Jemena Electricity Networks (Vic) Ltd

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1 Jemena Elecriciy Neworks (Vic) Ld Elecriciy Disribuion Price Review Regulaory Proposal Price conrol mechanisms Public 30 April 2015

2 TABLE OF CONTENTS TABLE OF CONTENTS ii Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld

3 TABLE OF CONTENTS Abbreviaions... iv Overview... v 1. Conrol mechanisms Price conrol mechanism Direc Conrol Services Demonsraing compliance for conrol services Compliance wih designaed pricing proposal charges Jurisdicional cos recovery scheme Revenue rue-ups Special reamen SCS ransiion Special reamen Type 5 and 6 meering ransiion Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld iii

4 ABBREVIATIONS ABBREVIATIONS ABS AER CROIC DMIS DPPC ESC JCRS JEN NER PFiT PTRM TFiT WACC Ausralian Bureau of Saisics Ausralian Energy Regulaor Cos Recovery Order In Council Demand Managemen Incenive Scheme Designaed Pricing Proposal Charges Essenial Service Commission Jurisdicional Cos Recovery Scheme Jemena Elecriciy Neworks (Vic) Ld Naional Elecriciy Rules Premium Feed-in Tariff Pos Tax Revenue Model Transiional Feed-in Tariff Weighed Average Cos of Capial iv Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld

5 OVERVIEW OVERVIEW 1. This paper oulines how we propose o adjus our prices for each year in he 2016 regulaory period and how we will comply wih he requiremens of he Naional Elecriciy Rules (NER) ha relae o seing prices. Compliance wih he relevan conrol mechanisms [cl (13)] Reporing and compliance wih designaed pricing proposal charges [cl (19)] Reporing and compliance wih jurisdicional scheme amouns [cl (20)] 2. In principle we agree wih he posiions aken in he Ausralian Energy Regulaor s (AER s) framework and approach 1 and propose o clarify he reamen of some iems ha have been flagged as requiring resoluion during he review process. 1 AER, Final Framework and approach for he Vicorian Elecriciy Disribuors, Regulaory conrol period commencing 1 January 2016, 24 Ocober 2014 Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld v

6 APPENDIX M M 2 Public 30 June 2014 Jemena Gas Neworks (NSW) Ld

7 CONTROL MECHANISMS 1 1. CONTROL MECHANISMS 3. To ensure Jemena Elecriciy Neworks (JEN) Ld ses prices in accordance wih he regulaory regime he AER s framework and approach 2 oulines mechanisms under which i conrols he way process are se. For alernaive conrol services JEN mus demonsrae how i will comply wih hese conrols By adhering o he formulae oulined in his aachmen, JEN considers i will mee he requiremen of Cl (13) o demonsrae compliance wih he relevan conrol mechanism. 1.1 PRICE CONTROL MECHANISM DIRECT CONTROL SERVICES 5. The AER s framework and approach ses ou he price conrol mechanism ha JEN s applies o direc conrol service ariffs for each of is services offered in he 2016 regulaory period and adjused annually via an annual pricing proposal. We will submi an iniial pricing proposal following he AER s firs final deerminaion on his regulaory proposal and hen by 30 Sepember of each remaining year in he regulaory period. 6. The AER s price conrol mechanisms include: A revenue cap for sandard conrol services (refer Box 1-1) A revenue cap for ype 5, ype 6 and smar regulaed meering for insallaion, operaion, repair & mainenance, and replacemen and collecion of meer daa, processing and sorage of meer daa, and provision of access o meer daa services (refer o Box 1-4) Price caps for each individual service for alernaive conrol services (refer Box 1-5) REVENUE CAP FOR STANDARD CONTROL SERVICES 7. A revenue cap on sandard conrol services means ha we have no scope o recover more or less from our ariffs han he oal revenue allowed by he AER. Where ariff levels and acual demand levels resul in an under- or over-recovery of revenue in any one year (year -2), we mus adjus he nex year s (year ) ariffs o correc his. 2 3 AER, Final Framework and approach for he Vicorian Elecriciy Disribuors, Regulaory conrol period commencing 1 January 2016, 24 Ocober 2014 NER cl (c)(3). Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld 1

