 13 450 13 300 13 140 13 180 13 030 12 870 2007 14 060 13 850 13 590 13 720 13 500 13 250 13 450 13 230 12 980 2008 14 410 14 070 13 760 14 060 13 720 13 410 13 790 13 450 13 140 2009 14 780 14 330 13 910 14 430 13 980 13 560 14 160 13 710 13 290 2010 15 210 14 670 14 080 14 850 14 320 13 730 14 580 14 050 13 460 2011 15 650 15 010 14 310 15 300 14 660 13 960 15 020 14 380 13 680 2012 16 050 15 260 14 510 15 700 14 910 14 160 15 430 14 640 13 880 2013 16 500 15 560 14 690 16 150 15 200 14 330 15 870 14 930 14 060 2014 16 990 15 910 14 880 16 630 15 560 14 520 16 360 15 290 14 250 Average increase 380 280 180 380 280 180 380 280 180 Average growth rate 2.6 2.0 1.3 2.6 2.0 1.4 2.7 2.0 1.4 * To estimate peak demands measured on a sent out basis, divide the numbers in this table by 1.056.
Statement of Corporate Intent – 2004 – 2005 Page 32
APPENDIX 3 – Transmission Planning and Development
Exhibit A3.3: NSW Load Forecast 2004 - Summer Maximum Demand* ACTUAL TEMPERATURE CORRECTED (10%) TEMPERATURE CORRECTED (50%) TEMPERATURE CORRECTED (90%) MW MW MW MW 1993-94 8 667 8 990 8 612 8 291 1994-95 9 003 9 290 8 902 8 574 1995-96 8 879 9 411 9 031 8 710 1996-97 8 961 9 857 9 414 9 040 1997-98 9 966 10 349 9 870 9 464 1998-99 10 220 10 823 10 287 9 834 1999-00 10 662 11 294 10 694 10 186 2000-01 11 572 12 110 11 392 10 784 2001-02 10 990 12 352 11 595 10 954 2002-03 12 456 12 683 11 880 11 199 2003-04 12 216 12 926 12 167 11 524 Average increase 355 394 355 323 Average growth rate 3.6 3.7 3.5 3.4
PROJECTIONS: 10% PROBABILITY OF EXCEEDANCE 50% PROBABILITY OF EXCEEDANCE 90% PROBABILITY OF EXCEEDANCE HIGH MEDIUM LOW HIGH MEDIUM LOW HIGH MEDIUM LOW MW MW MW MW MW MW MW MW MW 2004-05 13 440 13 430 13 400 12 680 12 660 12 630 12 030 12 010 11 980 2005-06 13 940 13 880 13 800 13 150 13 080 13 000 12 470 12 410 12 330 2006-07 14 430 14 310 14 160 13 610 13 480 13 330 12 910 12 790 12 640 2007-08 14 840 14 620 14 400 13 990 13 770 13 540 13 270 13 050 12 830 2008-09 15 370 15 020 14 690 14 490 14 140 13 810 13 750 13 400 13 070 2009-10 15 910 15 460 15 010 15 000 14 550 14 100 14 230 13 780 13 330 2010-11 16 510 15 960 15 390 15 560 15 010 14 450 14 770 14 220 13 660 2011-12 17 110 16 440 15 780 16 140 15 470 14 800 15 310 14 640 13 980 2012-13 17 710 16 940 16 150 16 700 15 930 15 140 15 850 15 080 14 290 2013-14 18 330 17 410 16 510 17 290 16 370 15 460 16 410 15 480 14 580 Average increase 540 450 360 510 420 330 490 400 310 Average growth rate 3.6 3.0 2.5 3.6 3.0 2.4 3.6 3.0 2.4 * To estimate peak demands measured on a sent out basis, divide the numbers in this table by 1.060. Statement of Corporate Intent – 2004 – 2005 Page 33
APPENDIX 4 – Glossary of Terms
Net Operating Profit after Tax (NOPAT)
The after tax operating profits of a business unaffected by financing issues.
NOPAT = Reported Net Operating Profit (PBIT) – Cash Taxes
Profit before Interest and Tax (PBIT)
The operating profit of a business measured before interest and tax
Net Debt
Net debt is sum of all overdrafts, short and long term debt, net of any cash and deposits.
Cost of Capital
The cost of capital is measured by the weighted average cost of capital (WACC) and is the minimum rate of return on capital required to compensate debt and equity investors for bearing risk. The Cost of Capital is computed by weighting the after tax Cost of Debt and Cost of Equity by the target debt to capital.
Cost of Capital = Weighted Cost of Equity + Weighted Cost of Debt
Total Capital Employed
The financing components of a business, consisting of the net debt, shareholders‟ equity and other non-operating financing items. For the purposes of calculating SVA the Capital Charge should be based on the average Total Capital Employed, rather than the opening or closing values.
Total Capital Employed = Net Debt + Shareholders‟ Equity + Other Capital
Shareholders’ Equity /Ordinary Equity
The amount of equity invested in the company by ordinary shareholders through share issues, reserves and retained profits.
Other Capital/Other Capital Balances
Items of capital that cannot be easily classified as debt or equity nor form part of operating current liabilities. Payments that are not expected to be made within one year are also classified as other balances.
Statement of Corporate Intent – 2004 - 2005 Page 34
APPENDIX 4 – Glossary of Terms
Return on Capital (Economic Return on Capital Employed)
Return on Capital Employed = NOPAT/Net Assets
Net Assets = Fixed Assets + Working Capital
Working Capital = Current Assets – Current Liabilities
The definitions above relate to the SVA framework. In addition, the following items are derived from the existing accrual accounting requirements, including the accounting treatments prescribed under the Tax Equivalent Regime.
Operating Profit before Income Tax
Revenue less expenses less Abnormal Items before Income Tax Expense attributable to these items is deducted.
Operating Profit after Income Tax
Revenue less expenses less Abnormal Items less Extraordinary Items, after Income Tax Expense attributable to these items is deducted.
Income Tax Expense
The amount of tax charged against profits, based on accounting income which has been adjusted only for permanent differences.
Income Tax Payable
The amount of tax which the agency must pay as tax equivalents based on taxable income for a given year, after all adjustments for permanent and timing differences.
Dividend Payable
Dividend Payable for 2004-05 would be in respect of Operating Profit after Income Tax for 2004-05. However the actual payment of the dividend may occur in subsequent years.
Statement of Corporate Intent – 2004 - 2005 Page 35
CONFIDENTIAL SECTION
Statement of Corporate Intent – 2004 - 2005 Page 36
Five Year Capital Budget
TransGrid‟s Capital Works Program is the subject of continuous review and refinement. This continual process of program assessment ensures the most timely and cost effective program of works is undertaken by the organisation.
This is particularly critical due to the convoluted and resource intensive regulatory approval process which TransGrid must undertake to gain approval for a new project. The National Electricity Code approval process can take up to three years to complete. In addition, the environmental and community consultation process is also a long and detailed process. While TransGrid generally accepts the requirements of these approval processes, the length of these processes and extended appeal processes make the development of solid project plans and timings extremely difficult to estimate and then to achieve.
The capital program for major projects for the next five years is displayed below.
Five Year Budget For Major Capital Projects
Development Project 04/05 05/06 06/07 07/08 08/09 Total $M $M $M $M $M $M
1 Supply to West and Central West of 4.3 21.4 50.8 4.2 - 84 New South Wales
2 Reinforce North Coast of New South 1.9 5.6 5.4 12.3 44.2 72 Wales
3 Yass – Wagga 330kV Transmission 0.5 1.0 8.6 16.7 64.1 100 line
4 Holroyd – Mason Park 330kV Cable 0.1 0.2 1.6 3.4 6.7 116
5 Kemps Creek – Sydney South 0.4 1.5 7.6 18.3 37.1 103 Transmission line
6 Holroyd 330/132kV Substation and 0.6 7.5 20.4 22.7 6.9 72 associated Transmission Line Diversions
7 Wagga – Darlington Point 330kV 0.3 0.8 5.7 37.1 41.4 85 Transmission Line
Note : Duration for some of the above-mentioned projects extend beyond the 5 year timeframe.
For the reasons stated above, these programs will change on a yearly basis as circumstances change. As project plans are further developed, the ability of these plans to meet the regulatory tests can be better quantified and resulting plans better defined.
Statement of Corporate Intent – 2004 - 2005 Page 37
Five Year Capital Budget
As can be seen from the levels of expenditure in the initial years, the above projects are still in the initial development phase. Costs in early years represent initial planning and possible route selection costs. Each project must progress through a long detailed planning stage, out-rank any alternative options such as local generation or demand-side options, pass the ACCC-defined Regulatory Test and TransGrid‟s internal approval processes before it becomes a committed project.
Once a firm project is defined, Projects of State Significance will be submitted to the Budget Committee of Cabinet for approval. However, given the long lead times associated with electricity transmission projects, this stage may not be reached for a number of years after the project need is identified, usually just prior to the anticipated commitment to incur the major components of expenditure set out in the table above.
A brief description of each of the major projects follows:
1. Supply to the West and Central West of New South Wales
The Wellington and Central West area of NSW is currently supplied through a single circuit 330kV transmission line from Mount Piper to Wellington and a supporting network of 132kV transmission lines and substations. Reinforcement of this system to provide a more secure supply as the load increases is required.
The project will involve the construction of a new 330kV switching station at Wollar and a new single circuit 330kV transmission line between the new Wollar switching station and Wellington Substation. It also includes the establishment of a Microwave Radio Link to provide better communications to Wellington Substation, and the installation of shunt reactors at Wellington Substation.
Based on the current project scope, the estimated cost is $84 million and is anticipated to be completed in 2008.
2. Reinforce North Coast
One circuit of the recently completed Coffs Harbour – Nambucca – Kempsey double circuit 132kV transmission line presently operates at 66kV to supply Country Energy substations at Sawtell, Raleigh and Newee Creek. Following commissioning of the Coffs Harbour 330/132kV Substation, this double circuit transmission line will be a major supply to the mid north coast and it will be necessary to operate both circuits at 132kV.
As the load continues to grow, an additional transmission line between Kempsey and Port Macquarie is required by 2006 to improve security of
Statement of Corporate Intent – 2004 - 2005 Page 38
Five Year Capital Budget
supply to the Port Macquarie area. While it will initially operate at 132kV, this transmission line will be predominantly of 330kV construction and will form part of the planned coastal 330kV network. These works in part replace the need to augment the 330kV system capacity from Liddell to Armidale and is anticipated to be completed in 2008/2009.
Once the existing Armidale – Kempsey 132kV transmission line is reconstructed as a 330kV line, a 330/132kV substation will be established at Port Macquarie. This is expected to be completed by 2008/2009.
Based on current plans, the total project cost is estimated at around $72 million.
3. Yass - Wagga 330 kV Transmission Line
The Victorian import of Snowy and NSW power has a significant impact on conditions in the Wagga, Jindera and Buronga section of the main system. The growth of NSW loads in this region, coupled with a requirement for heavy power transfer to Victoria, will require augmentation to the Wagga area system to maintain adequate reliability of supply.
Based on the current plans, the project cost is estimated to be around $100 million and is anticipated to be completed by 2009, assuming the construction is a double circuit 330kV steel tower line.
4. Holroyd – Mason Park 330 kV Cable
To meet the load growth in the inner metropolitan area of Sydney, there will be a requirement to establish another 330/132kV substation in the inner western part of Sydney (the Mason Park area) by 2009. This substation would be supplied via a new 330kV underground cable from Holroyd. Based on the current planning proposals for a single 330kV cable, the project is expected to cost around $116 million.
This project, together with augmentation of EnergyAustralia‟s 132kV network, will relieve the heavily loaded network between Sydney South and the inner metropolitan area.
