Australian Energy Market Commission Issues in relation to the Availability and Use of Asset, Expenditure and Related Information for Australian Electricity and Gas Distribution Businesses August 2009 This report contains 124 pages Network Advisory Services Issues in relation to the Availability and Use of Asset, Expenditure and Related Information for Australian Electricity and Gas Distribution Businesses August 2009 Contents 1 Executive Summary 2 2 Introduction 7 3 Australian Electricity and Gas Distribution Businesses 12 4 Asset Age Profile Information 23 5 Available Expenditure Information 46 6 Factors Affecting Quality and Comparability of Historic Expenditure Information 70 7 Expenditure Drivers and Interactions 84 8 Other Options Available to AER for Sourcing Information 97 AEMC09 TFP Report FINAL 110809 1 Network Advisory Services Issues in relation to the Availability and Use of Asset, Expenditure and Related Information for Australian Electricity and Gas Distribution Businesses August 2009 1 Executive Summary The Australian Energy Market Commission (AEMC) is currently assessing a proposed Rule Change submitted by the Victorian Government, which seeks to allow the Australian Energy Regulator (AER) to use Total Factor Productivity analysis (TFP) as an economic regulation methodology to be applied to electricity distribution businesses. In order to inform its assessment, the AEMC is undertaking a review of the use of TFP for electricity and natural gas distribution businesses and released a Framework and Issues Paper on 12 December 2008, which was followed by a public forum in February 2009. The AEMC has engaged Network Advisory Services to investigate what publicly available expenditure and asset information exists for Australian electricity and gas distribution businesses. In particular, the AEMC is seeking to understand the degree of stability of capital and operating expenditure over time and whether there is a “wall of wire” looming for the Australian electricity and gas distribution sectors by virtue of a need to replace large quantities of ageing assets that are nearing the ends of their useful lives. By agreement with the AEMC, this Report has been prepared on the basis of desktop research of existing publicly available information. Network Advisory Services found that there are various factors that affect the availability, quality and comparability of historic expenditure information for Australian distribution businesses. These factors limit the conclusions that have been drawn in this Report in relation to the stability of capital and operating expenditure over time and the possibility of an impending “wall of wire”. Actual Capital Expenditure: 1950 to the mid 1990s Network Advisory Services has not been able to find an existing publicly available data set of capital expenditure information for the electricity and gas distribution sectors across Australia that could be used either to: • Provide long term data that could be used as the basis for TFP analysis, if such a long term data set was considered necessary or valuable for such a purpose; and • Understand, in specific terms, the profile of investment in Australian electricity and gas distribution infrastructure. While distribution-specific capital expenditure data is available in annual reports for some businesses, such as the State Electricity Commission of Victoria, it is not feasible to prepare a comprehensive data set of capital expenditure information: • For the electricity distribution sector because of the lack of organisational continuity, especially in NSW and Queensland, before the mid to late 1990s and the fact that not all of the formerly vertically integrated electricity monopolies separately reported distribution expenditure information before the mid 1990s. AEMC09 TFP Report FINAL 110809 2 Network Advisory Services Issues in relation to the Availability and Use of Asset, Expenditure and Related Information for Australian Electricity and Gas Distribution Businesses August 2009 Even where information is publicly available it is not always clear on what basis “distribution” data that is available has been prepared; and • For the gas distribution sector given that several distribution systems were privately owned by companies that no longer exist or no longer have an interest in distribution assets and none of the entities that owned gas distribution systems before 1997 still own them today. Actual Capital and Operating Expenditure: Mid 1990s to the present day Network Advisory Services found that capital and operating expenditure information is publicly available for the electricity distribution sector for: NSW and Victoria from 1995-96; South Australia and Tasmania from 1999-00; Queensland and the Northern Territory from 2001-02; and Western Australia and the ACT from 2002-03. Attachment A of this Report provides a detailed breakdown of the specific nature, and source, of the publicly available electricity expenditure information by jurisdiction, for each distribution business, by year. Network Advisory Services found that capital and operating expenditure information is publicly available for the gas distribution sector for: AGL in NSW from 1996-97 and for other NSW distribution businesses from 1999-00; Victorian distribution businesses from 1998; Envestra in South Australia from 1998-99; ActewAGL in the ACT from 1999-00; AlintaGas in Western Australian in 2000; and Queensland distribution businesses from 2000-01, although operating expenditure information is available for Allgas from 1999-00. Attachment B of this Report provides a detailed breakdown of the specific nature, and source, of the publicly available gas expenditure information by jurisdiction, for each distribution business, by year. However, there are a variety of factors that affect the quality and comparability of the available expenditure data, both between distribution businesses, and over time for individual businesses. These factors include that distribution businesses’ expenditure, whether it be forecasts or actual amounts incurred, reflect different: • Categorisations of distribution services – this reflects the fact that not all distribution services are regulated and that not all regulated services are regulated under a building block approach; • Distinctions between distribution and transmission assets – this reflects the flexibility in the definitions in the National Electricity Rules as well as various jurisdiction specific arrangements; • Allocations of shared costs between services – this reflects the flexibility given in the regulatory regime to distribution businesses to develop their own cost allocation methods; AEMC09 TFP Report FINAL 110809 3 Network Advisory Services Issues in relation to the Availability and Use of Asset, Expenditure and Related Information for Australian Electricity and Gas Distribution Businesses August 2009 • Approaches to capitalising and expensing expenditure – this reflects the flexibility given in the regulatory regime to distribution businesses to develop their own capitalisation policies; • Types and scope of works being undertaken by distribution businesses and third parties – this reflects differences in contestability arrangements between jurisdictions; • Treatments, and financial recognitions, of capital contributions – these contributions are included in capital expenditure in some jurisdictions but not others; • Legislative and regulatory obligations – this reflects the needs for distribution systems to be designed to deliver specific service performance outcomes, which differ between jurisdictions; • Operating environments – this reflects such matters as the geographic, topographic and climatic circumstances of distribution businesses, as well as their customer bases and historic development; • Categorisations of expenditure – this reflects the differences between the categories that distribution businesses use internally to report expenditure information as well as differences between the categories that they have been required to report to their regulator; and • Values of reported information – this reflects the difficulty in some cases in verifying whether expenditure has been reported in real or nominal terms and the need to convert expenditure before 1966 from Australian pounds to dollars. Taken together, these factors limit the ability to develop a meaningful data set of comparable historical expenditure and to draw conclusions about the profile of historic expenditure for individual electricity and gas distribution businesses or between electricity and gas distribution businesses. Forecast Capital Expenditure: The present day to 2029 Network Advisory Services has not been able to obtain current capital expenditure forecast information for electricity and gas distribution businesses between the present day and 2029: • Electricity distribution businesses planning reports and regulatory proposals do not typically include long term capital expenditure forecasts. The NSW and Victorian distribution businesses did provide forecast information to their jurisdictional regulators for their respective 2004-05 to 2008-09 and 2006-10 regulatory control periods. However, this information is now outdated and is not supported by detailed publicly available explanations; and AEMC09 TFP Report FINAL 110809 4 Network Advisory Services Issues in relation to the Availability and Use of Asset, Expenditure and Related Information for Australian Electricity and Gas Distribution Businesses August 2009 • The gas distribution businesses’