8 1 CONTROL MECHANISMS Box 1-1. Conrol mechanism for sandard conrol services n m * ij qij i=1,...,n and j=1,...,m and =1,...,5 i1 j1 MAR p (1) MAR AAR I T B = 1,2,,5 Where: (2) AAR1 AR1 (1 S ) = 1 (3) AAR AAR 1(1 CPI )(1 X )(1 S ) = 2,3,4,5 Where: MAR is he maximum allowable revenue in year. p ij is he price of componen i of ariff j in year. q * ij is he forecas quaniy of componen i of ariff j in year. AR is he annual smoohed revenue requiremen in he Pos Tax Revenue Model for year. Adjused as necessary o accoun for any difference beween acual inflaion and esimaed inflaion. AAR is he adjused annual smoohed revenue requiremen for year. I T B CPI X S is he sum of incenive scheme adjusmens in year. To be decided in he final decision. is he sum of end-of-period adjusmens in year. Likely o incorporae bu no limied o adjusmens from he iniial regulaory conrol period. To be decided in he final decision. is he sum of annual adjusmen facors in year. Likely o incorporae bu no limied o adjusmens for he overs and unders accoun. To be decided in he final decision. is he percenage increase in he consumer price index. To be decided in he final decision. is he X-facor in year, incorporaing annual adjusmens o he PTRM for he railing average reurn on deb where necessary. To be decided in he final decision. is he sum of he s-facors for all parameers afer applicaion of he s-bank adjused for he change in he annual revenue requiremen beween he las year of he regulaory conrol period o S is he s-facor for regulaory year. 8. JEN has adoped he conrol mechanism as se ou in he AER s framework and approach. This mechanism allows for he modificaion of elemens in he formula as hey are idenified during he price rese consulaion phase. 2 Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld

9 CONTROL MECHANISMS Iems o be decided in he final decision Sandard Conrol Services I Term 9. JEN noes here are number of incenive schemes 4,5 in he 2016 regulaory period however only proposes including he Sae Governmen s f-facor scheme acive in he 2016 regulaory period 6 in he I Term. Previous regulaory period adjusmens, T Term 10. JEN proposes one componen be included in he ransiional adjusmen facor ( T erm) o accoun for adjuss from he 2006 and 2011 regulaory periods. 11. The Demand Managemen Incenive Scheme (DMIS) from he 2011 regulaory period 7 requires us o reurn unspen funds o cusomers by adjusing fuure revenue. 8 We are also required o offse any revenue no recovered as a resul of iniiaives delivered under he DMIS. 9 To achieve his objecive, we propose adjusing revenue in he 2017 year in accordance wih he DMIS process 10 (see Box 1-2). 12. JEN does no propose o claim any foregone revenue, permissible under Cl , aribued o he DMIS scheme noing ha is making a conribuion o he developmen of demand managemen iniiaives for he long erm ineress of cusomers JEN noes ha oher incenive schemes oulined in NER cl (a)(3) are (i) capured in he building block model (efficiency benefi sharing scheme (EBSS) and capial expendiure sharing scheme (CESS) are capured in he building block model), (ii) applied under is own S facor in he price conrol formula (Service Targe Performance Incenive Scheme (STPIS) or no proposed a all (Smallscale incenive scheme). The mechanism proposed o manage he Demand Managemen and Embedded Generaion Connecion Incenive Scheme is oulined under he T erm. AER, Final Framework and approach for he Vicorian Elecriciy Disribuors, Regulaory conrol period commencing 1 January 2016, 24 Ocober 2014, s6.1 AER, Demand Managemen Incenive Scheme, Jemena, CiiPower, Powercor, SP AusNe and Unied Energy, , April Ibid, cl Ibid, cl Ibid, Appendix A. Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld 3