5. Kemps Creek - Sydney South Transmission Line
Kemps Creek 500/330kV Substation provides a focal point for the connection of 500kV and 330kV transmission lines, which supply a large portion of the Sydney load. The reinforcement of supply between Kemps Creek and the Sydney loads will require an additional double circuit transmission line between Kemps Creek and Sydney South 330/132kV Substation. Based on current proposals and feasibility studies, the total
Statement of Corporate Intent – 2004 - 2005 Page 39
Five Year Capital Budget
project cost is around $103 million and is anticipated for completion in 2009/2010.
6. Holroyd 330/132kV Substation and associated Transmission Line Diversions
To relieve the loading on Sydney West 330/132kV Substation, it is necessary to establish a 330/132kV substation at Holroyd by 2009.
To enable Integral Energy to connect additional 132kV cables which will supply the Parramatta area, it will be necessary to establish the 132kV busbar of this substation by 2006.
There are presently two double circuit 330kV lines between Sydney West and the existing TransGrid owned Holroyd substation site. Both of these lines are operating at 132kV to supply Integral Energy‟s Guildford and Camellia Substations.
Development to the west of Holroyd since the lines were constructed now precludes converting the existing lines to 330kV operation. It will be necessary to divert these lines to avoid the developed area. On current plans, diversion of the lines and establishment of Holroyd 330/132kV Substation is expected to cost around $72 million.
7. Wagga – Darlington Point 330kV Transmission Line
To meet the needs of the south western area of NSW without compromising the capacity of the existing interconnection with Victoria at Buronga and the Murraylink interconnection with South Australia, a second 330kV transmission line between Wagga and Darlington Point is expected to be required by around 2008. This transmission line may utilise parts of the routes of existing 132kV transmission lines. Based on current plans, it is expected to cost around $85 million.
Statement of Corporate Intent – 2004 - 2005 Page 40
Staffing Levels
As noted earlier in this document TransGrid over the past few years has reduced its Controllable Costs to a significant degree. Part of this cost reduction process has been to review staffing levels and where necessary make reductions where these reductions would not threaten the reliability and security of the assets including ensuring the asset maintenance levels are maintained. The following graph indicates staffing levels since TransGrid‟s inception.
Staff Numbers 1300
1200
1100
1000
900
800 1995 1996 1997 1998 1999 2002 2001 2002 2003 2004
In the last few years TransGrid staff numbers have increased marginally to reflect the growing asset base and the increased demands of regulatory compliance associated with the National Electricity Market.
The following table indicates estimated future staffing levels:
2004 2004 2005 2005 2006 2007 2008 September December March June June June June
983 982 979 970 977 977 977
TransGrid is aiming to minimise any future staffing increases though recognition will need to be given to the need to recruit additional employees to ensure maintenance and reliability of the Network. The majority of these additional resources are expected to be provided through the recruitment of apprentices and engineering graduates.
Statement of Corporate Intent – 2004 - 2005 Page 41
ACCC Revenue Determination
The majority of TransGrid‟s revenue is regulated by the ACCC on a five-year cycle.
In December 1999, the ACCC issued a Revenue Determination for TransGrid for the period July 1999 until June 2004 based on their “building block” methodology.
In the financial projections provided in this document, the revenue proposed in the ACCC‟s 2004 Draft Revenue Detemination has been used.
TransGrid is again the first Transmission Company to go through the regulatory process with the ACCC from which a wide series of regulatory principles flowed.
TransGrid will again be the first Transmission Company to go through a regulatory reset with the ACCC. A number of “roll-forward” actions in this process are unclear and are being defined during the reset process. As such to project over- optimistic outcomes may be to the detriment of the Shareholder in its future financial planning.
In September 2003, the ACCC commenced their revenue determination process for the period 2004 – 2009. This process ran through till the end of April when the ACCC released their Draft Decision in regard to TransGrid‟s Revenue Cap.
The Draft Decision outcomes are set out below:
Cost of Capital Parameters (WACC)6
Parameter Draft Decision TransGrid’s Proposal Nominal risk-free interest 5.89% 5.01% rate (rf) Expected inflation rate (f) 2.44% 2.08% Debt margin (over rf ) 0.87% 1.485% Cost of debt rd = rf + debt 6.76% 6.495% margin Market risk premium (rm-rf 6.00% 6.00% ) Gearing (D/V) 60% 60% Value of imputation credits 50% 50% Asset beta 0.40 0.45 Debt beta 0.00 0.00 Equity beta 1.00 1.12 Nominal post-tax return on 11.87% 11.73% equity Post-tax nominal WACC 7.03% 7.42% Pre-tax real WACC 6.75% 8.35% Nominal vanilla WACC 8.80% 8.59%
6 NSW and ACT Transmission Network Revenue Caps : 2004/2005 - 2008/09 – Draft Decision : Table 6.5 : Page 96 -ACCC – 28 April 2004
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ACCC Revenue Determination
The TransGrid Maximum Allowable Revenues (MAR) proposed by the ACCC are:
TransGrid’s return on capital, 2004/05 to 2008/09 ($ million)7
2004/05 2005/06 2006/07 2007/08 2008/09 Opening asset base 2,923.25 3,048.27 3,254.03 3,555.02 3,824.23 Capital expenditure 175.56 264.05 367.21 337.57 332.52 Economic depreciation* (50.54) (58.29) (66.21) (68.36) (75.33) Closing asset base 3,048.27 3,254.03 3,555.02 3,824.23 4,081.42 Return on capital 257.32 268.32 286.44 312.93 336.63
Draft TransGrid MAR, 2004/05 to 2008/09 ($ million)8
2004/05 2005/06 2006/07 2007/08 2008/09 Return on capital 257.32 268.32 286.44 312.93 336.63 Return of capital 50.54 58.29 66.21 68.36 75.33 Operating expenses 118.19 120.26 122.47 124.71 125.26 Estimated taxes payable 13.42 15.60 18.56 22.16 28.98 Less value of franking credits (6.71) (7.80) (9.28) (11.08) (14.49) Unadjusted revenue allowance 432.75 454.68 484.40 517.09 551.71 CPI-X smoothed MAR 432.75 458.70 486.21 515.36 546.27
The revenue determination was based on the traditional “CPI – x” approach where in TransGrid‟s case “x” = -3.5% (or effectively annual adjustments of CPI + 3.5%)
Implications for TransGrid
The draft revenue cap outcomes are at the lower end of the scale and will have implications for TransGrid in delivering an appropriate Dividend to the shareholder.
In addition, the ACCC‟s allowance for Operating Expense is well below the figure sought by TransGrid and well below the cost in 2003/04. Reductions in expenditure to the levels proposed by the ACCC may have significant consequences on TransGrid‟s ability to meet its Service Standards. This will be compounded by the introduction of Service Standard incentives and penalties.
The ACCC‟s draft decision has been based flawed recommendations by its consultants, GHD, and by a lack of understanding by both the consultants and the
7 ibid – Table 7.1 – Page 99 8 ibid – Table 7.2 – Page 100
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ACCC Revenue Determination
ACCC. TransGrid will be working diligently to correct these misunderstandings and is confident the final decision will see an improved revenue position.
However, the final decision will not be released until at least April 2005.
TransGrid issues with Draft Decision
In addressing their respective responsibilities both TransGrid and the ACCC must both make judgements about balancing service outcomes with costs. TransGrid believe the ACCC must also make judgements about the balance between providing incentives for efficiency improvements and intervening in the operations of the business in order to achieve effective regulation. TransGrid‟s response to the ACCC‟s Draft Decision on TransGrid‟s 2004/05 to 2008/09 Revenue Caps has been prepared with both these considerations in mind.
In reviewing TransGrid‟s response to the ACCC‟s draft Revenue cap decision, TransGrid has asked the ACCC to objectively and responsibly consider:
The very real challenges faced by TransGrid over the next 5 years and beyond in maintaining an appropriate level of network reliability within NSW, while continuing to support competitive trading in the wider National Electricity Market.
The need for TransGrid to deliver sustainable outcomes, having regard for the trade-off between short term cost reductions and longer term service implications. Among other matters, TransGrid faces specific challenges in maintaining a suitably skilled core workforce at reasonable cost due to labour market cost pressures and a substantial proportion of its core skill base approaching retirement.
Very real evidence that TransGrid has been, and remains, focussed on efficiency improvements, having regard for the crucial balance between cost and service outcomes.
The need for some increase in transmission prices in order to accommodate essential and pressing investment, as well as organic growth in the operating side of TransGrid‟s business.
In terms of the challenges facing TransGrid, the most obvious is the pressing need for significant network developments, supplemented where appropriate, by demand side management and generator support agreements, over the next regulatory period, simply to „keep the lights on‟. These developments include
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ACCC Revenue Determination reinforcing the main backbone network capability to enable NSW and interstate generation to match the growing demand in NSW, as well as continuing the development of Sydney area network to ensure adequate reliability for this vital load.
Significantly, TransGrid has provided information to the ACCC and its consultants, GHD, showing very real achievements in efficiency since TransGrid‟s formation in 1995. Specifically, operating costs have been reduced by at least 25%, and operating staff levels have fallen by almost 40%, since that time. Service levels have been maintained or improved over the same period. In short, TransGrid has a demonstrated commitment to improving operating efficiency and is coming off an efficient base coming into the next reset period.
In recent years, TransGrid‟s operating staff levels have been relatively constant. In line with information previously provided to the ACCC and their consultants, GHD, this has been a deliberate strategic objective over this past period and into the next reset period. It is TransGrid‟s assessment that this achieves an appropriate balance between efficiency gains and sustainable service outcomes.
The efficiency gain arises from the increase in new service obligations, and asset base managed by these staff over the past period, as well as to support substantial development of network capability over the next reset period. Importantly, there has been a concurrent increase in training positions, at the expense of more experienced staff, in line with the need to ensure a sustainable level of core skilled staff as a disproportionate number of experienced and critical specialised staff reach retirement age. The relative reduction in experienced staff has been possible because of the improved productivity of a smaller pool of remaining experienced staff.
With regard to transmission charges, some impact is necessary, and TransGrid believe, acceptable to end users, having regard for the level of investment and asset management needed to underpin a high performance essential service, and the very modest impact of transmission charges on end use electricity charges. TransGrid also notes that transmission charges in NSW are coming off a very low base, as set out clearly in TransGrid‟s revenue cap application.
It is important that the ACCC, in representing these price impacts includes all the factors. In this regard the impact of TransGrid‟s original revenue application on transmission charges needs to be expressly adjusted for the acquisition of Snowy assets. While this is a real impost on customers it represents the outcome of a previous revenue cap decision by the ACCC and should not be included as an
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ACCC Revenue Determination impact arising from the current revenue cap decision. TransGrid have requested that information provided by the ACCC on its website or other publications either did not include this impact, or explicitly and transparently quantified this impact.
Issues with ACCC Operating Expenditure Targets.
TransGrid believes that the ACCC should adopt 2003/04 actual operating expenditure levels as the appropriate starting point for its calculations. However, should the ACCC wish to retain its approach of basing the starting point on 2002/03 actual operating expenditure levels, TransGrid proposes the following adjustments to the ACCC‟s draft determination:
Labour related cost increases should be forecast at 5.0% p.a. in line with actual award provisions not 4.1% p.a.; The costs to TransGrid of maintaining new assets should be included in projections; Reinstate the $1.55m incorrectly removed from 2002/03 insurance premiums; Cost changes in the two years 2002/03 to 2003/04 and 2007/08 to 2008/09 should be modelled on the basis of cost indices accepted by the ACCC in other parts of the draft determination rather than CPI; and The ACCC‟s explicit 2% efficiency target needs to be adjusted to compensate for other implicit efficiencies, to reflect a more complete assessment of the true scope for efficiency gains, to accommodate the consequential costs associated with implemented these targets, and to enable TransGrid to share equitably (as required by the Code) in both explicit and implicit efficiency gains.
The table below sets out the effect of these proposed changes on TransGrid‟s allowable operating and maintenance expenditure over the next regulatory period.
