SAPN’s 2015-2020 proposal: initial comments
Bruce Mountain
Outline
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Capex
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Opex
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Revenue
•
RAB
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WACC
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TAX
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Profits
2
But first, a few words on SAPN’s proposal
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1,000 Mega bytes
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542 documents and spreadsheets
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34 consultant reports.
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Compared to Ergon, Energex, AusGrid, Endeavour and Essential, more consultancy
reports, bigger (in mega bytes) and only slightly fewer documents than most prolific
(Ergon - 560 documents and spreadsheets).
•
How should we be thinking about a system of regulation that works this way?
– In the commercial world, deals are not done like this.
– Does this reflect a breakdown in trust?
– What does an application like this say about SAPN’s desire to meaningfully
engage with consumers ?
3
Much higher opex is proposed
SAPN - opex
$million (2014)
Proposed
Allowed
Actual
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$-
2001-5
4
2006-10
2011-15
2016-20
Likewise, much higher capex
SAPN - Capex
$million (2014)
Proposed
Allowed
Actual
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
2001-5
5
2006-10
2011-15
2016-20
Regulated Asset Base projected to increase significantly
SAPN (actual)
$millions (2014)
$6,000
SAPN (proposed)
$5,000
$4,000
$3,000
$2,000
$1,000
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
$-
6
Higher revenues reflect much higher proposed spending but partially offset
by lower rate of return
SAPN - Revenue
$million (2014)
Proposed
Allowed
Actual
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
2001-5
7
2006-10
2011-15
2016-20
But proposed WACC (net of risk free rate) higher than current
regulatory period
WACC Vanilla Nominal cost of
nominal
equity
Ofgem (British distributors,
underway)
AER (NSW, Draft Decision)
SAPN proposal*
4.8%
7.1%
7.7%
Debt - nominal
7.1%
8.1%
10.6%
3.7%
6.5%
5.9%
* SAPN proposal restated to be consistent with AER Risk Free Rate in NSW Draft Decision of 3.55%
SAPN proposed WACC (stated as premium to risk
free rate)
Current Regulatory Period WACC (stated as
premium to risk free rate in current RP)
8
4.3%
3.9%
And proposed income tax in next period now almost 3X as much as
AER allowed for current period
$(millions)
nominal
SAPN Income tax charges allowed/proposed
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$2011-2015 (AER)
Source: SAPN proposal, ACT Orders
9
2011-2015 (Compe
on Tribunal)
2016-2020 (Proposal)
Claim for tax charge to consumers - about $450m - not insignificant.
Important to know that this is a realistic estimate
•
Competition Tribunal decision meant SAPN allowed to recover $414m (nominal) in
tax charges from consumers during current regulatory period (2011 to 2015).
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But for 2011 to 2013 financial years inclusive, SAPN financial statements show that it
has received tax credit of $4.2m.
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SAPN financial statements describe tax consolidation under head entity “Utility
Management Pty Ltd”, and various Caribbean subsidiaries. So, how much tax has
SAPN actually paid, and how does this compare to what it has been allowed to
recover from electricity users?
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Transparency very important in assessing SAPN claims and AER decision: if SAPN is
paying substantially less tax than AER expected, the regulatory arrangements for
taxation must address this.
10
The profitability of SAPN’s regulated business is a concern
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In 2012 the regulated business of UK Power Networks (majority owned by CKI)
achieved profit before interest and taxes (PBIT) of GBP711m for delivering electricity
to around 8 million connections, giving a PBIT per connection of $161 per connection.
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In 2012/13 SA Power Networks’ distribution business achieved PBIT of $595m for
delivering electricity to 838 000 connections to give PBIT margin of $710 per
connection.
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Even after adjustment for financing costs, SAPN’s regulated distribution business still
seems to deliver about 4 times more pre-tax profit than UKPN per connection.
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SAPN has underspent regulatory capex and opex allowances but not by large
amounts. Why then is SAPN so profitable in absolute terms and in comparison to
UKPN ?
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Regulatory asset valuation per connection is about 4 times higher for SAPN than
UKPN and (real) WACC has been about 33% higher in SA than GB. Can these
differences be justified or is this evidence of regulatory failure ?
11•
These concerns should be investigated by the AER.