10 1 CONTROL MECHANISMS Box 1-2. Adjusmens for DMIS (Secion adjusmens) Annual adjusmen amouns (1) C C R A 5 * 2 (1 i) (1 i 1 i) 1 ) Where: R ex-ane revenue allowance under he DMIS for regulaory year ( = 1,2,,5) A i expendiure approved ex-pos under he DMIS for regulaory year ( = 1,2,,5) nominal vanilla WACC as se in he disribuion deerminaion for he forhcoming regulaory conrol period i* nominal vanilla WACC as se in he disribuion deerminaion for he forhcoming regulaory conrol period NPV amoun ($, 2015) o be adjused in 2017 ( R1 A1 ) ( R2 A2 ) ( R3 A3 ) ( R4 A4 ) ( R5 A5 ) C5 (2) NPV 0 (1 i) * 2 (1 i) (1 i) (1 i) (1 i) (1 i) (1 i ) Where: R ex-ane revenue allowance under he DMIS for regulaory year ( = 1,2,,5) A i expendiure approved ex-pos under he DMIS for regulaory year ( = 1,2,,5) nominal vanilla WACC as se in he disribuion deerminaion for he forhcoming regulaory conrol period i* nominal vanilla WACC as se in he disribuion deerminaion for he forhcoming regulaory conrol period Annual adjusmens, B Term 13. License fees charges by he Vicorian Essenial Service Commission (ESC) were recovered hrough he L-facor during he 2011 regulaory period. In he 2016 regulaory period we propose only recovering he licence fee o he exen ha i varies from he amouns forecas in he operaing cos forecas; ha is, a rue up amoun on he annual variaion only. 14. Wih a change in he form of price conrol owards a revenue cap and he consequenial changes in price conrol formulae, he recovery of hese fees can bes be achieved hrough he B erm raher han coninuing he use of he L-facor mechanism. 15. JEN also proposes o include a rue-up for he ne presen value of under or over recovery of revenue in he -2 year. The mehod o achieve his is o creae he presen value of acual revenue equal o he presen value of revenue allowable. The mechanism o achieve his is bes displayed by way of he example provided in secion 4. 4 Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld

11 CONTROL MECHANISMS 1 Calculaion of CPI 16. In various price conrol formula, CPI is used o escalae revenues and prices o nominal dollars. In he framework and approach paper, he AER indicaed i would advise he mehod for deermining CPI as a par of he final deerminaion JEN proposes he mehod for deermining his escalaor in Box 1-3. This is consisen wih he approach followed in he previous regulaory conrol period using he Sepember quarer daa from he Ausralian Bureau of Saisics (ABS). JEN proposes o balance he mos recen acual escalaion daa wih he submission imelines required under he Naional Elecriciy Rules (NER) requiremens for ariff and revenue submissions. 12 Box 1-3. Mehod for deermining CPI The Consumer Price Index, All Groups Index Number (weighed average of eigh capial ciies) published by he Ausralia Bureau of Saisics for he Sepember Quarer immediaely preceding he sar of regulaory year ; divided by The Consumer Price Index, All Groups Index Number (weighed average of eigh capial ciies) published by he Ausralia Bureau of Saisics for he Sepember Quarer immediaely preceding he sar of regulaory year -1; minus one. Adjusing X-facor for he railing average reurn on deb 18. The X-Facor is deermined by he Pos Tax Revenue Model (PTRM) 13. The value of X-Facor is o be amended annually o adjus for he railing average reurn on deb REVENUE CAP FOR TYPE 5, TYPE 6 AND SMART REGULATED METERING 19. Similar o he approach adoped for sandard conrol services, he AER has se ou a revenue cap for ype 5, ype 6 and smar regulaed meering. This is consisen wih he form of price conrol adoped under he former Cos Recovery Order In Council (CROIC) 14 conrol regime AER, Final Framework and approach for he Vicorian Elecriciy Disribuors, Regulaory conrol period commencing 1 January 2016, 24 Ocober 2014, s2.3.9 NER clause (a) requires ha our annual pricing proposal for years 2 o 5 of a regulaory conrol period be submied o he AER hree monhs prior o he sar of he regulaory year (i.e. by 30 Sepember). This is prior o Sepember CPI becoming available, which is in Ocober each year. This changed as a resul of he disribuion nework pricing arrangemens rule change made by he Ausralian Energy Marke Commission on 27 November AER, Final decision, Amendmen, Elecriciy ransmission and disribuion nework service providers, Pos-ax revenue models (version 3), 29 January See, Box 3-1, JEN 2016 Regulaory Proposal. Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld 5