03/04 04/05 05/06 06/07 07/08 08/09 TransGrid‟s estimated operating 118.4 123.4 125.9 128.7 132.2 135.2 expenditure (real 2003/04 $m) ACCC Draft Decision (real 2003/04 $m) 114.4 115.4 114.6 113.9 113.3 111.1
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ACCC Revenue Determination
Before adopting an explicit efficiency target, the ACCC needs to undertake significantly more analysis (and explanation) of where TransGrid can achieve these efficiencies. However, if the ACCC is to impose such a target:
It should only be applied to controllable costs (eg, not to costs influenced by external factors such as insurance and taxes; nor to costs the ACCC has separately determined as efficient – eg debt raising costs and self-insurance of Tower‟s and Wires risks);
It should be set at a level to allow a fair sharing of the benefits between TransGrid and customers; and
It should not exceed the average efficiency levels in the Australian economy. In effect this would require that the ACCC‟s only efficiency adjustment be to escalate wages by CPI rather than nominal wage growth. (To be clear, this means that the ACCC would remove the 2% efficiency target altogether in favour of indexing labour related input costs at CPI rather than nominal wage growth. This, of itself, imposes an economy wide average level efficiency improvement target on TransGrid‟s operating costs. Further adjustments are also needed to address the above comments on adjustments to controllable costs and equitable sharing of efficiency gains.)
Issues with Optimisation of 500kV Assets.
The ACCC‟s draft decision in relation to TransGrid‟s 500kV assets is, in effect, to exclude $70 million of re-optimised value from the regulated asset base for both the current regulatory period and future regulatory periods. This decision clearly has a material financial impact on TransGrid and it is important for the transparency of the regulatory process to be accompanied by an intellectually sound rationale.
To assist in the ACCC‟s assessment of this matter TransGrid has reviewed the relevant facts and has come to the following four key conclusions:
Aspects of the ACCC‟s current interpretation of the previous TransGrid (2000) Revenue Decision on this matter need to be reassessed. Specifically, operation or otherwise of an asset at its design voltage is not the essential consideration in assessing whether there has been a change in the service level of that asset.
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ACCC Revenue Determination
The Bayswater-Mt Piper and Mt Piper-Marulan 500 kV lines (the Bayswater line) should not be excluded from TransGrid‟s asset base under any reasonable interpretation of the optimisation regime applying to TransGrid.
If the optimised value relating to the 500kV assets is brought back into the RAB in the future, the draft Statement of Regulatory Principles (SORP) requires the roll-forward of the optimised value at TransGrid‟s WACC. This has the affect of leaving customers essentially no better off than leaving the asset in TransGrid‟s current asset base. That is, removing the value of 500kV assets from TransGrid‟s asset base creates costs and complexity that serves no substantive purpose.
If the ACCC remains of the view that operation at 500kV is the determining consideration for bringing the value of the 500kV assets into the RAB then this will almost certainly arise during the 2005 to 2009 regulatory period. As a matter of proper process, TransGrid would expect the ACCC‟s position on this be clearly set out in the final decision to ensure that there is no confusion about such treatment in the future.
Issues with MetroGrid Project.
The approach adopted by the ACCC to calculate a prudency adjustment is not consistent with the requirements of the Code and the ACCC‟s own Statement of Regulatory Principles. Accordingly, there is insufficient basis for excluding any of the capital expenditure, or associated returns on investment, resulting from the MetroGrid project from being rolled into the Regulatory Asset Base.
The approach adopted by Mountain Associates of attempting to estimate the costs which would have been incurred by a prudent operator acting in accordance with good industry practice, is sound. However, some of the conclusions drawn by Mountain Associates, particularly that the project could have been delayed with the assistance of Demand Side Management, are incorrect.
Once the errors in the Mountain Associates report are corrected, it supports TransGrid‟s position that TransGrid‟s expenditure on the MetroGrid project is prudent.
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ACCC Revenue Determination
Issues with the Regulated Rate of Return.
The ACCC‟s approach to setting the debt margin is biased downwards in two important respects. TransGrid recommends the ACCC amend their final decision to remove these biases by:
Adding 18 basis points to the cost of debt on the basis of Professor Grundy‟s conservative estimate of the bias inherent in CBASpectrum‟s estimation technique for long dated bonds; and
Adding around 9 basis points to the costs of debt as a result of adopting an A- credit rating rather than an A credit rating (based on CBA Spectrum reported differential in yields between A and A- corporate bonds on 2 July 2004).
In addition, around 3 basis points needs to be added to the real risk free rate (and around 9 basis points to the nominal risk free rate) used in the draft decision to convert the yield quoting convention to a compounded yield over a single 12 month period.
Issues with ‘Pass throughs’, Service Standards and Other Matters.
1. TransGrid is seeking to have specific foreseeable material operating expenditure increases, that are outside TransGrid‟s control, and that are triggered by events in the past regulatory period, which result in material levels of expenditure in the 2004 to 2009 regulatory period, included as operating expenditure „pass throughs‟.
2. In relation to Service Standard targets TransGrid is requesting:
Clarification of Average Outage Time Restoration measures
A transformer availability target that is achievable and involves a more symmetric cap and collar incentive regime than proposed by consultants, GHD. Specifically, a target of 99.0%, with a cap of 99.5% and a collar of 98.7% is being sought.
3. The removal of capital expenditure associated with the provision of the Kempsey to Coffs Harbour line from TransGrid‟s Regulatory Asset Base is unjustified and based on a misunderstanding of the arrangements for provision of this line involving Country Energy and the local community.
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ACCC Revenue Determination
4. Disallowing TransGrid‟s claim for the inclusion of benchmarked equity raising costs in TransGrid‟s revenue cap reflects inconsistent regulatory treatment and is contrary to principles of competitive neutrality.
Final Determination Options
In respect of all the issues raised above, Transgrid has submitted a detailed response to the Draft Revenue Determination.
In terms of providing future financial scenarios which may eventuate from the forthcoming final determination, a wide range of options are possible as the ACCC has the ability to determine an unlimited number of combinations. The following options are a cross section of possible outcomes:
Option 1 : The final determination increases revenue by $10 million per annum.
Improved Final Determination (CPI + 3.5% +$10m for 2004/05)
2003/04 2003/04 2004/05 2005/06 2006/07 2007/08 SCI Target Actual Estimate Estimate Estimate Estimate $M $M $M $M $M $M E.B.I.T. 184.9 203.5 213.5 225.1 239.3 254.3 Operating Profit before Tax 93.5 115.0 106.1 113.5 120.2 129.9 Income Tax Payable 10.1 5.7 20.3 20.9 22.1 22.4 Income Tax Expense 28.1 31.8 37.3 39.9 42.2 45.4 Target Distribution 60.0 70.0 55.0 58.9 62.4 67.6
Target Debt Level 1446.8 1523.6 1568.9 1633.2 1734.5 1916.6
Return on Assets (%) 6.65% 6.57% 6.23% 6.37% 6.48% 6.50% Return on Equity (%) 6.30% 4.73% 4.82% 5.08% 5.33% Capital Structure1 56.3% 50.1% 49.5% 49.9% 50.7% 52.5% Earnings Protection2 2.02 2.30 1.99 2.02 2.01 2.04
Note (1) - Capital Structure = Debt to Debt plus Equity (2) - Earnings Protection = Times Interest Cover
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ACCC Revenue Determination
Option 2 : The final determination reduces future capital expenditure allowance by $50 million per annum.
Reduced Future Capital Expenditure
2003/04 2003/04 2004/05 2005/06 2006/07 2007/08 SCI Target Actual Estimate Estimate Estimate Estimate $M $M $M $M $M $M E.B.I.T. 184.9 203.5 204.8 217.0 231.8 247.5 Operating Profit before Tax 93.5 115.0 99.0 108.6 119.8 134.0 Income Tax Payable 10.1 5.7 19.3 20.5 23.0 24.7 Income Tax Expense 28.1 31.8 35.2 38.4 42.1 46.6 Target Distribution 60.0 70.0 51.0 56.2 62.2 69.9
Target Debt Level 1446.8 1523.6 1525.5 1541.6 1593.3 1726.7
Return on Assets (%) 6.65% 6.57% 6.02% 6.27% 6.50% 6.61% Return on Equity (%) 6.30% 4.15% 4.46% 4.81% 5.26% Capital Structure1 56.3% 50.1% 49.5% 49.1% 49.3% 50.6% Earnings Protection2 2.02 2.30 1.94 2.00 2.07 2.18
Note (1) - Capital Structure = Debt to Debt plus Equity (2) - Earnings Protection = Times Interest Cover
Option 3 : The final determination increases the prior years capital expenditure allowance by $100 million.
Opening Regulated Assets base increased by $100 million
2003/04 2003/04 2004/05 2005/06 2006/07 2007/08 SCI Target Actual Estimate Estimate Estimate Estimate $M $M $M $M $M $M E.B.I.T. 184.9 203.5 211.0 222.4 236.5 251.4 Operating Profit before Tax 93.5 115.0 103.6 110.7 117.2 126.7 Income Tax Payable 10.1 5.7 19.5 20.1 21.2 21.4 Income Tax Expense 28.1 31.8 38.6 39.0 41.3 44.4 Target Distribution 60.0 70.0 53.6 57.3 60.7 65.8
Target Debt Level 1446.8 1523.6 1571.0 1635.8 1737.7 1920.5
Return on Assets (%) 6.65% 6.57% 6.16% 6.29% 6.41% 6.43% Return on Equity (%) 6.30% 4.36% 4.55% 4.69% 4.95% Capital Structure1 56.3% 50.1% 50.2% 50.6% 51.5% 53.3% Earnings Protection2 2.02 2.30 1.96 1.99 1.98 2.02
Note (1) - Capital Structure = Debt to Debt plus Equity (2) - Earnings Protection = Times Interest Cover
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Strategic Risks
Currently there are a series of issues over which TransGrid has only limited control, which could significantly impact future financial performance. These issues are summarised in Section 6 of the Statement of Corporate Intent and are expanded on in this section
Revenue Regulation
The National Electricity Code gives the ACCC the power to set TransGrid's maximum allowable revenue for periods of 5 years or more at each determination. This process is the major determinant of TransGrid‟s income. Revenue risks arise from the:
Evolving revenue setting criteria - The ACCC‟s Draft Statement of Regulatory Principles issued in 1999 have never been finalised; - The Regulatory Principles are being rewritten at the same time TransGrid‟s revenue is being set for the next 5 years.
High levels of regulatory discretion;
Processes within the regulation framework for writing down asset values at each revenue reset;
Uncertainty about the operation of efficiency incentive mechanisms and sharing of efficiency gains;
Uncertainty to pass through unforeseen costs such as changes in the ancillary services procurement arrangements, liability insurance, new taxes or 'Acts of God';
Recognition of capital expenditure for revenue setting purposes; and
The interaction of price setting processes with predetermined revenue caps.
A significant resource effort has been dedicated to managing the interface with the revenue regulator, the ACCC, to minimise these risks.
In addition, TransGrid‟s income is revenue capped not price capped. As such there is no change in income as a result of increases in power transported over TransGrid‟s network. Instead, annual revenue caps are adjusted to reflect the regulator‟s view of TransGrid‟s capital expansion needs.
As stated earlier, TransGrid will do all in its power to improve its financial performance but as the regulator controls around 95% of TransGrid‟s total
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Strategic Risks revenue, any unexpected requirements against its finances could have a dramatic effect on its ability to achieve its performance targets.
Transmission Price Structures Converting allowed revenue caps into price structures produces additional business risks. These include the scope for ensuring that there is full recovery of the maximum allowable revenue, possible limits on the flexibility to set prices to avoid network bypass and associated asset write downs, the ability to set prices to recover capital associated with assets with short economic lives, and resolving the means for appropriate recovery of interstate transmission charges.
Regulatory Changes The new regulatory bodies to be formed create uncertainty and potential risk to TransGrid. The new bodies may make changes to the current regulatory regimes or compliance requirements of the National Market which may create risks for TransGrid into the future. This risk will be better defined as details of the new regulatory framework and structures are bedded down.
