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Page 1
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Submission on Network Regulatory Submission on Network Regulatory Arrangements 2004 Arrangements 2004 -- 0909
Joe FlynnJoe FlynnManaging DirectorManaging Director
Australian InlandAustralian Inland
Page 2
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Acknowledgement
Thank you to our Customer Consultative Group Members who have taken three days out of their schedule to make this journey to Sydney for this presentation.
Michael Bruggy & Sue Andrews
Page 3
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
35 mins
Agenda1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusion
7. Discussion &Questions
Page 4
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Page 5
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Remote Location
Energy Australia
Integral Energy
Country Energy
A C T
Australian Inland
Page 6
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Long Lines, Low Density, Low GrowthCustomers
20% of NSW or 155,000 square kilometers
Less than 20,000 customers = 2 customers / network km
(Relative density: CE 200% more, EA & IE approx 1200% more)
Many small communities less than 1,000 population
Repair crews can travel 350 km to locate faults – more than a trip from Sydney to Canberra
Nature of Rural V City NetworksCountry: Cheap unreliable network shared by few customers
City: Expensive reliable network shared by many
Growth 1.5% per year over last 10 years
One large mine in Broken Hill consumes 33% energy
Impact of mining – flat outlook assumed
Page 7
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Page 8
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Current Pricing IssuesPricing cross subsidies
Some below cost tariffs
Urban subsidise remote
Business subsidise domestic
Increases since 1995Transmission increases passed through
AI chosen no real network distribution increases.
CompetitiveBelow comparable Victoria and South Australian
Total Monthly Bill
Business $82Residential $53*450 kWh/mth
Page 9
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Current Bill
Average Domestic Bill Components
30%
14%
56%
Distribution
Transmission
Retail
Network Charge = Distribution + Transmission
ONLY Distribution Costs being reviewed - 30% of total bill
Page 10
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Operating Expenditure
Operating Expenditure - Current
6,000
7,000
8,000
9,000
10,000
11,000
12,000
99/00 00/01 01/02 02/03 03/04
Financial year
Ope
ratin
g Ex
pend
iture
($,0
00s) Actual
IPART F'cast
Initial level : unsustainable and unrepresentative
increased focus on maintenance
Increased asset management and compliance costs
Page 11
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Capital Expenditure
Capital Expenditure - Current
0
1,000
2,000
3,000
4,000
5,000
6,000
99/00 00/01 01/02 02/03 03/04
Financial year
Cape
x ($
'000
s)
ActualIPART F'cast
Historically : pursued more profitable Customer Contribution work
Now: Targeting reliability improvements - by increased monitoring, protection and switching systems
Page 12
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Energy Sales
Sales Growth - Current
100%
105%
110%
115%
120%
99/00 00/01 01/02 02/03 03/04
Financial Year
% G
row
th in
Tot
al M
Wh
IPART f'castActual
Drought
impact
Highly sensitive to One Mining Customer (33%)
Generally low annual growth in Far West of New South Wales: 1.5% pa
Impact of Drought (8% increase)
Page 13
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Drought Economic Impact
Worst drought on record
March 2003 the lowest Darling inflows ever
Catastrophic impacts by mid to late 2003 if no rain:
Water quality (salinity) & safety (organic) at risk
Business / Agriculture have suffered
Recovery from drought will be prolonged
Page 14
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Revenue Shortfall
Network Revenue - Current
9,000
11,000
13,000
15,000
17,000
19,000
21,000
99/00 00/01 01/02 02/03 03/04
Financial year
Reve
nue
('000
s)
RequiredAllowedActual
Sustained under recovery
Current: 23% or $3.6m shortfall
Constrains sustainability, working capital and Shareholder dividend
Page 15
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Page 16
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Commercial NeedsGoal: Pursuit of an efficient and sustainable business