12 1 CONTROL MECHANISMS Box 1-4. Conrol mechanism for ype 5, ype 6 and smar meers (1) n i1 m MAR p j1 ij q ij i=1,...,n and j=1,...,m and =1,...,5 MAR AR T B (2) (3) AR AR 1(1 CPI )(1 X ) Where: MAR is he maximum allowable revenue in year. ij p is he price of componen i of ariff j in year. ij q is he forecas quaniy of componen i of ariff j in year. AR is he annual revenue requiremen for year. AR 1 in 2016 is he annual smoohed revenue requiremen in he Pos Tax Revenue Model for he 2016 year in 2015 dollar value. Afer 2016, his is he AR from he previous year. T B CPI X is he adjusmens in year for rue-ups relaing o he AMI-OIC. is he sum of annual adjusmen facors in year for he overs and unders accoun. is he percenage increase in he consumer price index. To be decided in he final decision. is he X-facor in real erms in year, incorporaing annual adjusmens o he PTRM for he railing average reurn on deb where necessary. To be decided in he final decision. Previous regulaory period adjusmens T erm 20. The T erm will incorporae adjusmens in 2016 and 2017 in accordance wih he requiremens of Clause 5L of CROIC. The amouns are o be deermined a he ime of developing he pricing proposals for he respecive years. Annual adjusmens, B erm 21. JEN proposes o include a rue-up for he ne presen value of under or over recovery of revenue in he -2 year. The mehod o achieve his is o creae he presen value of acual revenue equal o he presen value of revenue allowable. The mechanism achieve his is bes displayed by way of he example provided in secion JEN does no propose o include any oher adjusmens under his erm. CPI erm 23. We propose calculaing his CPI erm using he same mehod as oulined in Box Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld

13 CONTROL MECHANISMS 1 X erm 24. The X-Facor is deermined by he PTRM; he value of X-Facor is o be amended annually o adjus for he railing average reurn on deb CAP ON INDIVIDUAL PRICES FOR ALTERNATIVE CONTROL SERVICES 15, 16 Box 1-5. Conrol mechanism for alernaive conrol services i i p p i=1,...,n and =1,2,3,4 p i p 1 (1 )(1 i CPI X i ) Where: p i p i CPI X i is he cap on he price of service i in year is he price of service i in year. The iniial value is o be decided in he final decision. is he percenage increase in he consumer price index. To be decided in he final decision. is he X-facor for service i in year, incorporaing annual adjusmens o he PTRM for he railing average reurn on deb where necessary. To be decided in he final decision. 25. The alernaive conrol services price cap formula requires ha he price for each service canno be higher han he previous year s price afer adjusmens for inflaion (CPI) and X-facor (X) Iems o be decided in he final decision pi erm 26. The p i erm represens he price oulined in he final deerminaion. CPI erm 27. The CPI erm will be calculaed using he same mehod oulined in Box 1-3. Xi erm 28. The X i erm represens he value oulined in he final deerminaion. The only service in his caegory for which X-Facor will be adjused is public lighing. No oher services in his caegory are affeced by he railing average reurn on deb Excludes alernaive conrol services provided under ype 5, ype 6 and smar regulaed meering Whils public lighing classified as alernaive conrol service will be calculaed using a limied building block model i is effecively compliance wih his price conrol model. Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld 7

14 1 CONTROL MECHANISMS 1.2 DEMONSTRATING COMPLIANCE FOR CONTROL SERVICES 29. The NER requires JEN o demonsrae he applicaion of he conrol mechanisms and provide supporing informaion for alernaive conrol services 17. Our proposed approach o demonsraing compliance wih his requiremen is o provide he calculaions, as a par of he annual pricing proposal, which mahemaically solves prices in accordance wih he consrains of he price conrol formula. By approving he pricing proposal, he AER will effecively endorse ha JEN has complied wih he requiremen. 17 NER, cl (c)(3). 8 Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld

15 COMPLIANCE WITH DESIGNATED PRICING PROPOSAL CHARGES 2 2. COMPLIANCE WITH DESIGNATED PRICING PROPOSAL CHARGES 30. Designaed Pricing Proposal Charges (DPPC) 18 include cos recovery for services ha include: Transmission charges Iner disribuion business charges Amouns paid for avoided Transmission Services in accordance wih NER cl 5.5(j). 31. JEN proposes o include a rue-up for he ne presen value of under or over recovery of revenue in he -2 year. The mehod o achieve his is o creae he presen value of acual revenue equal o he presen value of revenue allowable. The mechanism o achieve his is bes displayed by way of he example provided in secion NER cl Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld 9