Liability
As a transmission network service provider, TransGrid is liable to other Code participants and other third parties for failure to comply with the requirements of the National Electricity Code and for common law negligence. There is scope for significant damages claims where actions result in poor quality of supply or interruptions to supply. The scope of insurance coverage has not been tested and premiums may rise significantly if there is a major event such as a widespread power system failure. An indication of the potential compensation claims can be gained by way of comparison with similar events in recent years such as the electricity network failure in Auckland (New Zealand) and gas supply failure at Longford (Victoria), and major grid failures in the USA, Italy and the United Kingdom.
TransGrid also has network operator functions under the National Electricity Code and other obligations in its role as an agent for, or as service provider to, the National Electricity Market Management Company (NEMMCO). Certain statutory immunities existed in relation to potential liabilities arising from these functions until 13 December 1999. The introduction of the National Electricity Law removed these protections and increased TransGrid‟s liability exposure in relation to the provision of transmission services.
The availability and cost of insurance for these risks will be largely influenced by claims history, the level of uncertainty and the insurance market.
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Strategic Risks
Competitive Electricity Markets
The operation of the National Electricity Market Code in its present form has a very short history and is legally and functionally untested. The national market commenced in earnest in December 1998. Many aspects of the market are still being phased in as set out in the various derogations to the National Electricity Code by each participating jurisdiction. The relationships between TransGrid and other market participants are still evolving under this new framework.
This has placed significant demands on TransGrid to review its business relationships. The establishment of partnerships with generators and distributors in a series of connection agreements has set the levels of service to be provided between the parties.
However, there are a number of unquantifiable risks associated with the National Electricity Market processes. These include new challenges in getting approval for essential transmission works and the emergence of new competitive arrangements driven by overriding National Electricity Code objectives, the commercial agendas of market participants, and the positions adopted by NEMMCO, NECA and the ACCC.
Regulation Compliance Costs
The National Electricity Code provides scope for the imposition of additional regulatory compliance costs. Notable examples include the powers given to the ACCC to insist on „ringfencing‟ regulated business activities from unregulated business activities, the inequitable appeal process for regulated interconnectors and the information disclosure powers provided to the ACCC.
NEMMCO also has the power to impose costly service level requirements in relation to market related services such as the Communication Data Control communication network.
Regulatory Tests on New Assets
The National Electricity Code requires Network Service Providers to carry out a “Regulatory Test” analysis of proposed options for network development. The analysis must have regard to alternative projects, timings and market development scenarios. Due to this regulatory process for network augmentations, the planning for projects must make an additional allowance of between 12 - 24 months to expected construction lead times.
Practical problems encountered to date, that can add delays, include:
Ongoing changes to the National Electricity Code and the regulatory test. In the case of the Central Business District project a delay of a further 6 months was encountered and a considerable amount of reworking was required.
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Strategic Risks
TransGrid has been involved in gaining regulatory approval for the interconnector into South Australia for several years and is now in the midst of an inequitable appeal process.
Interested parties, who have no accountabilities to customers, to government or under the National Electricity Code, can (and do) propose partially thought out alternatives and raise un-constructive criticisms of the proponent and/or the National Electricity Code process, which results in unnecessary delays.
Some aspects of the National Electricity Code and regulatory test still remain unclear.
NEMMCO Issues
At the present time, many aspects of transmission service delivery are impacted by decisions made by NEMMCO. This limits TransGrid‟s ability to manage its service delivery and exposes TransGrid to greater liability when generation is constrained or there are supply shortfalls.
Related issues include the extent to which transmission companies can control the delivery of network control ancillary services and the nature of TransGrid‟s obligations to generators to „sell‟ additional levels of transmission access rights. Resolution of these matters will affect TransGrid‟s risk profile and capacity to augment regulated income with negotiated service arrangements.
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Asset and Liability Management
Management Policy
The Treasury functions of TransGrid are performed within specific policy guidelines and limits approved by TransGrid's Board, relevant Acts of Parliament and NSW Treasury Guidelines.
TransGrid‟s Treasury Policy Document establishes a prudential framework within which TransGrid's treasury objectives are stated, the financial risks to be managed are defined, and policy developed to ensure appropriate controls and reporting systems are in place.
TransGrid‟s Treasury functions include: . the management, accounting and settlement of interest rate risk, within policy defined parameters, arising from TransGrid's debt and investment portfolios. . the management, accounting and settlement of foreign exchange risk, within policy defined parameters, arising from supplier contracts. . the provision of cash management services, including cashier, credit card and cheque facilities. . the provision of financial advice to TransGrid's business units in relation to capital expenditure projects.
TransGrid's financial risk management is based on the following principles: . Treasury activities are to be positioned towards the conservative end of the risk profile and are to be consistent with New South Wales Government policies and practices. . Speculative transactions are prohibited. . Opportunities may be taken within Board approved limits to minimise TransGrid's interest rate exposures. . Treasury activities are to be performed only by qualified personnel acting under specific delegations and in accordance with the Australian Financial Markets Association ("AFMA") code of conduct. . Control systems have been established and maintained, incorporating:
- policy and procedure documentation for all treasury activities, with the Treasury Management Policy reviewed annually by the Board;
- effective processing and performance reporting systems, including appropriate segregation of duties between staff responsible for
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Asset and Liability Management
initiating transactions and those responsible for the settlement, accounting and risk control functions;
- regular risk-based audit; and
- business continuity or disaster recovery plans for the contingency of a major systems failure.
The Treasury Policy Document establishes a prudential framework within which TransGrid's treasury objectives are stated, the financial risks to be managed are defined, and policy developed to ensure appropriate controls and reporting systems are in place. The document is divided into three sections, namely:
. Treasury Management Framework, which outlines the functions and liability management principles of the Corporate Finance Branch.
. Operational Risk Policy, which defines the specific financial risks and contains policies that address the management and reporting of these risks.
. Risk Limits, Delegations and Board Resolutions which overlays prudential limits in relation to each of the above policies, delegates the authority to implement policy and is approved on an annual basis by TransGrid's Board.
Debt Benchmark
As part of the debt restructure imposed in 2000, TransGrid engaged Macquarie Risk Advisory Services Limited to determine an appropriate long-term debt benchmark using a revenue matching approach. This approach explicitly recognises the factors determining TransGrid's revenue and its interest cost.
TransGrid‟s long-term debt benchmark is its minimum risk long-term debt portfolio structure. Macquarie‟s analysis with TransGrid and a range of other firms indicates that:
. there are diminishing marginal benefits, in terms of reduced profit volatility from borrowing for increasingly long periods; and
. beyond a certain point, borrowing for longer periods actually increases profit volatility.
Macquarie's benchmarking model simulated various inflation and real interest rate outcomes, which were used as inputs into a financial model of TransGrid's business. The financial model projected TransGrid's financial performance and
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Asset and Liability Management cash flow outcomes over a 15-year period. In each year, the model tested 100 possible inflation and real interest rate outcomes for each candidate benchmark - 22,500 simulations in total.
Each candidate benchmark was assessed based on its capacity to meet TransGrid's objectives namely to:
. minimise interest cost with an acceptable level of interest cost volatility;
. avoid changes in interest cost of greater than $10m from year to year (“interest cost shocks”);
. produce an acceptable profit with minimal profit volatility;
. avoid unacceptably low profit outcomes in any single year; and
. minimise the risk that target interest cover ratios are breached.
In order to select the appropriate benchmark, TransGrid evaluated a range of trade-offs - most importantly between interest cost and interest cost volatility and hence, profit and volatility of profit. Given its regulated status, TransGrid places greater importance on certainty of outcomes over absolute levels of outcomes. Therefore, the most important variables for consideration, in order of importance, are:
1. minimising volatility of profit;
2. maximising average minimum profit; and
3. minimising the risk of an interest cost shock where interest cost increases by more than $10 million from one year to the next.
From this analysis, it was concluded that the most appropriate debt benchmark for TransGrid was a modified duration of 3.5 years. The recommended debt benchmark incorporates borrowing over 9 years with approximately 11.1% of TransGrid's debt maturing in each year.
This benchmark is review on an annual basis and approved by the Board.
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Unregulated Revenue
Introduction
In order to add value to TransGrid‟s operating performance and more importantly provide a competitive environment within which TransGrid employees can develop their business skills, the organisation is committed to seeking unregulated project opportunities. These opportunities have already been experienced through TransGrid‟s telecommunication network and providing maintenance and advisory services in Australia and Overseas.
UNREGULATED INCOME
13
11
9
7
5 $A Million $A
3
1
-1 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04
Telecommunications
TransGrid‟s telecommunications network is one of the largest private networks in New South Wales. Sharing this infrastructure with third parties has proven to be a very profitable source of unregulated income for TransGrid over the past 7 years. The revenues from this business account for approximately 40% of TransGrid‟s total annual unregulated revenues. Its success to date is largely attributable to the dedication, commitment and customer focus of the small team in TeleGrid.
TransGrid‟s radio sites and high voltage towers are proving to be attractive assets for commercial and non-commercial radio operators. Although the market entrants have now saturated, more opportunities are being presented in rural areas where TransGrid has relatively large number of radio and HV towers.
TransGrid is authorised under the Telco Act to provide telecommunications services (narrow and broadband) to members of the ESI and to licensed carriers. This limited customer base is one of the main challenges for the further growth of
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Unregulated Revenue this profitable business. Forming an alliance with a licensed carrier who has similar objectives to TransGrid is one of the solutions to overcome this limitation.
Only AARNet, a not for profit organisation and a Licensed carrier, has agreed to form such an alliance with TransGrid. AARNet is currently providing cost effective telecommunications services to 37 universities and research organisations nationwide, and has indicated willingness to become more commercial without breaching their charter. AARNet is looking to expand its services in the future to cover education at all levels, Government traffic, medical centres and healthcare and other community type organisations such as libraries and museums. Through the alliance with AARNet, TransGrid can facilitate such expansion for mutual benefits.
A Pilot Project to provide high speed Internet access to private schools and other government and professional organisations at Tamworth, is being investigated. The Project will enable TransGrid and AARNet to gain valuable information regarding typical regional market demand, the effectiveness of the technology used, the level of success in meeting NSW Government‟s objective and TransGrid and AARNet commercial benefits. The lessons learned will be put to effect for further enhancements in order to apply it more widely to other regions in NSW.
To grow this business further, TransGrid would need to consider additional initiatives such as:
Exploring new technologies (IP based) and the opportunities they offer using additional pairs of TransGrid fibres and market these new services to existing and potential customers;
Investigating getting a carrier license, initially on a trial basis for a period of 6 months to expand customer base;
Developing flexibility in the employment of skilled telecommunication staff to meet the customer service support requirements;
Developing employees marketing skills and establish appropriate customer billing systems;
Acknowledging the importance of organisational commitment and responsiveness to customers to promote business repeats and growth in this area; and
Exploring opportunities in contributing to the capital investment for expanding TransGrid‟s broadband network to other areas especially in the regions.
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Unregulated Revenue
Regulated/Unregulated Asset Decisions
A significant business opportunity exists in developing, owning or acquiring transmission assets outside TransGrid‟s shared network. This could include assets such as:
Privately owned and developed inter-connectors
Privately owned high voltage transmission systems
Combined regulated and unregulated assets
Privately owned mining and industrial high voltage sub-stations, and transmission and distribution systems broadly categorised as asset acquisition.
This type of business activity will increase TransGrid's total asset base and lock in the provision of value-added services in TransGrid‟s core competencies of planning, designing, managing, operating and maintaining such assets. In some instances these value-added services could be provided at low cost that would further increase the attractiveness of ownership.
TransGrid‟s participation in this business activity may lead to other opportunities such as the provision of telecommunications services and yield a range of intangible benefits associated with the expansion of its customer base and the development of relationships with external organisations.
