“Down, right?”
Privatisation and the regulatory valuation of electricity distribution
network service providers in New South Wales: Evidence and issues.
A report for the Public Interest Advocacy Centre
AIE Breakfast Seminar
Sydney
4 December 2015
Bruce Mountain
Director
Outline
•
Context
–
–
–
–
Prices
Regulated revenues
Regulatory asset valuations
Market versus regulatory asset valuations
•
Evidence of stranded assets
•
Quantification of possible revaluation
•
Is revaluation before privatisation necessarily a bitter pill?
•
Next steps
2
Network prices in NSW are high, after AER Draft Decision
Source: AER Draft Decision, Ofgem RIIO ED1 proposals, OECD (for PPP exchange rates), CME analysis
3
Regulated revenues per connection in NSW do not compare favourably
Regulated revenue per connec on
2002
$ (2013)
2013
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$Ergon
Energy
Essen al
Energy
Ausgrid Endeavour
Aurora
Energy
Source: regulatory decisions, CME analysis
4
Energex
SA Power SP Ausnet Powercor Ci power
Networks
Jemena
United
Energy
Regulatory asset valuations in NSW 2-2.5X those in VIC per
connection
Regulated assets per connec on
(PPP exchange rates)
$ per connec on
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$Avg in GB
(2016)
SA
(2013)
VIC
(2013)
Regulatory decisions, CME analysis
5
TAS
(2013)
NSW
(2013)
Endeavour
(2015)
Essen al
(2015)
AusGrid
(2015)
QLD
(2013)
Market vs regulatory asset valuations ?
$7,000
Great Britain
Victoria
$6,000
$(thousands) (2013) per connec on
NSW
$5,000
$4,000
$3,000
$2,000
$1,000
$-
RAB per connec on at priva sa on
(2013 AUD)
Market valua on per connec on at
priva sa on (2013 AUD)
Sources: CME analysis with data from www.statisticsauthority.gov.uk (British RPI), www.rba.gov.au (Australian CPI),
Grout et al. (2004), (Grout and Jenkins, 2001, Domah and Pollitt, 2000) (GB market values and customer numbers),
www.aer.gov.au (Regulatory Information Notices for NSW regulatory asset values), Victorian market value and
6
regulatory asset values (Quiggin, 2002), GB regulatory asset values (Office of the Electricity Regulator, 1999).
Is stranding: a real concern?
GWh through-put
RAB per
MW of
average
demand
7
AEMO’s changing forecast of total electricity consumption in NSW in
2014/15: When will AEMO under-forecast demand?
8
AEMO projects that NSW rooftop PV capacity will account for a
quarter of NSW peak demand in 15 years time
25%
20%
15%
10%
5%
0%
2013
9
2015
2017
2019
2021
2023
2025
2027
2029
Average demand divided by installed transformer capacity: high and
rising capacity margins
10
$(thousands) per connec on (2013)
$7
$6
$5
$2.3
VIC
$3.5
$4
$3
$2
$1
$3.8
$2.6
$Opening (1 Jan 2000)
Addi ons
Indexa on less deprecia on and
disposals
Closing (31 Dec 2012)
$(thousands) per connec on (2013)
$12
$10
$3.6
$8
NSW
$6.8
$6
$4
$6.5
$2
$3.3
$Opening (1 July 2000)
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Addi ons
Indexa on less deprecia on and
disposals
Closing (30 June 2013)
Is a write-down necessarily a bitter pill?
•
Current owner averse to write-downs, but future owners don’t like risk of
future write downs. Assurances by politicians at privatisation that assets will
not be written-down in future may provide some protection.
•
But banking on future political will to underwrite stranding risk in a fading
monopoly is not particularly desirable.
•
Therefore asset write-down before privatisation likely to be counted more
highly than political assurances: a bird in the hand is worth two in the bush.
•
This may result in more vigorous investor competition at privatisation, and
hence higher RAB multiples. Following this logic, a lower regulatory
valuation need not translate into lower privatisation proceeds:
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Next steps
•
Find out what prospective buyers think. Are they worried about stranding
risk and will a pre-privatisation revaluation be counted more highly than
politicians’ assurances?
•
Extend analysis to the rest of the NEM - underway.
•
Think about the best way to write down:
– Once-off write-down;
– Differentiated rate of return for sunk v new investment;
– Escrow account for stranded assets, with opportunity to write-back if
assets later become “used and useful”;
– Accelerated depreciation;
– Ending CPI indexation of stranded sunk assets.
– Many others and combinations of above.
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