Intention to Declare Control on Unison Networks Limited

1
Intention to Declare Control on Unison Networks
Limited

• PowerNet Limited Submission
• Martin Walton Chief Executive
• Greg Buzzard Chief Financial Officer

2
PowerNet Limited Background

• Network management
• JV company (formed in 1994)
• Offices in Invercargill and Balclutha
• Owned 50/50 by
• Electricity Invercargill Ltd
• The Power Company Ltd (Southland)
• Manages 4 electricity networks

3
Network Details

• ODV 350M 4th
• System Length 13,547km 3rd
• Consumers 63,000 6th
• GWh conveyed 1,230GWh 5th
• Land Area sq km 2nd
• Customer density - highest (2nd) and lowest
• Undergrounding - highest and lowest
• 2005 lowest SAIDI and SAIFI, 2004 highest SAIDI
• Most efficient network

4
Network Ownership Experience

• Central Government
• Local Government
• Consumer Trust
• Consumer Co-operative
• Investor Owned Joint Venture

5
The 3 Dimensions

• Basis for Declaring Control (para 77-79)
• The balance between
• Quality
• Price Return

6
Sharing Benefits

• Acquisition process
• Cost savings are identified
• AND paid to the seller
• Benefits identified by the Commission
• Are not benefits
• They represent cost savings identified and
  already paid for on acquisition
• Paying twice is fundamentally wrong
• Retrospective effect

7
WACC and ROI

• Measuring apples with apples
• Lallys WACC tax rate 33
• Commissions view of Unisons ROI tax rate
  16.6
• Individual WACCs (para 162)
• Use the WACC tax rate in the ROI
• Prima facie 33
• AND in regulatory accounts

8
Tax Impact on Lallys WACC

• Tax WACC
• EIL 33 7.35
• TPCL 66 5.11
• OJV 0 9.58
• Unison 16 8.50
• Prima facie 33 tax for ROI as in Lallys WACC
• WACC as per Lally 8 September 2005

9
Disaggregation

• Discourages rationalisation of networks
• Penalises recent acquisitions/mergers
• Inhibits overall commercial effective pricing
• Limits further industry wide efficiency gains
• Commerce Commission
• Company wide value and return
• Electricity Commission
• Methodology, aggregation, averaging.

10
Capital Contributions

• Upfront cash contribution
• Covers negative discounted cash flow cost of
  supplying consumer
• NPV 0 approach
• Cost is incurred over the life of asset
• Income spread over the same period
• IFRS change to spreading

11
Inflation

• CPI as a proxy for revaluation gains
• Inflation scenarios modeled up to 3
• A possible scenario
• - Customer contributions 2 of ODV
• - Inflation 5
• - Lally WACC of 7.35
• - Every profit would equate to an ROI above WACC

12
Summary

• Balance between the 3 dimensions
• Price, quality and return
• Building block approach does not share efficiency
  gains
• Identified benefits are not benefits
• WACC and ROI parameters are inconsistent
• Continued disaggregation is less efficient
• Consistency with the Purpose Statement?