Pursing these types of opportunities will require TransGrid to evaluate the risks it would be prepared to accept and the appropriate returns to compensate for it. TransGrid is already exposed to a range of risks associated with its regulated business however, for the acceptance of commercial risks a better than regulated return is an essential requirement to participation. The type of risks include:
Project risk involving penalties for both delays in completion and performance;
Project risk resulting from the actions of its contractors and suppliers;
Market risk where ventures depended upon the price of electricity in the NEM;
Design risk where projects were based on feasibility studies;
More stringent customer requirements in terms of availability and reliability guarantees; and
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Unregulated Revenue
The potential for stranded asset risk.
Maintenance and Project Services
TransGrid will continue to leverage off its resources, both its fixed assets and its people. TransGrid‟s expertise in planning, designing and maintaining high voltage transmission networks gives it a strong competitive position when it is able offer these skills to the external market. In an international sense, TransGrid‟s skills in owning and operating a transmission company in a deregulated electricity industry are highly sought after.
The major considerations for TransGrid in pursuing these opportunities include:
Major unregulated projects will require a significant commitment of time and resources, but given that they are competitive, the organisation must be prepared to accept the possibility that they may not result in a growth opportunity for TransGrid.
Initiatives in this area may represent a significant “step out” from TransGrid‟s current activities in terms of the risks to be assessed and the skills required to capture and implement these initiatives.
TransGrid will need to be flexible in developing these opportunities, including being prepared to partner with a wider range of organisations to solve needs that extend beyond the customers‟ high voltage transmission assets.
It is also recognised that winning and carrying out external consultancy and contracting work remains of significant strategic importance to TransGrid:
External work provides the opportunity to grow our business in concert with regulated and unregulated business activities.
A level of external work effectively bid, won and executed brings an important source of “bottom line” revenue to TransGrid.
External consultancies and contracting provides TransGrid with a strong national and international profile in an increasing competitive environment.
The bidding process and winning external work, provides a model for the competitive framework to which TransGrid aspires in its regulated business.
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Unregulated Revenue
Carrying out external consulting and contracting work continues to drive cultural change in TransGrid.
Whilst the impetus for TransGrid‟s entry into external consulting and contracting work was originally based on the utilisation of excess resources, this is now only a secondary factor in determining the future growth of these activities. The rate of growth in external work will depend on the balance of priorities across the TransGrid regulated and unregulated businesses.
Strategies for resource management for external work will be developed across TransGrid to allow for appropriate growth in external consulting and contracting work while the regulated and unregulated businesses also grow.
Key elements of TransGrid‟s plan for growth include:
Focus on pursuing unregulated opportunities that “fit” TransGrid‟s work and risk profile;
Develop more flexible approaches for securing employee resources on short notice, and for variable time periods, to allow TransGrid to pursue unregulated opportunities without affecting internal projects;
Recognising competitors may offer engineering services at low/no margin in order to gain entry to asset investment opportunities, TransGrid will only participate in ventures that will result in an increase in shareholder value;
Focus on developing strong, long-term relationships with valued clients in markets in Australia and overseas where our specific high voltage and market capabilities represent a competitive advantage; and
Identify preferred projects early in the client‟s project development and review prospects regularly in order to maintain an up-to-date forecast of the most attractive targets and to allow revision of priorities.
Pursuing these types of opportunities will require TransGrid to evaluate the risks it would be prepared to accept and the appropriate returns to compensate for these risks. TransGrid is already exposed to a range of risks associated with its regulated business however, for the acceptance of commercial risks a better than regulated return is an essential requirement to participation.
TransGrid has identified China as a key market within which major opportunities exist for both revenue generation and knowledge sharing. TransGrid has signed a co-operation agreement with the State Power Bureau, the supreme Power Authority in China. Approval to enter a minimal risk Joint Venture to exploit this opportunity is with NSW Treasury seeking approval.
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Outline of Risk Management Reporting
Policy
The Board of TransGrid is committed to explicit risk management at all levels of the business. This commitment is embodied in the internal Risk Management Policy and Charter.
The nature of operational activities associated with risk management include:
strategic risk assessment exercises at the executive level;
explicit risk assessments and development of risk management plans for each Business Unit;
provision of training in risk management for personnel; and
provision of guides and tools for any person within TransGrid to complete a risk assessment and develop action plans for managing the risks identified.
The risk assessment is owned by the Manager of the Business Unit involved or jointly by the stakeholders if an assessment crosses several business units.
Risk assessment and management training is provided by Corporate Risk and Audit Group.
Risk management is considered in all significant business decisions conducted by TransGrid. In addition, an Executive Risk Management Committee (ERMC) exists to ensure all significant risks are identified and managed. This committee is supported by the Corporate Risk and Audit Group which provides risk based audit services, facilitates risk assessment exercises and provides training in risk management to TransGrid employees. An external service provider supplies specialist skills where necessary to ensure the right skills are applied to risk management reviews.
The ERMC ensures there is a coordinated approach and focus to risk management. Strategic risk assessments have been conducted and each business unit has a formal risk management plan in place. In addition, a number of other specific risk areas such as environmental, occupational health and safety, human resources, business development etc., are managed through dedicated Executive Committees and associated risk management programs.
The objective of the frameworks in place and those being established is to ensure that the risks to achievement of TransGrid‟s business objectives are known and managed.
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Outline of Risk Management Reporting
TransGrid‟s Risk Management Framework is depicted below:
1. RISK CONTEXT: WHAT ARE THE BUSINESS OBJECTIVES
2. IDENTIFY RISKS
6. MONITOR
3. ANALYSE RISKS AND
REVIEW
4. EVALUATE RISKS
7. COMMUNICATE AND CONSULT AND 7. COMMUNICATE
5. TREAT RISKS
Source: Adapted from AS/NZS 4360:1999
In analysing TransGrid‟s risks, severity levels of each risk using the predetermined TransGrid risk assessment criteria are assessed. Secondly, the existing controls and treatments in place to manage those risks are identified.
TransGrid risk assessment involves determining business impacts and likelihood of occurrence. Risks are categorised as Mission Critical, High, Medium or Low. The following matrix has been adapted from AS/NZS 4360:1999 and is used as the guide for assessing the severity of identified inherent risks.
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Loan Guarantee Fee
The NSW Government provides a government guarantee on all borrowings raised by through the NSW Treasury Corporation on behalf of government agencies. In return for this guarantee, the Government imposes a Loan Guarantee Fee to compensate for its exposure to public sector credit risk. The individual agency's credit rating provides an indication of the Government's exposure to risk and the guarantee fee is calculated on a sliding scale compared to the rating.
The "stand-alone" rating is developed on the basis of no actual or implied financial support deriving from government ownership. TransGrid is assessed on its own merits, business environment, financial performance, capital structure and its management's capabilities, strategies and policies.
In its 1999 Credit Rating process, Standard and Poor's took into account the ACCC Draft Determination and on this basis downgraded TransGrid to A from its previous held AA rating. Standard and Poor's made their determination on the basis that no better information was available in respect to TransGrid's future revenue stream.
In 2002, Standard and Poor's reaffirmed the Credit Rating at A. The rating on TransGrid reflects the company‟s monopoly business, stable and secure level of earnings and solid and improving operational performance. These strengths are offset by the potential financial pressures created by the reduction in operating revenue as a consequence of the determination by the ACCC on regulated transmission revenue and the Capital Restructure imposed by the NSW Government.
Standard and Poor‟s believe TransGrid operates as a natural monopoly provider of electricity transmission services for the state of New South Wales. The company‟s monopoly status and regulated revenue streams provide stability and security of cashflows. Moreover, the revenue cap pricing methodology shields the company from volume risk and ensures that the company is not exposed to revenue reductions as a consequence of reduced energy demand.
However, the additional debt allocated by the NSW Government in 2000, at a time when debt levels are naturally increasing due to the capital expansion program, adds a level of risk to the organisation.
TransGrid‟s improving operational performance mitigates its exposure to operational failure. The operational performance of the company continues to improve in the areas of operations and maintenance costs, system reliability, and system availability in terms of the number and duration of outages.
This places TransGrid on the lowest acceptable Credit Rating level set by NSW Treasury in their Capital Structure Policy.
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Transmission Network Performance
INTRODUCTION Each year, a Network Performance Report is prepared by TransGrid to fulfil the requirements of the Electricity Network Operator reporting regime and the Electricity Supply (Safety and Network Management) Regulation 2002. The enactment of Electricity Supply (Safety and Network Management) Regulation 2002 has superseded the Electricity Supply (Safety Plans) Regulation 1997.
PROFILE
TransGrid is the owner, operator and manager of the high voltage transmission capability between generators, distributors and directly connected end users in New South Wales as well as interconnections with Queensland and Victoria. The system is a major part of one of the most extensive systems in the world comprising of 81 substations and power station switchyards and over 12,400 kilometres of transmission lines.
The system operates at voltage levels of 500, 330, 220 and 132kV. The substations are located on land owned by TransGrid and the transmission lines of steel tower, concrete or wood pole construction are generally constructed on easements acquired across private or public land.
Network Operator Statistics Number at 30-6-03 Number at 30-6-04 Customer Numbers at Year End (Total) 13 14 Energy Delivered to Year End (GWh) 69,427 71,571 System Loss Factor (%) 3.0% 3.0% Transmission System (km) 12,420 12,446 High Voltage Overhead (km) 12,400 12,426 High Voltage Underground (km) 20 20 Substations (Number) 81 81 Employees (Full Time Equivalent Number) 964 974
NETWORK MANAGEMENT
TransGrid published its updated (5 year) Network Management Plan 2001-2006 in May 2002. This Plan provides a focus for ongoing analysis within TransGrid aimed at continually improving the management of the transmission system while also providing an authoritative vehicle for dissemination of information to TransGrid‟s managers, employees, customers and stakeholders.
TransGrid also produced its 30-year Plan in July 2000, covering the period from 2001 to 2030. The 30 Year and 5 Year Plans quantify TransGrid‟s medium and long-term strategies for asset management and provide expenditure budget forecasts.
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Transmission Network Performance
Ongoing management strategies aimed at the achievement of TransGrid‟s mission are the maintenance and development of Asset Maintenance Policies and Strategies in the framework of an accredited Quality Documentation system, a system of Quarterly Asset Performance Reviews, regular Technical Performance Assessments and audits, and extensive benchmarking studies.
In accordance with the Electricity Supply (Safety and Network Management) Regulation 2002, TransGrid prepared and lodged a Public Electrical Safety Awareness Plan on 30th June 2003 and lodged its Network Management Plan and Bush Fire Risk Management Plan on 29th August 2003.
Subsequently, independent audits of the Network Management and Bush Fire Risk Management Plans were conducted and Audit Reports were lodged on 31st October 2003.
NETWORK COMPLAINTS TransGrid has an established process of contacting all property owners before entering their property to perform any type of work in maintaining transmission lines, easements and access tracks and to fully explain the nature of work to be done, so that all property owners‟ concerns may be addressed prior to commencement.
During the year, each of TransGrid‟s Regions receives a number of calls from property owners relating to this work. Most of these calls are enquiries about activities about to take place and are satisfied by information supplied by TransGrid‟s officers. However, some required further discussion with property owners to clarify the situation and sometimes to provide rectifying actions. In its three Regions for 2003/2004, only eight notable verbal or written expressions of dissatisfaction were received. These are shown as complaints relating to vegetation and access track management, and complaints relating to disturbance of livestock from aerial activity.
In addition, TransGrid received four complaints arising from transformer or insulator noise and interference. Three complaints which related to each of Yass 330kV substation, 330kV line No.1 and 330kV line No.32 have been resolved, while the proposed solution to the complaint regarding Vales Point 330kV switching station is subject to a future review.
Also, there was one (1) complaint regarding perceived difficulty in access to transmission loading data to be used by an EMF consultant. After discussion, this matter was mutually and satisfactorily resolved.
Also, claims were made as a consequence of interrupted supply, which were caused by TransGrid. During the year, there were a total of 121 claims as a result
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Transmission Network Performance of four (4) incidents. Seven (7) of these claims, from two (2) incidents, are still under consideration. The remaining 114 claims were accepted.
