Jemena Electricity Networks. Cost Allocation Method

Transcription

1 Final decision Jemena Electricity Networks Cost Allocation Method February 2010 i 1

2 Commonwealth of Australia 2010 This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be reproduced without permission of the Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should be addressed to the Director Publishing, Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT Inquiries about the currency of these guidelines should be addressed to: Australian Energy Regulator GPO Box 520 Melbourne Vic 3001 Tel: (03) Fax: (03)

3 Contents Shortened forms... iv 1 Introduction Summary Background Process and NER requirements NER requirements Assessment process Details of Jemena Electricity Network s CAM Direct cost allocation Shared cost allocation Consistency with the guidelines Decision... 6 Appendix A: Jemena Electricity Network s CAM... 7 Appendix B: McGrathNicol s Review of Jemena Electricity Network s CAM... 8 Appendix C: clause by clause comparison of Jemena Electricity Network s CAM with the requirements of the Guidelines... 9 iiii

4 Shortened forms AER CAM Capex DNSP ESC JEN NEL NEM NER Opex Australian Energy Regulator Cost allocation method Capital expenditure Distribution Network Service Provider Essential Services Commission Jemena Electricity Network National Electricity Law National Electricity Market National Electricity Rules Operating and maintenance expenditure iv

5 1 Introduction 1.1 Summary The Australian Energy Regulator (AER) is required under the National Electricity Rules (NER) to assess the cost allocation methods of electricity distribution businesses. McGrathNicol Corporate Advisory (McGrathNicol) was engaged by the AER to provide expert independent advice on the compliance of Jemena Electricity Network s (JEN s) proposed CAM with the requirements of the National Electricity Rules (NER) and the AER s Victorian Cost Allocation Guidelines (the Guidelines). McGrathNicol concluded that the CAM appeared to be compliant with its requirements. The AER has assessed JEN s proposed CAM, taking account of McGrathNicol s independent advice, and has determined that it: is in accordance with the requirements of the National Electricity Law (NEL) and NER; and gives effect to and is consistent with the Guidelines. Accordingly, the AER has approved JEN s proposed CAM under clause (c) of the NER. 1.2 Background The AER is responsible for regulating the revenues of electricity distribution businesses in the National Electricity Market in accordance with the NER and NEL. Chapter 6 of the NER deals with the economic regulation of electricity distribution services. Cost allocation concerns the direct attribution of a regulated business s costs, or the allocation of shared costs, between the different categories of distribution services and other non-regulated sections of the business. The different categories are defined in the NEL and the NER. The CAM allocates costs between: direct control services; comprising of: standard control services, and alternative control services; negotiated distribution services; and non-distribution or unregulated services. 1

6 The Guidelines only deal with cost attribution down to the level of services, not individual prices for different categories of services. Separate regulatory requirements govern the allocation of costs for pricing purposes. Effective cost allocation has an important role to play in promoting the national electricity objective which is stated in section 7 of the NEL, as follows: The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to- (a) price, quality, safety, reliability and security of supply of electricity; and (b) the reliability, safety and security of the national electricity system. Effective cost allocation requirements support the national electricity objective by: Promoting the appropriate allocation of costs between direct control distribution services, alternative control distribution services and non-distribution services to reflect the consumption or utilisation of a resource or service by a business, or part of a business. Preventing cross-subsidisation between direct (standard and alternative), negotiated and non-distribution services and the prices paid by end customers for any of these services being inappropriately inflated or discounted. Making the treatment of direct and shared costs transparent so as to ensure that only efficient costs relevant to the provision of a service are passed through to customers. Promoting consistency and comparability in the provision and reporting of financial information over time in relation to the various services. Each electricity distribution business is responsible for developing the detailed principles and policies for attributing costs to, or allocating costs between, the categories of distribution services that it provides. These detailed principles and policies must be included in the proposed CAM that it submits to the AER for approval. 2

