Jemena Gas Networks (NSW) Ltd

Transcription

1 Jemena Gas Networks (NSW) Ltd JGN Customer Council Agenda paper: Consumer Challenge Panel - Who are they and what is their role? Public 31 May 2014

2 An appropriate citation for this paper is: JGN Customer Council - Agenda paper: Consumer Challenge Panel - Who are they and what is their role? Copyright statement Jemena Limited. All rights reserved. Copyright in the whole or every part of this document belongs to Jemena Limited, and cannot be used, transferred, copied or reproduced in whole or in part in any manner or form or in any media to any person other than with the prior written consent of Jemena. Printed or downloaded copies of this document are deemed uncontrolled.

3 PURPOSE 1 1. PURPOSE We have proposed our 5-year plan for the period 1 July 2015 to 30 June 2020 (2015 Plan). Our 2015 Plan sets out how much funding we need in terms of the costs we need to recover from our customers to continue to provide safe and reliable gas distribution network services. The Australian Energy Regulator (AER) is currently reviewing our 2015 Plan to check that it meets the relevant rule requirements and promotes the long-term interests of our customers. The AER then either approves the plan, or specifies the changes we must make. Once approved, we must set our prices in line with the plan. To assist the AER, the Consumer Challenge Panel (CCP) will be providing advice on issues of importance to consumers. This will better equip the AER to understand and balance the range of views considered as part of its decisions. This paper provides the Customer Council with information on the CCP and their areas of interest in reviewing our proposed 2015 Plan. Objective (inform) To: inform the Customer Council of the CCP, including their role in reviewing our proposed 2015 Plan inform the Customer Council of the CCP s areas of interest in reviewing our proposed 2015 Plan Public 31 May 2014 Jemena Gas Networks (NSW) Ltd 1

4 2 WHO ARE THE CONSUMER CHALLENGE PANEL? 2. WHO ARE THE CONSUMER CHALLENGE PANEL? On 1 July 2013, the AER established the Consumer Challenge Panel (CCP) as part of its Better Regulation reforms. The CCP assists the AER to make better regulatory determinations by providing input on issues of importance to consumers. The intention is for the expert members of the CCP to bring consumer perspectives to the AER using their knowledge of regulatory, commercial and consumer issues involved with network services, costs and pricing. The roles of CCP members include advising the AER on: whether a network business's proposal is justified in terms of providing services that are acceptable to, and valued by, customers whether the proposal is in the long term interests of consumers the effectiveness of network businesses engagement with their customers and how this engagement has informed, and been reflected in, the development of their proposals. 1 The CCP will provide advice to both the AER staff and the AER Board during the development of the AER s draft and final decisions. The CCP may also inform the public on matters relating to CCP processes and potentially on key consumer issues. Box 1: How will the CCP members work together? Members of the CCP have been appointed in their capacity as individuals and not as representatives of an organisation. As such, CCP members will not be able to nominate alternative representatives or nominees to attend meetings on their behalf. Members have been appointed for a three year term from 1 July 2013 to 30 June Members from the CCP will be selected to work together on a price reset for a particular business or businesses. The AER will select the sub-panel members after considering panel members experience, conflict of interest issues, availability and preferences. The number of sub-panel members selected to work on each reset will vary between 1 and 5 members. These members may also work on other resets. For example, the same sub-panel members may work together on the four resets for the NSW/ACT electricity distribution. Sub-panel members will work together, but will not have a team leader or someone with authority over the subpanel s advice. All sub-panel members opinions will be equally valued and considered. Sub-panels do not need to present one voice in its advice to AER staff and the Board. Any differences of opinion would ideally be discussed and debated among sub-panel members, but does not need to be resolved. Sub-panel members will have flexibility to work in a way that best suits the members to achieve the objectives. CCP members will also meet together as required to share experiences and communicate any lessons learnt. 1 Initial paper to AER from Consumer Challenge Panel subpanel 7 regarding access arrangements for the Jemena Gas Networks (JGN) gas distribution network in New South Wales to apply from 1 July 2015 to 30 June 2020, July Public 31 May 2014 Jemena Gas Networks (NSW) Ltd