The above easement maintenance complaints, noise and interference complaints, information request and supply claims are summarized in the following tables.
Network Complaints: Total Received 2003/2004 Total Complaints Received 134 Vegetation Management Program: % of Network where Clearing Carried 8.6% Out Number of Complaints in Relation to Vegetation and access track 6 Management Activities Number of Complaints in Relation to disturbance of livestock from aerial 2 activity Number of Complaints in Relation to requests for network information 1
Network Complaint Investigations Completed 2003/2004 % of Total % Category Nature of Complaint Sub- Number Valid1 Total Sustained over voltage Sustained under voltage Voltage fluctuations Voltage dips Switching transients N-E voltage difference Voltage Ground fault voltage Voltage unbalance Mains signalling voltages HV injection (HV/LV Intermix) Notching SUB TOTAL (Supply Voltage
Complaints)
Direct current Harmonic content Current Inter Harmonics SUB TOTAL (Supply Current
Complaints)
Mains signalling reliability Noise & Interference 4 100% 100% Other Level of supply capacity Quality Supply frequency Level of EMF SUB TOTAL (Other Quality of 4 100%
Supply Complaints)
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Transmission Network Performance
Network Complaint Investigations Completed 2003/2004 % of Total % Category Nature of Complaint Sub- Number Valid1 Total
SUB TOTAL (All Quality of Supply 4 100%
Complaints)
No. of supply failures (No. of claims) 114 100% Duration of supply failures Reliability No. of <1 min. interruptions SUB TOTAL (Reliability of Supply) 114 100%
Overhead line safety Underground safety Safety Electrical station safety Service line safety SUB TOTAL (Network Safety)
TOTAL 118 100% N/A Note 1: A complaint is valid where non-compliance with published service and network standards occurs.
TECHNICAL SERVICE STANDARDS
TransGrid‟s prime service standards of customer focussed network performance are those of Reliability and Availability.
Reliability Reliability is a measure of the service level of the transmission network as perceived by the customer. It relates to the amount of Energy Not Supplied resulting from a temporary failure of a component of the network. The measure used to describe Reliability is System Minutes. This is the equivalent of how many minutes the total Network, while delivering the annual maximum MW demand, would have to be out of service to equate to the amount of Energy Not Supplied during the year.
TransGrid has established a Reliability target of between 0.5 and 2.0 System Minutes per annum, with a 3 year rolling average target of 1.3 system minutes.
Availability Availability is a measure of the network‟s transmission circuits preparedness to transmit energy to and from customers. It relates to the total duration of transmission circuit outages compared to the total possible hours available for all circuits. It indicates the effectiveness of strategies to minimise the number and
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Transmission Network Performance duration of planned maintenance outages and the success of maintenance policies in reducing unplanned circuit outages.
Availability is measured as a percentage of the ideal (but unrealistic) no outages situation. TransGrid has established a target of between 99.0% and 99.2% over the year.
Connection Point Performance
In addition to Reliability and Availability, TransGrid measures its network performance at the individual customer Connection Point level. TransGrid‟s total connection points are spread across 14 connected customers, 10 being Distributor/Direct customers, and 4 Generator customers. The numbers of connection points per customer range from as few as 1 to as many as 182. The measures reported are the Connection Point Unplanned Interruption (with loss of supply) frequency, duration and restoration time, for each individual customer and an average across the network for the Distributor/Direct customers.
Historically, TransGrid has not recorded details of planned outages that result in unsupplied energy. Contributing to this has been the difficulty in judging what constitutes loss of supply. In many instances, due to forward planning, the customer is able to arrange alternative sources of supply by switching in back- feed circuits or use of alternative local generation. Subsequently, the customer was not without supply.
In many other cases, the TransGrid planned outage is coordinated with a customers scheduled major maintenance involving a shut down of all plant. Often, the outage planned by TransGrid is coordinated with a distributor to allow them to perform outstanding maintenance work, both benefiting from the outage.
Actionable Asset Incidents – SENI-2 Scheme
A summary of Actionable Asset Incident reports is provided below, with the incident date, brief description, location, network element affected and any action proposed or undertaken if necessary to prevent re-occurrence.
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Transmission Network Performance
Actionable Asset Incident Summary Date Description Location Network Element Affected 21/7/03 Category b) Sydney West Busbar differential protection had A section of 132kV busbar tripped 330/132kV operated. while busbar protection links were Substation being isolated prior to circuit breaker maintenance. There was a loss of supply of 0.17 system minutes.
14/9/03 Category b) Liddell 330kV 132kV lines 964 and 96G tripped losing During protection maintenance work switching supply to Port Macquarie 132kV at Liddell Sw/S, No.83 330kV line was station busbar. Contingency operational inadvertently tripped while No.84 line procedures have been amended. This was out of service. With the will permit the system to separate Queensland interconnection then only either side of Port Macquarie substation retained via the 132kV network, the dependant on network configuration mal-operation of a 132kV contingency and system loading. system resulted in the loss of load at Port Macquarie. There was a loss of supply of 0.235 system minutes. 25/10/03 Category b) 132kV lines 132kV lines 976 and 977 were affected, During severe thunderstorms, between No systemic action was required. lightning caused inulator flashovers on Queanbeyan 132kV lines 976 and 977 Canberra – and Queanbeyan, causing them to trip, Canberra. reclose, trip and lock-out. As a result, there was a loss of supply at Queanbeyan of 0.255 system minutes.
29/12/03 Category b) Buronga 220kV busbar at Buronga switching During strong winds, wind-blown 220kV station was impacted by wind-blown debris caused the trip of the 220kV Switching debris. Outages at other locations was busbar leading to outages of the X2 station a direct result of this busbar outage. Buronga – Broken Hill 220kV line and No systemic action is available nor both Broken Hill and Balranald 220kV required as the incidence of these substations. There was a loss of types of faults is very low for 220kV supply of 0.196 system minutes. and 330kV equipment.
30/6/04 Category b) Newcastle The damaged white phase of The white phase bushing of the 3x 330/132kv Transformer No.1 has been replaced single phase No.1 transformer substation and the transformer returned to exploded, damaging the adjoining red service. phase bushing and also causing the No.2 transformer was undamaged and No.2 transfomer to trip. No direct returned to service two hours after supply interruption occurred, although tripping. the Kurri Hydro smelter potlines tripped via their own control systems. Two potlines were initially restored at full loads but were requested to reduce load to allow the third potline to be restored. A subsequent request
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Transmission Network Performance
Actionable Asset Incident Summary Date Description Location Network Element Affected by TransGrid resulted in a the shedding of one of the potlines. A resulting loss of load from Newcastle substation was 1.23 system minutes.
Transmission Performance Data
2003/2004 performance for Reliability and Availability experienced no significant impact from the inclusion of the transferred Snowy Hydro transmission assets. There were no reliability impacting outages involving the ex-Snowy Hydro assets. Though there were a small number of planned and forced outages on the ex- Snowy Hydro assets, their overall impact on TransGrid‟s availability measure was not significant.
For the year 2003/2004, TransGrid experienced 10 Energy not Supplied outages totaling 2.22 system minutes. While this is above the annual upper target of 2.0 system minutes established by ACCC, it includes the impact of one non-typical event with the catastrophic failure of one transformer and temporary tripping of its adjoining transformer. Without this one event, the annual total would have been 0.94 system minutes. When converted to a percentage of energy delivered, 2.22 system minutes equates to a reliability of 99.9994%.
For the year 2003/2004, TransGrid achieved an availability of 99.65 %. This represents the availability of TransGrid‟s transmission lines at all voltages from 132kV up to 500kV.
Connection Point Performance
Of TransGrid‟s 14 connected customers, 9 did not experience any unplanned outages causing loss of supply or interruption to generation. Five (5) distribution customers experienced loss of supply from unplanned outages. These were ACTWEGL, Australian Inland, Country Energy, EnergyAustralia and Integral Energy :-
Network Reliability Trend Network Objective 99/00 00/01 01/02 02/03 03/04 Reliability System minutes 0.5 – 2.0 4.23 0.67 0.44 4.40 2.22
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Transmission Network Performance
Circuit Availability Trend Circuit Objective 99/00 00/01 01/02 02/03 03/04 Availability Percent 99.0 – 99.2 99.31 99.55 99.63 99.64 99.65
Connection Point Interruptions – Average 2003/2004 Objective1 03/04 averaged across network Connection point interruption NA 0.10 frequency Connection point interruption NA 6.68 duration (minutes) Restoration time (minutes) NA 65.97
Note 1: Objective values are calculated only for Distributor/Direct Customers
Connection Point Interruptions (Unplanned) 2003/2004 Connection Point No. of Total Duration Unplanned of Interruptions Interruptions 03/04 ¾ (min) ACTEWAGL Queanbeyan 132/66 kV S/S – 66kV Fdr 844 1 97 Fyshwick Queanbeyan 132/66 kV S/S – 66kV Fdr 845 1 97 Fyshwick
Australian Inland Balranald 220/22kV S/S - 22kV Fdr N0.2 1 74 Moulamein Broken Hill 220/22kV S/S - 220kV Fdr X4 1 25 Broken Hill Mines Broken Hill 220/22kV S/S - 22kV Fdr No. 3 1 25 South Broken Hill 220/22kV S/S - 22kV Fdr No. 4 1 25 Railway Broken Hill 220/22kV S/S - 22kV Fdr No. 5 2 76
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Transmission Network Performance
Connection Point Interruptions (Unplanned) 2003/2004 Connection Point No. of Total Duration Unplanned of Interruptions Interruptions 03/04 ¾ (min) Talc St No.2 Broken Hill 220/22kV S/S - 22kV Fdr No. 6 1 25 Talc St No.1 Broken Hill 220/22kV S/S - 22kV Fdr No. 7 2 76 West Broken Hill 220/22kV S/S - 22kV Fdr No. 8 2 76 Cockburn
Country Energy Cowra 132/66kV S/S – 66kV Fdr 863 1 78 Canowindra Molong 132/66kV S/S - 66kV Transformer 1 120 no.3 Nambucca 132/66kV S/S – 66kV Fdr 752 1 11 Newee Creek Port Macquarie 132/33kV S/S – 33kV Fdr 712 1 72 Rocks ferry Port Macquarie 132/33kV S/S – 33kV Fdr 711 1 72 Laurieton tee Pumps Port Macquarie 132/33kV S/S – 33kV Fdr 710 1 72 Owen St Port Macquarie 132/33kV S/S – 33kV Fdr 708 1 72 Owen St tee Boronia St Port Macquarie 132/33kV S/S – 33kV Fdr 707 1 72 Boronia st No.2 Port Macquarie 132/33kV S/S – 33kV Fdr 703 1 72 Boronia St No.1 Port Macquarie 132/33kV S/S – 33kV Fdr 702 1 72 Rocks Ferry Queanbeyan 132/66kV S/S – 66kV Fdr 82K/1 1 97 Bungendore Queanbeyan 132/66kV S/S – 66kV Fdr 82A 1 97 Lorn Rd
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Transmission Network Performance
Connection Point Interruptions (Unplanned) 2003/2004 Connection Point No. of Total Duration Unplanned of Interruptions Interruptions 03/04 ¾ (min) Queanbeyan 132/66kV S/S – 66kV Fdr S826 1 97 Captains Flat Queanbeyan 132/66kV S/S – 66kV Fdr 82B 1 97 High St Queanbeyan 132/66kV S/S – 66kV Fdr 82F 1 97 No.11 Transformer Queanbeyan 132/66kV S/S – 66kV Fdr 82M 1 97 No.12 Transformer Wallerawang 132/66kV S/S – 132kV Fdr 92C 1 6 Oberon
EnergyAustralia Newcastle 330/132kV S/S – 132kV Fdr 96B 1 120 Capral (Hydro) Newcastle 330/132kV S/S – 132kV Fdr 96W 1 120 Capral (Hydro)
Integral Energy Sydney West 330/132kV S/S – 132kV Fdr 237 1 40 BHP Mini Mill
Averaged Individual Customer Connection Point Performance 2003/2004 03/04 Averaged Across Customer
Customer: ACTEWAGL Connection point interruption frequency 0.4 Connection point interruption duration (mins) 38.8 Restoration time (mins) 97.0
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Transmission Network Performance
Averaged Individual Customer Connection Point Performance 2003/2004 03/04 Averaged Across Customer Customer: ANM Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0 Customer: Australian Inland Connection point interruption frequency 1.0 Connection point interruption duration (mins) 36.5 Restoration time (mins) 36.5 Customer: BHP (Rod) Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0 Customer: Country Energy Connection point interruption frequency 0.09 Connection point interruption duration (mins) 7.15 Restoration time (mins) 76.53 Customer: EnergyAustralia Connection point interruption frequency 0.03 Connection point interruption duration (mins) 3.64 Restoration time (mins) 120.0 Customer: Integral Energy Connection point interruption frequency 0.02 Connection point interruption duration (mins) 0.8 Restoration time (mins) 40.0 Customer: SRA Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0
