Download Revised draft decision

Revised draft decision:
Initial default price-quality paths
for gas pipeline services
Briefing for financial market analysts
24 October 2012
Overview
•
Revised draft decision to set initial default price-quality paths
1. Proposed approach and context
2. The paths we have proposed for suppliers
3. Details on the approach we have used to set the paths
2
Proposed approach
•
3
The proposed default price-quality paths apply to:
–
Three distribution businesses under price caps (GasNet, Powerco, and
Vector)
–
Two transmission businesses under revenue caps (Maui Development and
Vector)
•
Paths apply for a regulatory period of 4 years, 3 months from
1 July 2013 to 30 Sept 2017
•
We expect to make a final decision by 28 February 2013
Proposed approach
•
4
Key features of the proposed default price-quality paths
–
Prices based on current and projected profitability using recently redetermined input methodologies (decisions NZCC27 and NZCC28)
–
Quality standards based on emergency response times
–
Overall reduction in prices/revenue for industry
–
Significant price reductions for Vector
–
Building blocks approach the same as that used for electricity distribution
revised draft reset 2012
Context for change in prices
•
•
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Changes brought about by new Part 4 regime
–
New purpose statement to guide us in setting prices
–
Input methodologies define key “building blocks”
–
Price path set base on current and projected profitability
Prior to Part 4
–
Powerco and Vector distribution services (excluding network
purchased from NGC) subject to Authorisation
–
Maui Development, Vector transmission services, Vector distribution
services (excl. NGC) and GasNet not subject to the Authorisation
Context - Authorisation
•
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Authorisation used a building block approach. Differences
between then and now include:
–
WACC for Authorisation on average 10.45% compared to 7.53% now
–
Authorisation used tax payable (now using deferred tax approach for
distribution, tax payable for transmission)
–
Authorisation prices included claw-back of 50% of previous overrecovery of revenues
–
The initial default price-quality paths use updated projections for
opex, capex and revenue growth
Proposed adjustments
Forecast revenues minus forecast costs - 1 July 2013 to 30 September 2017 (if no reset)
GasNet: +$0.8m
Powerco: -$8.7m
Vector (Distribution):
+$48.4m
Maui Development
Limited: -$15.3m
Vector (Transmission):
+$110.9m
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Proposed adjustments
Adjustments for the first full pricing year of the regulatory period
Maui Development
Limited
2%
Powerco
5%
GasNet
-2%
Vector (Distribution)
-16%
This chart provides an indication of the prospective
change in revenue in the first year of the regulatory
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Vector (Transmission)
-25%
These figures may change following
consultation.
Other features – clawback
• We propose claw-back for GasNet
– Claw-back applies for the over-recovery of revenues for the period
1 January 2008 to 30 September 2012 compared to CPI increases
– Negates effect of delay to establishing the initial paths
– GasNet is the only supplier to have over-recovered during this period
• Claw-back could still apply to other suppliers
– Before making a final decision we will assess revenues from 1 October
2012 to date of determination
• Recovery of claw-back
– Claw-back will occur across the regulatory period 1 July 2013 to 30
September 2017
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No alternative rates of change proposed
• We have not proposed any alternative rates of change at this
point
– Increases for Powerco and Maui Development are below the levels we
have previously considered for price shocks to consumers
– We do not have sufficient evidence to conclude that the proposed
downward adjustment for GasNet and Vector will result in undue
financial hardship
• If suppliers believe the proposed price adjustment will cause
undue financial hardship, they should provide evidence in
their submissions
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Quality Standards
•
Quality Standards set for emergency response time
– suppliers of gas pipeline services must take 180 minutes or less to respond to
any emergency; and
– gas distributors must take 60 minutes or less to respond to 80% of
emergencies
•
Our preferred option is to also establish quality standards
based on reliability
– we consider reliability as the most important measure of the level of service
that suppliers should be providing to consumers
– however, we currently have little data to establish robust reliability targets
•
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By contrast response times to emergencies targets can be
set independently of historical time series data, and are
based on industry knowledge
The approach to adjusting prices
Overview of our proposed approach
Step One
Forecast costs over the regulatory period
Step Two
Set forecast revenues equal to forecast costs over the regulatory period
Step Three
Determine starting prices for each supplier
Step Four
Apply an alternative rate of change if necessary or desirable
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Building blocks allowable revenue
• Derive present value of building blocks allowable revenue
based on costs
Main building block cost categories
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Return on capital
(net of any revaluations of the
Regulatory Asset Base)
Return of capital
(to allow recovery of depreciation)
Operating expenditure
(excluding pass through costs and
recoverable costs)
Tax costs
WACC
• We have used a vanilla WACC of 7.53% (cost of capital
determination for information disclosure decision NZCC20)
• We will estimate a WACC for our final decision by 1 Dec 2012
– risk-free rate and debt premium using data from the month of
November 2012
The paramaters used to estimate the WACC for GPB SPA
(As at July 2012 (to be updated prior to finalisation))
Estimate
Risk free rate (5 year)
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2.78%
Debt premium (5 year)
Leverage