5 WHO ARE THE CONSUMER CHALLENGE PANEL? 2 If a sub-panel member can no longer work on a reset, they should advise the CCP secretariat as soon as possible. CCP members will work according to the APS code of conduct. Source: AER, Consumer Challenge Panel: Framework for advice Box 2: Who are the CCP members providing advice to the AER on our 2015 Plan Mr David Prins Mr David Prins is the Managing Director of Etrog Consulting, a consultancy providing advice and resources to clients in energy and utilities. David has 23 years of experience specialising in the application of effective regulation and competition in electricity and gas industries. Much of David s recent work has focused on advice on smart metering and energy pricing and margins. He has worked with many national and jurisdictional government bodies and consumer organisations. Ms Robyn Robinson Ms Robyn Robinson has extensive experience in the energy industry. Her previous experience includes 15 years as an Executive Manager at Queensland transmission company Powerlink, providing corporate governance, financial management and strategic direction for the organisation. With a background in IT management, she was responsible for the development and delivery of IT services for Powerlink. Robyn s current roles include Director at Council on the Ageing (COTA) Queensland and a member of the Finance and Risk Committee and COTA Queensland Policy Committee. Public 31 May 2014 Jemena Gas Networks (NSW) Ltd 3

6 3 WHAT ISSUES ARE THE CCP INTERESTED IN? 3. WHAT ISSUES ARE THE CCP INTERESTED IN? The CCP has provided an initial review of our 2015 Plan setting out some of the key areas which the CCP intend to review in more detail (summarised in Box 3, and detailed in Attachment A). This may assist stakeholders in developing their submissions to the AER (see Box 4). The CCP has been invited to attend JGN s public forum on our 2015 Plan to be held on 15 August. The CCP will attend the Customer Council meeting on 21 August. This is an opportunity to ask any questions you may have on their role in the review process and their initial areas of interest. It also an opportunity for you to provide feedback on your role as a member of the Customer Council in assisting us develop our 2015 Plan. Box3: Key areas of our 2015 Plan which the CCP intends to review in more detail funding costs customer and stakeholder engagement activities capital expenditure operating expenditure, and the proposed application of an Efficiency Benefit Sharing Scheme (EBSS) to the operating expenditure forecasts of customer numbers, volumes and demands marketing costs proposed tariff structures and tariff levels proposed rebalancing of network bills between residential, commercial and industrial customer segments. Further information on the CCP s areas of interest can be found on the AER website: Box 4: Making a submission to the AER The AER is seeking submissions from interested stakeholders for consideration in making its draft decision on the Proposal. Submissions should be sent electronically to Jemena2014GAAR@aer.gov.au by 5pm AEST on Monday 25 August If you have any questions that you would like us to respond to prior to making a submission, please let us know via have your say. 4 Public 31 May 2014 Jemena Gas Networks (NSW) Ltd

7 Attachment A CCP: Initial paper to AER

8 ATTACHMENT A A-2 Public 31 May 2014 Jemena Gas Networks (NSW) Ltd

9 Initial paper to AER from Consumer Challenge Panel sub panel 7 regarding access arrangements for the Jemena Gas Networks (JGN) gas distribution network in New South Wales to apply from 1 July 2015 to 30 June 2020 Introduction Jemena Gas Networks (JGN) has submitted a gas access arrangement proposal (Proposal) for its NSW distribution network to the Australian Energy Regulator (AER) for the period 1 July 2015 to 30 June 2020, pursuant to its obligations under rule 52 of the National Gas Rules (NGR). 1 The AER is seeking submissions from interested stakeholders by Monday 25 August 2014 for consideration in making its draft decision on the Proposal. 2 Role of the Consumer Challenge Panel On 1 July 2013, the AER established the Consumer Challenge Panel (CCP) as part of its Better Regulation reforms. The CCP assists the AER to make better regulatory determinations by providing input on issues of importance to consumers. Regulatory determinations are technical and complex processes which can make it difficult for ordinary consumers to participate. The expert members of the CCP bring consumer perspectives to the AER to better balance the range of views considered as part of its decisions. The roles of CCP members include: advising the AER on whether a network business's proposal is justified in terms of the services to be delivered to customers; whether those services are acceptable to, and valued by, customers; and whether the proposal is in the long term interests of consumers; and advising the AER on the effectiveness of network businesses engagement with their customers and how this engagement has informed, and been reflected in, the development of their proposals. 3 The CCP is divided into sub panels. The JGN gas distribution access arrangements in NSW fall under CCP sub panel 7. Its members are David Prins and Robyn Robinson, who are the authors of this paper. 1 The proposed access arrangements, including all the JGN documents referenced in this paper, can be downloaded from the JGN website at Engagement and Price Review/Reviewing our gas network prices.aspx 2 The invitation for submission has been published at 3 For further information on the CCP, see Page 1 of 6