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Transmission Network Performance
Averaged Individual Customer Connection Point Performance 2003/2004 03/04 Averaged Across Customer Customer: Tomago Aluminium Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0 Customer: VISY Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0 Customer: Delta (Generation) Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0 Customer: Macquarie (Generation) Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0 Customer: Eraring (Generation) Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0 Snowy Hydro Authority Connection point interruption frequency 0 Connection point interruption duration (mins) 0 Restoration time (mins) 0
NETWORK SAFETY TransGrid‟s goal is zero injuries, occupational illnesses and incidents. The first priority is the health and safety of our people, and our contractors, visitors and
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Transmission Network Performance the public. Our strategies are aimed at continually improving performance and maintaining a major focus on risk management. The Executive Occupational Health and Safety Committee has responsibility for over-seeing the development and implementation of corporate occupational health and safety policy and procedures and the promotion and monitoring of health and safety performance within TransGrid. This includes the establishment of a number of subcommittees to address specific areas of TransGrid‟s activities who report to the Executive OHS Committee on a quarterly basis. The Executive OHS Committee and other Senior Managers of TransGrid hold an annual workshop to review OHS objectives and strategies and determine the focus for the coming year. A system of compliance audits and inspections ensure that procedures are implemented in accordance with legislative and organisational requirements. These include OHS system audits, random, unannounced safety compliance inspections, site conformance inspections, contractor audits and team leader audits of pre work risk assessments. Communication is an integral component of our health and safety system aimed at ensuring that everyone is aware of their responsibilities and role in the implementation of our strategies. OHS Audit reports provided by internal and external auditors reflect a strong OHS commitment, understanding and performance across TransGrid. The Safety Communications Steering Committee assists with the review of policy and procedures through consultation with local committees and other relevant parties, and develops initiatives to promote health and safety to maintain a high level of awareness amongst staff. The specific initiatives for 2003-2004 included a focus on Driver Safety, Diabetes Awareness, Spring Cleaning (housekeeping and lifestyle), Sun Sense, Water Safety, Nutrition and Warming Up for Work. Implementation strategies included presentations from guest speakers, health assessments, information kits, displays and demonstrations. TransGrid takes an active role in a number of industry and WorkCover committees to ensure that trends and expectations of legislators, industry and the community are understood and managed effectively. Compliance to these requirements was demonstrated by nil infringements or prosecutions and the renewal of TransGrid‟s workers compensation self-insurer licence for another three year period to 30 April 2007. TransGrid also holds an annual Safety Day with Risk Assessment, First Aid and Fire Fighting competitions for teams representing all areas of TransGrid. In addition to these internal competitions, TransGrid also participates in the Electricity Supply Industry Field Days and the Power Industry Safety Day.
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Transmission Network Performance
Electrical Network- Accidents and Incidents Involving the Public
Serious Electrical Accidents (Public) Tables revised to suit SENI
Serious Electrical & Electricity Network Accidents (Public) Trend 99/00 00/01 01/02 02/03 03/04 Serious Electrical 0 0 0 0 0 Accidents Serious Electricity Network 0 0 0 0 0 Accidents
Serious Electricity Network Accident (Public) Numbers 03/04 Description Fatal Non- Preventative Fatal Actions Taken or Planned Total 0 0
Network Workers Serious Electrical & Electricity Network Accident Numbers Trend 99/00 00/01 01/02 02/03 03/04 SEA SENA SEA SENA SEA SENA SEA SENA SEA SENA Employees 0 0 0 0 0 0 0 0 0 1 Network 0 0 0 1 0 0 0 0 0 0 Operator Contractors Accredited 0 0 0 0 0 0 0 0 0 0 Service Providers
Serious Electricity Network Accident (Network Worker) Numbers 03/04 Description Fatal Non- Preventative Actions Fatal Taken or Planned One SENA was reported for 2003 – 1 The two issues identified 2004. This involved an employee during the investigation have from TransGrid‟s Southern Region now been addressed by: who lost two days from work as a (a) The inclusion in both the result of the incident. He was Work Activity Risk
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Transmission Network Performance
Serious Electricity Network Accident (Network Worker) Numbers 03/04 Description Fatal Non- Preventative Actions Fatal Taken or Planned clipping in an OPGW when the Assessment and the Work stringing sheave securing the pin Method Statement of the jammed. When he was using a hazard presented by screwdriver as a lever to turn the stringing sheaves that are securing pin, the sheave dropped in the horizontal, or nearly suddenly jamming his hand between horizontal, positions, and the sheave and the pole. (b) The securing of a horizontal, or nearly horizontal, sheave as a suitable control measure to reduce the level of risk. Total 1
Actionable Safety Incidents (Network Workers)
Although no Actionable Safety Incidents were reported during 2003 – 2004, TransGrid takes a proactive approach to any safety issues or near miss incidents. All incidents are required to be reported and investigated.
Safety Alerts are issued for any relevant industry or internal safety incidents. A Health and Safety Notice Board is maintained on the intranet and staff are notified on a monthly basis of any additions posted during the previous month.
Lost Time Injuries
Though there has been an increase in both LTIs and Average Time Lost Rates from 2002-2003, there is a continuing downward trend over the past five years. The major contributing factors include manual handling injuries and slips and falls. An increased emphasis has been placed on these areas and the importance of thorough risk assessments prior to undertaking any work. All incidents are required to be reported (whether lost time or not) and thoroughly investigated by the team leader in conjunction with the injured employee (whenever possible). The investigation is to identify the root causes and develop corrective actions. Investigations of all LTIs are reviewed by the Executive OHS Committee at its quarterly meetings and by the Board on a monthly basis. A statistical trend analysis was undertaken to determine any specific areas requiring attention. With the exception of manual handling, there were no definitive trends highlighted. Initiatives that promote a positive safety culture within TransGrid are continuing with a focus on the three key areas identified:
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Transmission Network Performance i) risk management, ii) safety communications and consultation, and iii) training and awareness programs.
Lost Time Injuries 2003/2004 Measure Employees Network Contractors Number of Workers (full-time 974 89 equivalent) Number of Lost Time Injuries 7 3 Number of Days Lost 130 101 Lost Time Injury Frequency Rate 3.6 16.9 (LTIFR) Average Time Lost (ATL) 18.6 33.7
LTIFR Trend 99/00 00/01 01/02 02/03 03/04 Employees 8.3 6.3 4.7 2.1 3.6 Electrical Network N/A N/A 4.7 0 16.9 Contractors
Note: Whilst TransGrid‟s LTIFR has increased from 2002-03, the 5 year trend is continuing downwards. However, three LTIs were reported by contractors working on the upgrade of the Tuggerah-Sterland transmission line. No other lost time injuries were reported for any work on the network.
ATL Trend 99/00 00/01 01/02 02/03 03/04 Employees 6.9 10.9 9.7 7.3 18.6 Electrical Network N/A N/A 16 0 33.7 Contractors
Note: The increase in TransGrid‟s ATL rate is mainly due to two back injuries and a fractured ankle (total of 98 days for the three incidents).
The high ATL rate for contractors was due to a fractured leg and amputated finger which resulted in 31 days and 65 days away from work respectively. The third incident involved a painful elbow with 5 days lost time.
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Transmission Network Performance
BUSH FIRE RISK MANAGEMENT TransGrid‟s Bush Fire Risk Management Plan (Revision 2) is published on TransGrid‟s website. The plan was subject to an external audit and found to comply with the requirements of the Electricity Supply (Safety and Network Management) Regulation 2002 in relation to TransGrid‟s transmission network assets. The audit report is discussed below. TransGrid‟s network performed very well during the 2003-2004 reporting period, no bushfires were ignited by any of the high voltage assets. The following table summarises the performance outcomes, and compares these to the previous years performance:
Indicator 2002-2003 2003-2004 Performance Performance Target Actual Target Actual Network Assets Inspected in 100 % 100 % 100 % 100 % Bush Fire Prone Areas Outstanding Network Risk Defects in Bush Fire Prone Nil Nil Nil Nil Areas Fires where it appears ignition may have been Nil One (*) Nil Nil (**) caused by network assets
(*) A single incident occurred on 17th November 2002 that although technically not an ignition of a bush fire did cause a crop fire. The incident was the failure of an insulator on transmission line number 99M, a 132kV line between Yass and Murrumburrah. This resulted in a dropped conductor, the resultant arcing igniting the fire. The insulators were 1982 vintage porcelain discs of Chinese origin and only a small number existed on TransGrid‟s Network. The insulators were tested, found to be in substandard condition and have subsequently been replaced. This manufacture of insulator no longer exists on TransGrid‟s network.
(**) A single incident occurred on 6th February 2004 that did not result in an ignition of a bush fire, or fire of any kind, however it was a line trip due to flashover to a tree and therefore had the potential to ignite a fire. The tree responsible was identified for maintenance. However, it grew faster than anticipated due to local environmental conditions. This caused the 02 transmission line between Yass and Upper Tumut Switching Station to trip and lock out. The protection operated correctly extinguishing the arc and isolating the line. Process improvements have been implemented locally that will ensure an incident of this kind will not be repeated, and TransGrid
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Transmission Network Performance
wide improvements in easement management are currently being developed.
Formal reviews are carried out for all major incidents involving Network assets. These reviews are conducted under terms of reference set by the relevant General Manager or the Executive.
TransGrid has carried out reviews of the major bush fire emergencies that have impacted the NSW network in the last decade. These reports are:
. “Review of System Operation and Performance during the N.S.W. Bush Fire Emergency January 1994” issued 11/4/94.
. “Review of Network Performance During Bush Fires in December 2001 – January 2003 issued 4/3/02.
. “Investigation into the Impact of Bush Fires on TransGrid‟s Network” 4th-6th December 2002.
These reports covered:
. An assessment of system plant and performance
. A review of operating practices, emergency response procedures, and design and maintenance standards; and
. The identification of strategies with respect to easement or site management to enhance reliability of the network in future or similar bush fires.
Generally the reports concluded that the network exhibited excellent performance during these emergencies. A number of improvements have been implemented as a result of these reviews, which will further enhance network reliability. The Bush Fire Risk Management Plan (Revision 2) was audited as requested by the D-G of the ME&U by Denhine Holdings Pty Ltd and was found to comply with the Regulation in relation to TransGrid‟s transmission network assets (Audit Certificate issued on 28th October 2003).
A number of improvement suggestions were raised in the report for consideration. These included:
. Tower warning signs in the name applicable at the time of construction (e.g. The Electricity Commission of NSW). A strategy has been established to progressively update these signs in the name of TransGrid.
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Transmission Network Performance
. Telephone listings for TransGrid, and cross-referencing to the name ECNSW. Updated listings have been arranged.