Debt issuance costs
Asset beta
Equity beta
TAMRP
2.55%
44%
0.35%
0.44
0.79
7.0%
Cost of equity
Cost of debt
7.53%
5.68%
Midpoint estimate of:
Vanilla WACC
Post-tax WACC
6.72%
6.02%
75th percentile estimate of:
Vanilla WACC
7.53%
Post-tax WACC
6.83%
How we forecast capex
• Capex forecasts
– We use suppliers’ own forecasts of network capex up to a 20% increase over
historic levels
– Forecast of non-network capex is based on each supplier’s historic expenditure
– Change in input prices based on capital goods price index
• We propose to rely on each supplier’s capex forecast because suppliers are
well placed to forecast required capex
• We limit suppliers’ forecast average expenditure to a 20% increase over
average historic expenditure
– relying on suppliers’ forecasts would create an incentive to bias their forecasts to
increase their starting price
– Customised price-quality path can address material increase in investment
requirements
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Reasons for limiting increases in capex
• Customised price-quality paths can address material step changes
in capex
• Maui Development and Vector forecasts included capex increases
over 20%. The have the option to either:
– apply for a customised price-quality path
– undertake these projects within the DPP price cap
– defer these projects
• Note that even if we used Vector’s capex projections, its price
decrease would still be 23%
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Projected growth in network capex
Constant price increase in network capex allowance (2012-2017) compared to
the historical average (2008-2011) network capex
GasNet
11.6%
PowerCo
Vector (Distribution)
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20.0%
-4.7%
Maui
20.0%
Vector (Transmission)
20.0%
How we forecast opex
• Opex forecasts (network and non-network)
– Basis for projections is actual opex for 2010/11
– Considered impact of changes in network scale on opex
– Partial productivity growth assumed to be zero
– Change in input prices (using weighted average forecast of labour cost
index and producer price index)
• Network Scale
– For distribution elasticities for network length and customer numbers
applied to historic trend (approximately 0.35 each – taken from
Ofgem analysis )
– For transmission initial view number of customers and length not
appropriate drivers of network scale, elasticity for energy throughput
assumed to be zero due to information/data issues
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Projected growth in opex 2010-15
Projected growth in operational expenditure from 2012 to 2017
Gasnet
Powerco
Vector (Distribution)
Maui
Vector (Transmission)
0%
5%
10%
15%
Total change in forecast opex (excl. Insurance adjustment)
Change in opex input prices
Change due to network scale effects
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20%
25%
Impact of opex and capex modelling – sensitivity analysis
Adjustments for the first full pricing year of the regulatory period impact of
suppliers’ own forecast of opex and capex (all other inputs as per draft
decision)
Price adjustments for ComCom vs supplier forecasts
30.0%
ComCom forecasts
20.0%
Supplier opex forecast, ComCom capex
forecast
10.0%
0.0%
GasNet
Powerco
Vector_Dist
Maui
Vector_Trans
Supplier capex forecast, ComCom opex
forecast
-10.0%
-20.0%
-30.0%
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Supplier opex forecast, Supplier capex
forecast
How we forecast constant price revenue for gas distributors
• We forecast revenue from residential, commercial, and
industrial users, broken down into the two types of billed
quantity all three distributors use
• Forecasts of billed quantities of gas are based on the gas
supply and demand scenarios study for the Gas Industry
Company Limited
• Forecasts of the number of users billed for their connection are
based on extrapolating each supplier’s historic trends
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Constant price revenue 2012-2018 (distribution)
Vector Distribution
Powerco
GasNet
-2%
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-1%
0%
1%
2%
3%
4%
Change in constant price revenue
Change from industrial users
Change from commercial users
Change from residential users
5%
Role of constant price revenue for gas transmission
• We propose to put both gas transmission businesses under a
revenue cap
• We do not require a forecast of constant price revenue for
setting starting prices for gas transmission business
• However, we have developed forecasts for assessing
compliance and to illustrate the size of starting price
adjustments in percentage terms
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How we derive smoothed price path
• Calculate present value of building blocks allowable revenue
from 1 July 2013 to 30 September 2017 (4 years 3 months)
• Derive a smoothed path taking account of forecast changes in
– prices (CPI-X) where X = 0
– quantities (distribution only) derived from forecast of constant price
revenue
• Compliance will be assessed on a pricing year basis
– For all suppliers but Maui Development this results in a 15 month
initial assessment period from 1 July 2013 to 30 September 2014
– For Maui Development 3 month assessment period at the end of the
regulatory period (1 Jul 2017 to 30 September 2017)
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Next steps
• We will be holding a ‘Q&A’ of the model underpinning the
draft decision in November
Milestone
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Indicative date
Submissions on revised draft Initial default pricequality paths
7 December 2012
Cross-submissions on revised draft Initial default
price-quality paths
21 December 2012
Final decision on Initial default price-quality paths
28 February 2013
Questions?
For more information
Please contact: Karen Murray
[email protected]
Or visit:
http://www.comcom.govt.nz/initial-default-price-quality-path/
For information on:
•The revised draft decision
•The 2013-17 default price-quality path
Or visit:
http://www.comcom.govt.nz/additional-input-methodologies-forelectricity-and-gas-dpps/
For information on:
•The re-determined input methodologies
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