7 2 Process and NER requirements 2.1 NER requirements Clause (a) of the NER stipulates that electricity distribution businesses must submit to the AER a CAM together with the first building block proposal to be submitted by the provider after the commencement of Chapter 6. JEN submitted its CAM to the AER for approval on 28 August JEN also submitted a CAM to the AER with its building block proposal on 30 November Under clause (d) of the NER, the AER must decide to approve or refuse to approve a CAM submitted to it within 6 months of its submission. The NER requires that the CAM proposed by each electricity distribution business must give effect to and be consistent with the Guidelines. For Victorian electricity distribution businesses the NER also specifies that the AER must not approve the CAM unless it allows effective comparison of historical and forecast cost allocation between the period to which the ESC distribution pricing determination applies and later regulatory control periods. If this requirement is not satisfied the AER may, subject to the relevant Cost Allocation Guidelines, refuse to approve the Cost Allocation Method if it differs from the method previously used by the Victorian Distribution Network Service Provider. The AER has assessed the compliance of JEN s CAM with the requirements of the Guidelines and the NER. 2.2 Assessment process The AER contracted McGrathNicol to provide expert advice on the CAM s compliance with the requirements of the Guidelines and the NER. McGrathNicol has extensive experience in the assessment of CAMs having reviewed the CAMs of all Australian electricity distribution businesses outside of Victoria. McGrathNicol has also reviewed the CAMs of all the transmission network service providers within the National Electricity Market. The AER reviewed JEN s CAM having regard to McGrathNicol s advice. 3

8 2.3 Details of Jemena Electricity Network s CAM JEN is part of the Jemena group that operates and owns a number of large energy infrastructure assets in Australia. Energy infrastructure assets that Jemena wholly owns include Jemena Gas Networks, the Queensland Gas Pipeline and the Eastern Gas Pipeline. Energy assets that Jemena operates include ActewAGL s electricity and gas distribution networks, MutliNet s gas network and UED s electricity distribution network. Jemena utilises a SAP Enterprise Resource Planning corporate business system to capture, control and report its costs by general ledger cost account within cost centres for all of these networks Direct cost allocation Jemena uses SAP enterprise resource planning project accounting to track projects via unique client project codes. These project codes are used to capture direct costs associated with individual projects. JEN directly allocates these costs to the categories of distribution services that it provides. Specifically, the SAP system enables JAM to capture and report project costs by work breakdown structure (WBS) element. Each WBS element corresponds to an activity type, which relates to the nature of the works carried out for capital, operating and maintenance activities. The activity type also identifies the type of service being provided and is therefore used to directly assign costs to standard control, alternative control, negotiated distribution and unregulated services. This cost allocation approach is appropriate for allocating costs directly to the categories of distribution services that JEN provides Shared cost allocation Where costs are shared across the different categories of distribution services, JEN allocates these costs in accordance with the proportion of direct costs that have already been allocated to these services. Allocation of shared costs in accordance with the proportion of direct costs is a common shared cost allocation approach that is applied by a number of other electricity network businesses in their CAMs. Table 6-3 of JEN s CAM outlines the shared costs that are allocated across distribution services. These costs are allocated across all of the assets that Jemena owns and operates in accordance with Jemena s Whole Of Business Cost Allocation (WOBCA) methodology. Based on the AER s review of Jemena s CAM a portion of these costs are attributable to the distribution services that JEN provides, and as such they are allocated across these distribution services in Jemena s CAM. The cost allocation guidelines refer only to the allocation of costs between the categories of distribution services that Jemena provides. As the WOBCA methodology does not allocate costs between the different services that JEN provides, the review of WOBCA allocations is outside of the scope of the CAM. The AER will review the appropriateness of the WOBCA allocations to 4

9 the different Jemena businesses as part of the AER s future regulatory determinations for JEN and Jemena Gas Networks Consistency with the guidelines McGrathNicol s review of JEN s CAM concluded that: The proposed CAM appears to be compliant with the AER s Victorian Cost Allocation Guidelines. The proposed CAM appears to be compliant with the Cost Allocation Principles in clause 6A.15.2 of the NER. The proposed CAM appears to be sufficiently detailed so as to enable the AER to replicate JEN s reported outcomes. The proposed CAM appears to be consistent with the Distribution Ring-Fencing Guidelines. The proposed CAM appears to be compliant with the requirements of clause of the NER requiring effective comparison of historic and forecast cost allocation A copy of McGrathNicol s final report on the CAM is attached at Appendix B. The AER agrees with McGrathNicol s assessment of JEN s CAM. Appendix C contains a clause by clause analysis of the CAM with the requirements of the Guidelines. No inconsistencies with the requirements of the Guidelines or the NER have been identified. 5