10 The purpose of this paper This paper follows an initial overview review by sub panel 7 of the Proposal from JGN. It sets out some of the key areas which we intend to review in more detail during this initial submission period, and explains why we consider that they merit our attention. We intend to write short briefing papers on our concerns and any initial findings in each of these key areas. The AER will be asked to consider these papers in its regulatory decision making on the JGN Proposal. We are seeking that this paper should be published by the AER early in the initial consultation period on the JGN Proposal. While stakeholders are free to make submissions to the AER on any aspect of the JGN Proposal, this paper may provide useful information for interested stakeholders, particularly consumers and their representatives, on areas where they may wish to focus in their responses to the AER that are requested by 25 August Key areas which the sub panel intends to review in more detail during the initial submission period Energy affordability is a significant issue for many customers. JGN has proposed changes in network prices that represent, before inflation, decreases in network prices for typical residential customers and small business customers, and increases for typical large industrial customers. While any reduction in network charges will be welcomed by customers, we have nevertheless identified the following eight key areas in the JGN Proposal which we intend to review in more detail during the initial submission period: 1. JGN s funding costs 2. JGN s customer and stakeholder engagement activities 3. JGN s capital expenditure 4. JGN s operating expenditure, and the proposed application of an Efficiency Benefit Sharing Scheme (EBSS) to the operating expenditure 5. JGN s forecasts of customer numbers, volumes and demands 6. JGN s marketing costs 7. JGN s proposed tariff structures and tariff levels 8. JGN s proposed rebalancing of network bills between residential, commercial and industrial customer segments. Each of these areas is considered briefly in turn below. Further briefing papers will consider these areas in more detail. 1. JGN s funding costs Funding costs refer to the weighted average costs of equity and debt for JGN. JGN s Access Arrangement Information discusses funding costs in Chapter 9, entitled Rate of Return. Funding costs are expressed as a rate of return on the value of network assets, and are sometimes referred to as Weighted Average Cost of Capital (WACC). JGN is proposing a rate of return of 8.67 per cent. 4 4 See Overview, page xiv of JGN s Access Arrangement Information Page 2 of 6

11 The figure below shows thatt funding costs comprise over half of JGN s proposed revenuee requirements. Changes in JGN s proposed required r revenue per customer per year y ($2015)) Source: JGN 5 year plan 2015/ /20, Customer Overview, June 2014, page 11 Funding costs have received considerable attention over several years, and a new guideline was implemented in the AER s Better Regulation program. 5 However, JGN is proposing to depart from the AER s rate of return guideline. The full CCP is considering funding costs as a generic issue acrosss the variouss regulatory determinations currently in progress. JGN s proposed departuree from the AER s rate of return r guideline also merits attention. 2. JGN s customer and stakeholder engagement activities JGN states in its Proposal that it has undertaken a targeted program of customer engagement thatt has directly informed its Proposal. 6 JGN has stated that its approach a hass been consistent with the AER s Consumer Engagement Guideline. 7 The full CCP is considering consumer engagement as a generic issue across the various regulatory determinations currently in progress. We will be considering the effectiveness of JGN s consumer engagement program inn the contextt of our generic findings as a full CCP. 3. JGN s capital expendituree (capex) JGN s proposed capex for the period 1 July 2015 to 30 June is $1,148.5m. This is an increase of $190.7m, or 20 per cent, over the estimated expenditure for the current period (1 July 2010 to 30 June 2015), and an increase of $269. 6m, or around 30 per cent, over the amount thatt the AER approved for the current period. 8 5 See 6 See section 1.3 of JGN s Access Arrangement Information. Further details of JGN s customer engagement program and outcomes are provided in appendices 1.4 and 1.5 of JGN s Access Arrangement Information. 7 See 8 See Box 6 1, section 6 of JGN s Access Arrangement Information Page 3 of 6

