6 May 2010

Australian Energy Regulator

The Australian Energy Regulator today issued its final decision for Queensland's electricity distribution network service providers, Energex and Ergon Energy, for the period 1 July 2010 to 30 June 2015.

The AER's role is to assess expenditure proposed by the Queensland distributors over this period. These expenditures contribute to the revenues allowed to the providers, and ultimately to the prices they charge consumers.

This is the first time the AER has made determinations for the Queensland distributors. Previous determinations were made by the Queensland Competition Authority.

Energex provides electricity to nearly 1.5 million customers in the south east Queensland, while Ergon Energy delivers electricity to over 630,000 customers across the remainder of the state.

For Energex, the AER has approved capital expenditure of $6378 million (58 per cent more than in the previous five years in nominal terms) and operating expenditures of $1768 million (41 per cent more than in the previous five year period in nominal terms) for the next five year period.

AER chairman Steve Edwell said that in reviewing Energex's regulatory proposals for the next five years the AER had found Energex's approach to network planning and management to be sound.

For Ergon Energy, the AER has approved capital expenditure of $5560 million (42 per cent more than in the previous five years in nominal terms) and operating expenditure of $1942 million (34 per cent more than in the previous period in nominal terms) for the five year period.

"The AER has substantially reduced the expenditure proposed by Ergon Energy to ensure that only prudent and efficient costs would be recovered from customers," Mr Edwell said.

In line with its draft decision issued in November 2009, the AER has approved substantial increases in the revenue allowances for both Energex and Ergon Energy. The higher approved revenues result from the continuing need to augment Queensland's electricity distribution networks following strong growth earlier in the decade and the continued growth in population and energy use per customer, higher reliability standards and real increases in the cost of labour and materials.

Energex's revenues will increase by 18.2 per cent in real terms in the first year, followed by 7.9 per cent each year for the following four years. Ergon Energy's revenues will increase by 29.6 per cent in real terms in the first year, followed by 5.1 per cent in the subsequent years of the regulatory period. These increased revenues are largely driven by the higher expenditure requirements as outlined above and also by the cost of capital of 9.72 per cent, which is 126 basis points higher than the current regulatory period, reflecting current and prospective financial conditions.

Based on this determination, network charges for Energex's customers would increase in nominal terms on average by 17 per cent in the first year of the regulatory period, followed by 6.8 per cent in the subsequent years of the period. For Ergon Energy's customers, network charges would increase by 29 per cent in the first year followed by 4.6 per cent in the subsequent years of the period.

"There has been strong growth in the number of connections over the past few years and this is forecast to continue. In addition, the load at each connection is growing as customers continue to install air conditioners and other appliances. In addition, customers expect better service through improving standards of reliability. Cost of materials and labour and financing costs are increasing in the strong economic conditions Australia is experiencing. This decision allows increased charges so the companies can meet these higher demands, and the AER will be carefully monitoring their performance to be sure they deliver," Mr Edwell said.

In terms of a typical residential customer in Queensland with annual electricity charges of $1,400 in 2009-10, the increase in network charges (which make up about 40 per cent of the annual bill) will result in an increase in the annual electricity charge by $129 (around 9.2 per cent) in 2010-11 and by around $35 (around 2.3 per cent) each year thereafter in nominal terms (see note below).

Energex and Ergon Energy are required to submit pricing proposals 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.

In making its final decision, the AER took into account advice from independent experts. These documents will be available on the AER's website, www.aer.gov.au. For more information refer to the relevant chapters of the AER's Final Decision for more detail.

Note: To convert revenues to prices/charges, the AER used forecast demand growth for Energex and Ergon Energy of 3.6 per cent and 3.0 per cent per annum respectively. Distribution charges represent on average around 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 retails tariffs charged by electricity retailers, such as AGL and Origin. The change in distribution charges described in this Decision will be incorporated into retail tariffs from 1 July 2010 onwards. Inflation of 2.52 per cent per annum was assumed for figures presented in nominal terms.