5. options arrangements 2004 - 09 joe flynn managing ......fless than 20,000 customers = 2 customers...

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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



35 mins

Agenda1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusion


1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



Remote Location

Energy Australia

Integral Energy

Country Energy

A C T

Australian Inland

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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)

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



Building Block B: WACC

B. Weighted Average Cost of Capital (WACC) 7.8%Cost of capital including business and industry risks

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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)

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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.

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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.

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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.

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



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

1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



1. Introduction


3. Business Model

4. Key Issues

5. Options

6. Conclusions



Discussion & Questions

5. options arrangements 2004 - 09 joe flynn managing ......fless than 20,000 customers = 2 customers...

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