10 3 Decision The AER considers that the CAM proposed by JEN gives effect to and is consistent with the Guidelines and the NER. The AER therefore approves the CAM proposed by JEN under clause (c) of the NER. 6

11 Appendix A: Jemena Electricity Network s CAM JEN s CAM is attached as a separate document. Electronic copies are available at 7

12 Appendix B: McGrathNicol s Review of Jemena Electricity Network s CAM McGrathNicol s Review of JEN s Cost Allocation Method is attached as a separate document. Electronic copies are available at 8

13 Appendix C: clause by clause comparison of Jemena Electricity Network s CAM with the requirements of the Guidelines Clause 3.2 of the AER s Cost Allocation Guidelines (1) A version history and date of issue for the document; Relevant sections of JEN s CAM Cover page Findings Compliant: Jemena has provided its initial version of the CAM. The date of issue is on the cover page. (2) A statement of the nature, scope and purpose of the document and the way in which it is to be used by the DNSP; 3. Nature Scope and Purpose of the CAM Compliant: JEN has provided a statement of the nature, scope and purpose of the CAM and the way in which JEN will apply it. The nature, scope and purpose is appropriate and adequately described. JEN has stated that it will apply the CAM in a manner which is consistent with the NER and the cost allocation guidelines. 9

14 Clause 3.2 of the AER s Cost Allocation Guidelines (3) Details of the accountabilities within the DNSP for the document in order to set out clearly: A. the DNSP s commitment to implementing the Cost Allocation Method; and B. responsibilities within the DNSP for updating, maintaining and applying the Cost Allocation Method and for internally monitoring and reporting on its application. Relevant sections of JEN s CAM 6. Accountabilities and responsibilities Findings Compliant: JEN states that it is committed to the ongoing application of the CAM. Responsibility for the application of the CAM rests with JEN s General Manager, Finance, Infrastructure and Investments. (4) A description of the DNSP s corporate and operational structure to enable the AER to understand how the DNSP is organised to provide its distribution services; Appendix 1, 2 & 3 Compliant: JEN has provided diagrams outlining its corporate and operational structure in enough detail to enable the AER to understand how JEN is organised to provide its distribution services. (5) A specification of the categories of distribution services that the DNSP provides to which costs are to be attributed or allocated and the types of persons to whom those services are provided; 9. Distribution services Compliant: JEN has provided an outline of the distribution services that it provides. Jemena states that it will approach the AER to amend its CAM if the service classifications in the CAM differ from the final service classifications. 10

15 Clause 3.2 of the AER s Cost Allocation Guidelines (6) The DNSP s detailed principles and policies to be used for attributing costs directly to, or allocating costs between, categories of distribution services that meet the requirements of clause 2.2 of the Guidelines. For the avoidance of doubt, this includes the attribution or allocation of costs relating to any related party transactions; Relevant sections of JEN s CAM 6 Cost allocation principles and policies Findings Section 6 of JEN s CAM outlines the principles and policies that JEN uses to allocate costs directly to or between the categories of distribution services that they provide. The description of the principles and policies is thorough. These principles and policies are consistent with the cost allocation guideline requirements of DNSP s principles and policies. (7) A description of how the DNSP will maintain records of the attribution or allocation of costs to, or between, categories of distribution services to enable any such attribution or allocation to be: A. demonstrated to the AER, in accordance with clause 5.2 of these Guidelines; and B. audited or otherwise verified by a third party, including the AER, as required. 7 Records maintenance Compliant: A. JEN has outlined how it will maintain records to demonstrate to the AER that it has allocated costs in accordance with clause 5.2 of the cost allocation guidelines. B. JEN has outlined how it will maintain records that can be audited or otherwise verified by a third party as required. (8) A description of how the DNSP will monitor its compliance with the CAM and the Guidelines; 8 Compliance monitoring Compliant: JEN states that it will conduct internal audits as well as engage an independent auditor to review the application of the CAM. 11

16 Clause 3.2 of the AER s Cost Allocation Guidelines (9) Details of the proposed date on which the CAM will commence, having regard for clause 4.1(d) of these Guidelines. Relevant sections of JEN s CAM 4. Accountabilities and responsibilities Findings Compliant: The CAM will take affect on 1 January 2011 which is consistent with the requirements of the NER. 12