. Inspection classification of a line (TL 19) that TransGrid maintains under contract for Delta Electricity. This line has been included in TransGrid‟s standard GM ASA L7 001 -Transmission Line Inspection Classifications.
. Reference to the Australian Inland franchise area is now included in TransGrid‟s Public Electrical Safety Awareness plan.
. Recommendations from the interim report “Investigation into the Impact of Bush Fires on TransGrid‟s Network” 4th-6th December 2002. The report did not identify any further recommendations not covered by previous reports, however the investigating committee implemented some improvements to the protection schemes for 76 (Wallerawang – Sydney South) and 77 (Wallerawang to Ingleburn) lines.
The report also raised the matter of the interpretation of the terms „private lines‟ and „private overhead electricity lines‟ in the Regulation for clarification and direction by the Ministry of Energy and Utilities.
TransGrid provides representation to Bush Fire Management Committees as detailed in Attachment 1 of the Bush Fire Risk Management Plan. All major BFM committees have been attended. At these meetings TransGrid has been providing advice that proposed hazard reduction burns will be reviewed where they may impact our lines and recommendations made to protect assets prior to commencement of burn.
TransGrid has also initiated a process with the NSW Rural Fire Service to utilise TransGrid transmission line easements and access more effectively for bushfire management. A meeting was held with NSW RFS on 16th February to discuss this initiative including Asset Protection and Strategic Protection zone vegetation management options for high voltage transmission lines. As a result of this meeting, TransGrid will participate in the production of RFS Bush Fire Management plans by supplying data from its GIS system. Production of these plans is expected to commence in late 2004.
PUBLIC ELECTRICAL SAFETY AWARENESS CAMPAIGN REPORT TransGrid‟s Public Electrical Safety Awareness Plan is based on a risk assessment of public safety issues. This risk assessment identified eight strategic areas for attention in the Plan:
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Transmission Network Performance
1. Unauthorised access to substations 2. Unauthorised climbing of transmission towers 3. High machinery and extendable plant operating under transmission lines 4. Excavators and earth moving machinery in vicinity of high voltage cables 5. Kite flying and model planes in proximity to transmission lines 6. Fires under or in proximity to transmission lines 7. Crop dusting and aerial surveillance activities 8. Navigable waters under transmission lines TransGrid formed a partnership with Country Energy for 2003 – 2004 to implement joint initiatives for public electrical safety awareness. This included representation at Field Days, printing of stickers and videos with joint logos and specific training with Emergency services. In addition to this, TransGrid developed and implemented other specific initiatives to address priority issues identified in the Risk Assessment.
The TransGrid Public Electrical Safety Awareness Plan was revised to cover a five- year period from 2004 – 2009. An Action Plan is currently being developed to address issues identified as Priority 1 which are to commence and/or be completed during 2004 – 2005.
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Detailed Financial Performance Projections
Operating Forecasts
The future year targets and the quarterly targets for 2004/05 set out below in following Exhibit are based on the draft ACCC Revenue Determination issued in May 2004. While it is anticipated revenues will be increased in the final determination, this scenario has been used so that the Shareholder (NSW Government) do not overestimate returns from its investment in TransGrid and make decisions on revenue receipts which are over-inflated.
Financial Performance Targets
2003/04 2003/04 2004/05 2005/06 2006/07 2007/08 SCI Target Actual Estimate Estimate Estimate Estimate $M $M $M $M $M $M E.B.I.T. 186.0 203.5 203.5 214.5 228.1 242.4 Operating Profit before Tax 90.3 115.0 96.1 102.3 108.1 117.0 Income Tax Payable 9.6 5.7 17.3 17.6 18.4 18.5 Income Tax Expense 28.6 31.8 34.3 36.5 38.5 41.5 Target Distribution 60.0 70.0 49.4 52.6 55.7 60.4
Target Debt Level 1516.2 1523.6 1577.1 1643.8 1747.5 1932.2
Return on Assets (%) 6.39% 6.57% 5.94% 6.07% 6.18% 6.20% Return on Equity (%) 5.4% 6.30% 4.02% 4.18% 4.31% 4.55% Capital Structure1 56.9% 50.1% 50.4% 50.8% 51.6% 53.5% Earnings Protection2 1.94 2.30 1.90 1.91 1.90 1.93
Note (1) - Capital Structure = Debt to Debt plus Equity (2) - Earnings Protection = Times Interest Cover
Quarterly Financial Performance Targets
September December March June 2004 2004 2005 2005 YTD YTD YTD YTD $M $M $M $M E.B.I.T. 53.0 103.3 154.7 203.5 Operating Profit before Income Tax 20.4 46.3 72.9 96.1 Income Tax Expense 7.4 16.4 25.7 34.3 Operating Profit after Income Tax 13.0 29.9 47.2 61.8
Target Debt Level 1573.0 1573.0 1573.0 1577.1 Capital Expenditure 38.7 72.0 102.1 161.4
Target Distribution 35.0 70.0 70.0 70.0
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Detailed Financial Performance Projections
Capital Financing Arrangements
TransGrid's Capital Works Program is a combination of the various component requirements. Some of the projects fulfil dual roles catering for renewal of assets as well as addressing growth requirements. Exhibit 3.2 allocates each project to the area considered the most responsible for creating the need for the project.
Capital Expenditure Projections
Component of 2003/04 2003/04 2004/05 2005/06 2006/07 2007/08 Capital Works SCI Forecast Estimate Estimate Estimate Estimate $000 $000 $000 $000 $000 $000 Program by Component of Works Growth Requirements 136,826 171,676 51,161 123,816 186,961 300,970 Renewal of Assets 95,080 86,078 69,610 73,813 69,334 50,378 Operational 28,347 29,018 40,654 38,168 30,152 34,696 Requirements Total 260,253 286,772 161,425 235,797 286,447 386,044
Program by Source of Funds Budget Funding ------Borrowings 127,400 124,400 53,000 66,000 93,300 169,900 Internal Funding* 132,853 162,372 108,425 169,797 193,147 216,144 Total 260,253 286,772 161,425 235,797 286,447 386,044
*The fluctuation in internal funding reflects the variable arrangements in regards to the collection and refund of National Market Settlements Residues.
Long Term Financial Forecasts
The development of long-term financial forecasts is difficult as TransGrid‟s revenue is regulated on a 5-year cycle and the ACCC methodology has changed over the last 5-year period creating significant uncertainty as to the likely outcomes beyond 2009. However, for completeness, a ten- year forecast has been prepared on the basis that the ACCC Draft Decision is in fact in place for the full 10-years.
The 10-year tables are presented below.
It should be noted that all financial estimates beyond 2004/05 will alter significantly with the introduction of new Accounting Standards from 1 July 2005.
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Detailed Financial Performance Projections
Operating Assumptions and Projected Performance
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 Assumptions
Inflation % 2.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Regulated % 4.6 6.1 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 Revenue Change Interest Rates % 6.3 6.6 6.8 7.2 7.2 7.2 7.2 7.2 7.2 7.2
Operating Result Regulated $M 407.8 432.8 458.6 486.2 515.4 546.3 579.1 613.8 650.5 689.4 Revenue Unregulated $M 19.9 10.5 10.8 11.8 12.1 12.7 13.1 13.6 14.1 14.6 Revenue Other Revenue $M 10.3 13.2 9.9 9.8 10.1 10.0 10.3 10.6 11.0 11.4 Significant Item $M 14.7 Total Revenue $M 452.7 456.5 479.3 507.8 537.6 569.0 602.5 638.0 675.6 715.4
Operations and $M 131.4 124.9 130.5 137.7 144.8 152.5 160.3 168.6 177.6 186.8 Maintenance Depreciation $M 117.8 128.1 134.3 142.0 150.4 158.5 166.0 174.1 182.1 190.3 Financing Charges $M 88.5 107.4 112.2 120.0 125.4 132.5 141.3 152.3 160.2 162.8 Total $M 337.7 360.4 377.0 399.7 420.6 443.5 467.6 495.0 519.9 539.9 Expenditure
Operating Result $M 115.0 96.1 102.3 108.1 117.0 125.5 134.9 143.0 155.7 175.5
Tax $M 31.8 34.3 36.5 38.5 41.5 43.9 47.1 49.8 54.2 60.7
Dividend $M 70.0 49.4 52.6 55.7 60.4 65.3 70.3 74.6 81.2 91.8
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Detailed Financial Performance Projections
Projected Balance Sheet
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
Assets Plant and $M 3,247.2 3,306.7 3,434.7 3,606.7 3,871.6 4,044.9 4,162.3 4,272.5 4,375.5 4,471.1 Equipment Receivables $M 62.2 75.8 81.5 83.8 80.6 85.3 90.4 95.7 101.3 107.3 Inventories $M 23.5 32.5 33.1 34.3 36.1 38.7 40.4 41.6 42.7 43.8 Other $M 50.5 50.6 51.7 53.1 54.3 54.9 55.6 55.5 56.1 55.6 $M 3,383.4 3,465.6 3,601.0 3,777.9 4,042.6 4,223.8 4,348.7 4,465.3 4,575.6 4,677.8
Liabilities Creditors $M 68.3 70.7 73.2 75.8 78.4 81.2 84.0 86.9 90.0 93.1 Provisions $M 239.1 252.9 279.4 308.4 341.5 373.5 408.2 436.2 469.1 500.1 Debt $M 1,523.6 1,577.1 1,643.8 1,747.5 1,932.2 2,030.5 2,066.9 2,099.7 2,118.5 2,127.8 Other $M 36.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 $M 1,867.0 1,910.7 2,006.4 2,141.7 2,362.1 2,495.2 2,569.1 2,632.8 2,687.6 2,731.0
Net Assets $M 1,516.4 1,554.9 1,594.6 1,636.2 1,680.5 1,728.6 1,779.6 1,832.5 1,888.0 1,946.8
Equity Asset Revaluation $M 869.2 895.4 921.9 949.6 978.8 1,010.6 1,044.0 1,078.3 1,113.5 1,149.3 Retained Earnings $M 62.3 74.6 87.8 101.7 116.8 133.1 150.7 169.3 189.6 212.6 Capital $M 584.9 584.9 584.9 584.9 584.9 584.9 584.9 584.9 584.9 584.9 $M 1,516.4 1,554.9 1,594.6 1,636.2 1,680.5 1,728.6 1,779.6 1,832.5 1,888.0 1,946.8
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Detailed Financial Performance Projections
Financial Performance Indicators
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
Balance Sheet Ratios Return on Assets % 6.6 5.9 6.1 6.2 6.2 6.2 6.4 6.7 7.0 7.3 Return on Equity % 6.3 4.0 4.2 4.3 4.6 4.8 5.0 5.2 5.5 6.0 Gearing Ratio % 50.1 50.4 50.8 51.6 53.5 54.0 53.7 53.4 52.9 52.2 Current Liquidity ratio % 34.2 44.0 44.1 42.9 39.4 39.4 39.4 39.6 39.4 39.0 Dividend to Equity % 4.6 3.2 3.3 3.4 3.6 3.8 4.0 4.1 4.3 4.7
Coverage Ratios EBIT Interest Coverage 2.3 1.9 1.9 1.9 1.9 1.9 2.0 1.9 2.0 2.1 EBITDA Interest Coverage 3.6 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.2
Cash Flow Adequacy Ratios Funds from Operations/Debt % 14.7 10.7 13.0 13.2 13.1 12.7 13.3 13.5 14.2 14.9 Free Operating Cash % 34.5 20.4 27.1 29.4 32.8 27.3 25.1 25.1 25.8 26.4 Flow/Debt
Profitability Ratios EBIT/ Revenue % 46.4 44.6 44.7 44.9 45.1 45.4 45.8 46.3 46.8 47.3 EBITDA/Revenue % 73.3 72.6 72.8 72.9 73.1 73.2 73.4 73.6 73.7 73.9
Capital Structure Long Term Debt % 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 89.5 Debt/Capitalisation % 100.5 101.4 103.1 106.8 115.0 117.5 116.1 114.6 112.2 109.3
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