Reliable Quality
Compliant
Competitively priced
Maintaining & Investing for future
Building Blocks or Drivers of PricingA. Network asset valuation
B. Weighted average cost of capital
C. Annual operating costs
D. Annual capital expenditure
E. Annual sales growth
Page 17
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Building Block A: Asset Value
A. Asset Base $63.8mAccepting recommended roll forward methodology
o Based on best information to date:
o 1995 assessment +CPI + Investment – depreciation - disposals
Commenced implementation of an asset management system including
o Define desired performance and plan to deliver
o Audit of network assets
o Customer owned V Network ownership issues will emerge
o Impact on valuation? question for the future
Page 18
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Building Block B: WACC
B. Weighted Average Cost of Capital (WACC) 7.8%Cost of capital including business and industry risks
Page 19
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Building Block C: Operating Costs
Operating Expenditure
6,0007,0008,0009,000
10,00011,00012,000
99/00
01/02
03/04
05/06
07/08
Financial year
Ope
ratin
g Ex
pend
iture
($,0
00s) Actual / Forecast
IPART F'cast
Historical: Non typical base year; Priority with Customer funded works resulted in low opex
Current: Increasing cost of compliance & Improved reliability
Future: 1.5% pa productivity improvement
Page 20
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Building Block D: Capital Expenditure
Capital Expenditure
01,0002,0003,0004,0005,0006,000
99/0
0
00/0
1
01/0
2
02/0
3
03/0
4
04/0
5
05/0
6
06/0
7
07/0
8
08/0
9
Financial year
Cap
ex ($
'000
s)
Actual / ForecastIPART F'cast
Historical: reactive
Now: Targeted reliability improvement – SCADA, Maintenance Mgmt
Future: Targeted 25% Improvement in Customer Minutes Off Supply
Page 21
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Building Block E: Sales Consumption
Sales Growth
100%110%120%130%140%150%160%
99/0
0
00/0
1
01/0
2
02/0
3
03/0
4
04/0
5
05/0
6
06/0
7
07/0
8
08/0
9
Financial Year
% G
row
th in
Tot
al M
Wh
IPART f'castActualF'cast lowF'cast MedF'cast Hi
Post Drought: 3% reduction forecast
1.5% pa growth long term trend
2.25% excluding Mine; (33% of energy)
Page 22
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Building Blocks Total: - Increasing Revenue Shortfall
Network Revenue
9,00011,00013,00015,00017,00019,00021,000
99/0
0
00/0
1
01/0
2
02/0
3
03/0
4
04/0
5
05/0
6
06/0
7
07/0
8
08/0
9
Financial year
Reve
nue
('000
s)RequiredAllowedActual
Required revenue increases from $15.6m to $19.4 m in 04/05
Total revenue shortfall (04/05 Required – Actual): $7.4m
Page 23
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Page 24
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Compliant - Alignment with CodeRevenue sufficiency
Recovery of $7.4m revenue needed
Safety NEVER has and NEVER will be compromised
Business sustainabilityRevenue gaps needs to be addressed
Reliability must Improve
15 year Asset Management Plan developed by Dec 03 to define required required maintenance and investment
EquityAbsorbing price impacts – reasonable balance between community, company & government. Further discussion necessary.
Pricing cross subsidies to be addressed in new tariffs
Page 25
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Service LevelsForecast Improvements
SCADA to improve monitoring and response times
Voltage control & switching upgrades
25% improvement in reliability for CustomerSCADA is estimated to provide a 13% reduction in customer outage minutes for rural customers
Target to reduce outage minutes by 10% because of improvements in protection systems
Pursue ongoing improvements
Page 26
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Summary - Drivers for Price ChangesContinually pursue efficiency & eliminate “gold plating”:
Board ensure weights on management to improve: Optimisecapital investment and operating expenses
o 1.5% pa operating productivity
o Capital investment – short term investment in monitoring, protection and switching then 50% reduction
15 year Asset Management Plan – define performance, maintenance and investment
Historical under recovery on asset valueUnder recovery increasing due to …
Improving reliability requires targeted maintenance and capital investment.
