6 May 2010

Australian Energy Regulator

The Australian Energy Regulator today issued its final decision for South Australia's electricity distribution network service provider, ETSA Utilities, for the period 1 July 2010 to 30 June 2015.

The AER's role is to assess expenditure proposed by ETSA Utilities over this period. These expenditures contribute to the allowed revenues and, ultimately, prices. This is the first time the AER has made a determination for ETSA Utilities. Previous determinations were made by the Essential Services Commission of South Australia.

ETSA Utilities' distribution network provides electricity to over 800,000 customers across the vast majority of the state.

The AER approved a capital expenditure program of $1768 million over five years (in nominal terms) nearly one-third less than what ETSA Utilities originally asked for. However, this amount is still more than double that spent by ETSA Utilities over the 2005-10 regulatory control period.

"More than half of this expanded program is required to ensure the capacity of the network meets future demand from both new and existing customers, including meeting the continuing growth in peak demand. The load is growing as customers continue to install air conditioners and other appliances. In addition, there is a need to address risks associated with ageing assets to maintain reliability for customers. The cost of materials and labour and financing costs are also increasing," AER chairman Steve Edwell said today.

The AER has also approved operating expenditure of $1115 million, which is 60 per cent more than in the previous five years in nominal terms.

Mr Edwell noted that: "ETSA Utilities' operating costs largely relate to network maintenance associated with increased inspections and higher emergency response expenditure forecast due to increasing asset age and growth in the network."

ETSA Utilities' revenues will increase by 12.1 per cent in real terms in the first year, followed by 5.8 per cent in the subsequent years of the regulatory period.  A factor underlying the revenue increase is the higher cost of capital of 9.76 per cent, which is 80 basis points higher than the current regulatory period, reflecting current and prospective financial conditions.

The substantial increase in allowed expenditure means network charges for retail customers will increase on average by 15 per cent in nominal terms in the first year, followed by 8.4 per cent in the subsequent years of the regulatory period.

The precise effect on retail charges will not be clear until ETSA Utilities submits its pricing proposal following the AER's decision.  The increases in 2010-11 will need to be adjusted as ETSA Utilities has over recovered revenue in the last year of the current regulatory control period and have to return the money to customers through lower tariffs.

Without this adjustment a typical household with annual electricity charges of $1,400 in 2009-10 could expect to pay 6 per cent or around $84 more in charges in 2010-11. With the adjustment the increase will be less. Beyond 2010–11, further price rises for residential customers will be around 3.4 per cent or $52 each year (see note below).

In making its final decision, the AER took into account ETSA Utilities' revised proposal, submissions from interested parties and advice from independent experts. These documents are available on the AER's website, www.aer.gov.au. Utilities is required to submit a pricing proposal to the AER by 27 May 2010, indicating how the required revenue allowances contained in the final decision will be recovered from customers in accordance with the rules.

Note: Distribution charges on average represent 40 per cent of the cost of supplying electricity to residential customers, although this may differ between states. Typically these customers do not see distribution charges in their electricity bills. Instead, the charges are included in retail tariffs charged by electricity retailers, such as AGL and Origin. The change in distribution charges proposed in this decision will be incorporated into retail tariffs from 1 July 2010 onwards. To calculate nominal figures an expected inflation rate of 2.52 per cent per annum was used over the next regulatory control period.