16 3 JURISDICTIONAL COST RECOVERY SCHEME 3. JURISDICTIONAL COST RECOVERY SCHEME 32. The Jurisdicional Cos Recovery Scheme (JCRS) 19 includes cos recovery for services ha are required wihin he Vicorian Jurisdicion. These include, bu are no limied o: Rebaes for he Premium Feed-in ariff (PFiT) 20 Rebaes for he Transiional Feed-in ariff (TFiT) JEN proposes o include a rue-up as required by he NER 22 for he presen value of under or over recovery of revenue in he -2 year. The mehod o achieve his is o creae he presen value of acual revenue equal o he presen value of revenue allowable. The mechanism o achieve his is bes displayed by way of he example provided in secion NER cl A. NER cl A(e)(1)(iv). NER cl A(d)(1). NER cl A(b). 10 Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld

17 REVENUE TRUE-UPS 4 4. REVENUE TRUE-UPS 34. For he following services, he form of price conrol requires a rue-up of he acual revenue as i varies o allowance: Sandard conrol services Type 5 and 6 regulaed meering services Designaed pricing proposal charges Jurisdicional scheme amouns. 35. To underake hese adjusmens, we will follow he process oulined in Box 4-1. I should be noed ha for sandard conrol services, provision is made wihin he mehodology o accoun for pass hrough amouns. 36. In all calculaions, he balance amouns mus be adjused for he ime value of money using he weighed average cos of capial (WACC) consisen wih he rae he AER approved for he final deerminaion in he year in which he deerminaion is applicable, i.e. he WACC in previous regulaory periods will be used where he formula crosses muliple regulaory periods. Box 4-1 Demonsraion of revenue rue-up In year we are ruing up revenue under and over recoveries for -2, he over or under recovery in year iself won be rued up unil +2. The following example demonsraes how we will perform he calculaions: -2-1 Revenue from ariffs 247, , ,511 Allowed revenue 247, , ,000 Pass hrough Revenue under / (over) recovery 500-1, WACC 10.00% 10.00% 10.00% Opening balance Ineres on opening balance Revenue under / (over) recovery 500-1, Ineres on over under [1] Closing balance [2] [1] Calculaed using a half year effec on he WACC, ie, (1+WACC )^0.5-1 [2] Mus se ariffs a raes ha cause his value o be close o zero 37. Special reamen of some services is required when ransiioning o his mehod of ruing up coss in he 2016 regulaory period. This special reamen is se ou in secions 4.1 and 4.2. Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld 11

18 4 REVENUE TRUE-UPS 4.1 SPECIAL TREATMENT SCS TRANSITION 38. The 2016 regulaory period is he firs ime sandard conrol services will be subjec o a revenue cap form of price conrol. Consequenly, we need o apply special adjusmens from hose demonsraed in he example in Box 4-1 o ensure he ransiion o his new mechanism do no inadverenly resul in under or over recovery of revenues from he 2011 regulaory period. These adjusmens are: when calculaing revenue and prices for he 2016 regulaory year: he opening balance in -2 and -1 year mus be zero he revenue under / (over) recovery in -2 and -1 mus be zero when calculaing revenue and prices for he 2017 regulaory year: he opening balance in -2 year mus be zero he revenue under / (over) recovery in -2 mus be zero. 4.2 SPECIAL TREATMENT TYPE 5 AND 6 METERING TRANSITION 39. Type 5 and 6 meering service is effecively subjec o a revenue cap under he CROIC requiremens. However, he CROIC requires ha he rue-up mechanism be calculaed using a specific rue-up mehod. 23 To accommodae his alernaive calculaion ino he formula demonsraed in he example in Box 4-1, special provisions are required. These special provisions are: when calculaing revenue and prices for he 2016 regulaory year: he opening balance in year -2 and year -1 year mus be zero revenue from ariffs in year -2 and year -1 year mus be zero allowed revenue in year -2 and year -1 year mus be zero he pass hrough amoun for year -2 will conain he rue-up value calculaed in accordance wih he CROIC Clause 5L.3 when calculaing revenue and prices for he 2017 regulaory year: he opening balance in year -2 mus be zero revenue from ariffs in year -2 year mus be zero allowed revenue in year -2 year mus be zero he pass hrough amoun for year -2 will conain he rue-up value calculaed in accordance wih he CROIC Clause 5L Cl. 5L, CROIC. 12 Public 30 April 2015 Jemena Elecriciy Neworks (Vic) Ld