Maintaining compliance
Page 27
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
ConcernsPrice Impacts
On top of Drought & marginal economic outlook
Intense Board discussion - Community ability to absorb price increases. Maintain a balanced community/commercial view.
Transmission ChargesDoubled in 2002 to $7.3m or 14% of Customer bill
Economic “location” theory smart for assets and penalisingremote communities
Strong case for Discounted Cash Flow valuation not ODV
Service LevelsEmerging from under recovery & reliability not optomised
Reliability MUST improve & Customers MUST see benefits
Page 28
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Page 29
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Options to Bridge the Revenue Shortfall1. One off increase, full recovery in 2004
Method:
o Seek full revenue increase in 04/05
Impact:
o 18.2% (50 cents /day) increase on total bill for average domestic customer.
Conclusion:
o Board concerns on community impact;
o Board view of balancing commercial and community, deems this unacceptable.
Page 30
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Options to Bridge the Revenue Shortfall2. Smoothed recovery over 5 years 2004 to 2009.
Method:
o Equal increases staged over five years to recoup full revenue in Net Present Value terms.
Impact:
o 7% increase every year for 5 years.
o Overshoot target by $8m in 2009
Conclusion:
o Overshoot demands 30% revenue correction in 2009
o Board concerns on community impact;
o Board view of balancing commercial and community, deems this unacceptable.
Page 31
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Options to Bridge the Revenue Shortfall3. Achieve target revenue by 2009
Mehod:
o Increase total bill by 6.9% then 2.9% pa achieving 18.2% by 2009
Impact:
o $4.80 per month in first year then $2 per month for 4 years.
Conclusion:
o Acceptable for Customer.
o Reduced Shareholder dividends of $11.7m over 5 years!
o Further discussion on acceptability with Shareholder
o Preferred Option
Page 32
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Options to Bridge the Revenue Shortfall
Revenue Recovery Options
10,000
15,000
20,000
25,000
2003
/0420
04/05
2005
/0620
06/07
2007
/0820
08/09
Financial Year
Tota
l Net
wor
k re
venu
e
1. One Off2. Smoothed3. Five Yr Target
Page 33
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Page 34
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Price Impacts – Total Bill Medium Domestic increase : $1.20/week 2004
Medium Business increase: $1.50/week Excludes annual CPI inflation adjustment
KWh / Month 2004 2005 2006 2007 2008Low 400 $48.39 $3.42 $1.45 $1.45 $1.45 $1.45Med 600 $70.23 $4.86 $2.05 $2.05 $2.05 $2.05High 800 $92.07 $6.29 $2.66 $2.66 $2.66 $2.66
kWh/Month 2004 2005 2006 2007 2008Low 50 $19.48 $1.71 $0.72 $0.72 $0.72 $0.72
Med 450 $81.12 $5.83 $2.47 $2.47 $2.47 $2.47High 5000 $744.59 $52.77 $22.33 $22.33 $22.33 $22.33
Current Monthly Bill
Increase per month - Business
Increase per month - Domestic
Revenue forgone by delaying increase from 1 to 5 years is $11.7 m borneby Shareholder in reduced EBIT.
Page 35
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
ConclusionsRemain sensitive to customer bills
Graduate the proposed increase over 5 years
Pursue improved Transmission pricing
Pursue sustainable businessEconomic sufficiency is an imperative
Improve supply quality and reliabilityImprovements to customers MUST be delivered
Balance all stakeholder needsNeed 5 year determination period to spread impact and provide certainty
Meet objectives of customers, shareholders, the public
Page 36
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Page 37
1. Introduction
2. Recent Experience
3. Business Model
4. Key Issues
5. Options
6. Conclusions
7. Discussion &Questions
Public Presentation 11 April 2003
Discussion & Questions