Decision South Australian Transmission Network Revenue Cap 2003-2007/08 Date: 11 December 2002 File No: Commissioners: C2001/1094 Fels Martin Bhojani McNeill Contents Glossary..........................................................................................................................vi 1 Executive Summary..................................................................................................1 1.1 Introduction.......................................................................................................... 1 1.2 Cost of capital....................................................................................................... 1 1.3 Opening asset base ............................................................................................... 2 1.3.1 Introduction.................................................................................................. 2 1.3.2 Easements..................................................................................................... 2 1.3.3 Interest during construction.......................................................................... 3 1.3.4 Re-admission of previously optimised assets............................................... 3 1.4 Capital expenditure............................................................................................... 4 1.4.1 Overview ...................................................................................................... 4 1.4.2 Treatment of refurbishment.......................................................................... 4 1.4.3 Commission’s assessment of capex.............................................................. 5 1.5 Operating and maintenance expenditure.............................................................. 5 1.5.1 ElectraNet’s application............................................................................... 5 1.5.2 Historical opex.............................................................................................. 6 1.5.3 Commission’s benchmarking of ElectraNet against other TNSPs............... 6 1.5.4 Commission’s assessment of opex............................................................... 7 1.6 Service standards.................................................................................................. 8 1.7 Total allowable revenue ....................................................................................... 8 2 Introduction............................................................................................................10 2.1 Background......................................................................................................... 10 2.2 Structure of this document.................................................................................. 10 2.3 Objectives and principles of the regulatory regime............................................ 11 2.4 Process................................................................................................................ 12 2.5 Overview of ElectraNet’s transmission network................................................ 12 3 The cost of capital...................................................................................................14 3.1 Introduction........................................................................................................ 14 3.2 The post-tax approach........................................................................................ 14 3.3 The capital asset pricing model.......................................................................... 16 3.4 Estimate of the risk-free interest rate.................................................................. 17 3.4.1 Sampling period.......................................................................................... 17 3.4.2 Submissions on the draft decision.............................................................. 17 3.4.3 Commission’s considerations..................................................................... 17 3.4.4 Selection of the bond rate........................................................................... 19 3.4.5 Submissions by interested parties............................................................... 19 3.4.6 Submissions on the draft decision.............................................................. 20 3.4.7 Commission’s considerations..................................................................... 20 3.5 Expected inflation rate........................................................................................ 21 3.5.1 Commission’s considerations..................................................................... 22 3.6 Cost of debt......................................................................................................... 22 3.6.1 Submissions by interested parties............................................................... 23 3.6.2 Submissions on the draft decision.............................................................. 23 South Australian Transmission Network Revenue Cap: Decision i 3.6.3 Commission’s considerations..................................................................... 23 3.7 Debt and equity raising costs.............................................................................. 25 3.7.1 Submissions on the draft decision.............................................................. 25 3.7.2 Commission’s consideration...................................................................... 26 3.8 Market risk premium.......................................................................................... 28 3.8.1 Submissions by interested parties............................................................... 29 3.8.2 Commission’s considerations..................................................................... 29 3.9 Value of franking credits.................................................................................... 30 3.9.1 Submissions by interested parties............................................................... 30 3.9.2 Commission’s considerations..................................................................... 30 3.10 Gearing............................................................................................................... 31 3.10.1 Submissions by interested parties........................................................... 31 3.10.2 Commission’s considerations................................................................. 32 3.11 Betas and risk ..................................................................................................... 33 3.11.1 Submissions by interested parties........................................................... 34 3.11.2 Commission’s considerations................................................................. 36 3.12 Treatment of taxation......................................................................................... 40 3.12.1 Commission’s considerations................................................................. 40 3.13 Conclusion.......................................................................................................... 40 4 Opening asset base.................................................................................................42 4.1 Introduction........................................................................................................ 42 4.2 ElectraNet’s proposal......................................................................................... 42 4.3 Easements........................................................................................................... 42 4.3.1 Jurisdictional valuation............................................................................... 42 4.3.2 ElectraNet’s application............................................................................. 43 4.3.3 Meritec’s review......................................................................................... 43 4.3.4 Submissions from interested parties........................................................... 43 4.3.5 Submissions on the draft decision.............................................................. 44 4.3.6 Submission by ElectraNet in response to the draft decision...................... 44 4.3.7 Commission’s considerations..................................................................... 44 4.4 Interest during construction................................................................................ 45 4.4.1 ElectraNet’s application............................................................................. 45 4.4.2 Meritec review............................................................................................ 45 4.4.3 Commission’s consideration...................................................................... 45 4.5 Optimisation....................................................................................................... 46 4.5.1 ElectraNet’s application............................................................................. 46 4.5.2 Meritec’s review......................................................................................... 46 4.5.3 Submissions by interested parties............................................................... 46 4.5.4 Commission’s consideration...................................................................... 47 4.6 Conclusion.......................................................................................................... 47 5 Capital expenditure