12 The graph below shows the proposed increase in capex, broken down over three classes of expenditure: market expansion; reinforcement renewal and replacement; and IT and other non system. Total capex forecast vs actual/estimate Source: Access Arrangement Information, Section 6.1 JGN states that it has analysed a numberr of scenarios and testedd them with customers to confirm that the capital plan for the Access Arrangement period provides a demonstrable benefit to customers, andd best meets customers preferred long term outcomes as regards safety, price and service levels. 9 Bearing in mind that all approved capex is added to the network s regulated asset base and results in increases in network revenues, we intend to examine the t proposedd capital plan across the various categories of expenditure to assess whether an increased level of expenditure is appropriate. We will also review the customer involvement in the process of developing the capital plan, and how their views were incorporated into the final plan. 4. JGN s operating expenditure (opex),, and the proposed application of an Efficiency Benefit Sharing Scheme (EBSS)( to the operating expenditure JGN proposes opex expenditure of $818.0m in the Access Arrangement period. 101 This compares with an expected opex over the current period of $802.2m. JGN iss also proposing to apply an Efficiency Benefit Sharing Scheme to the opex for the first time in the Access Arrangement period. 11 The EBSS is expected to reflect the same design that the AER hass approved for other gas networks. The benefits of efficiency improvements will eventually flow through to customers charges. 9 See Box 6 1, section 6 of JGN s Access Arrangement Information 10 See Box 7 1, section 7 of JGN s Access Arrangement Information 11 See Box 11 1, section 11 of JGN s Access Arrangement Information Page 4 of 6

13 We intend to review the structure and parameters of the proposed EBSS, and examine its interaction with opex forecasts. We will also consider the longer term benefits to customers of these proposed arrangements. 5. JGN s forecasts of customer numbers, volumes and demands Chapter 5 of JGN s Access Arrangement Information includes forecasts for customer numbers, volumes of gas and Maximum Daily Quantity (MDQ) for each of the five years of the upcoming regulatory period. These forecasts include an increase of over 150,000 new customers over the next five years, which it says will put downward pressure on JGN s revenue requirement and ultimately its network prices. We intend to review these forecasts of customer numbers, volumes and demands, and their appropriateness. It may also be beneficial to undertake sensitivity analysis to see what the effects will be on prices if the outturn customer numbers and demands differ from forecasts. 6. JGN s marketing costs JGN s forecast of growth in customer numbers reflects JGN s marketing program that promotes natural gas as a fuel of choice to increase gas demand. This program offers incentives to residential customers to install new natural gas appliances while also driving new connections. JGN is forecasting annual marketing costs in $2015 to increase from $7.66m in to $9.13m in We intend to review this expenditure to consider whether it is in the long term interests of customers for JGN to incur these marketing costs. 7. JGN s proposed tariff structures and tariff levels JGN is proposing to restructure its network tariffs. Its new tariff strategy includes targeting reductions in the cost of service for individual metered volume residential customers in the block of usage corresponding to residential cooking, and hot water or heating (but not both hot water and heating which corresponds to a higher usage block). 13 We intend to analyse the proposed restructuring of tariffs, to consider whether they are in the long term interests of consumers. JGN has also stated that its proposed network prices have been designed so that the affordability and stability of end retail gas prices will be greater than would otherwise be the case. We intend to consider the proposed tariff structures and tariff levels in that context. 12 JGN s Access Arrangement Information, section JGN s Access Arrangement Information, chapter 13 and appendix 1.8 Page 5 of 6

14 8. JGN s proposed rebalancing of network bills between residential, commercial and industrial customer segments. The figure below shows thatt while typical network customer billss are estimated to decrease over the next five years for residential and commercial customers, they will rise for industrial customers. Estimated change in typicall network customer bills, ($real) Source: Access Arrangement Information, Appendix 1.88 Tariff Structures Statement, June 2014, page 38 We intend to consider the appropriateness of this rebalancing off charges between residential, commercial and industrial customers, and will take into account any relevantt customer engagement with each of these customer segments. David Prins and Robyn Robinsonn AER Consumer Challenge Panel sub panel s 7 21 July 2014 Page 6 of 6