DRAFT DECISION Roma to Brisbane Gas Pipeline Access


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DRAFT DECISION Roma to Brisbane Gas Pipeline
Access Arrangement 2017 to 2022
Attachment 5 – Regulatory depreciation
July 2017

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

© Commonwealth of Australia 2017
This work is copyright. In addition to any use permitted under the Copyright Act 1968, all material contained within this work is provided under a Creative Commons Attributions 3.0 Australia licence, with the exception of:
 the Commonwealth Coat of Arms
 the ACCC and AER logos  any illustration, diagram, photograph or graphic over which the Australian Competition and
Consumer Commission does not hold copyright, but which may be part of or contained within this publication. The details of the relevant licence conditions are available on the Creative Commons website, as is the full legal code for the CC BY 3.0 AU licence.
Requests and inquiries concerning reproduction and rights should be addressed to the:
Director, Corporate Communications Australian Competition and Consumer Commission GPO Box 4141, Canberra ACT 2601
or [email protected]
Inquiries about this publication should be addressed to:
Australian Energy Regulator GPO Box 520 Melbourne Vic 3001
Tel: 1300 585 165
Email: [email protected]

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

Note
This attachment forms part of the AER's draft decision on the access arrangement for the Roma to Brisbane Gas Pipeline for 2017–22. It should be read with all other parts of the draft decision. The draft decision includes the following documents: Overview Attachment 1 - Services covered by the access arrangement Attachment 2 - Capital base Attachment 3 - Rate of return Attachment 4 - Value of imputation credits Attachment 5 - Regulatory depreciation Attachment 6 - Capital expenditure Attachment 7 - Operating expenditure Attachment 8 - Corporate income tax Attachment 9 - Efficiency carryover mechanism Attachment 10 - Reference tariff setting Attachment 11 - Reference tariff variation mechanism Attachment 12 - Non-tariff components Attachment 13 - Demand

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

Contents
Note ...............................................................................................................5-2 Contents .......................................................................................................5-3 Shortened forms ..........................................................................................5-4 5 Regulatory depreciation........................................................................5-5
5.1 Draft decision ..................................................................................5-5 5.2 APTPPL's proposal.........................................................................5-6 5.3 AER’s assessment approach.........................................................5-8
5.3.1 Interrelationships....................................................................... 5-10 5.4 Reasons for draft decision...........................................................5-12
5.4.1 Asset class consolidation .......................................................... 5-14 5.4.2 Accelerated depreciation – redundant compressors .................. 5-15 5.4.3 Asset lives ................................................................................. 5-15 5.5 Revisions.......................................................................................5-17

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

Shortened forms
Shortened form AER ATO capex CAPM CPI DRP ECM ERP Expenditure Guideline gamma MRP NGL NGO NGR NPV opex PTRM RBA RFM RIN RPP SLCAPM STTM TAB UAFG WACC WPI

Extended form Australian Energy Regulator
Australian Tax Office capital expenditure
capital asset pricing model consumer price index debt risk premium
(Opex) Efficiency Carryover Mechanism equity risk premium
Expenditure Forecast Assessment Guideline Value of Imputation Credits market risk premium National Gas Law national gas objective National Gas Rules net present value operating expenditure post-tax revenue model Reserve Bank of Australia roll forward model
regulatory information notice revenue and pricing principles Sharpe-Lintner capital asset pricing model
Short Term Trading Market Tax asset base
Unaccounted for gas weighted average cost of capital
Wage Price Index

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

5 Regulatory depreciation
When determining the total revenue for APTPPL for the Roma to Brisbane Pipeline (RBP), we include an allowance for the depreciation of the projected capital base (otherwise referred to as ‘return of capital’).1 Regulatory depreciation is used to model the nominal asset values over the 2017–22 access arrangement period and the depreciation allowance in the total revenue requirement.2
This attachment outlines our draft decision on APTPPL’s annual regulatory depreciation allowance for the 2017–22 access arrangement period. Our consideration of specific matters that affect the estimate of regulatory depreciation is also outlined in this attachment. These include:
 the standard asset lives for depreciating new assets associated with forecast capex3
 the remaining asset lives for depreciating existing assets in the opening capital base.4
5.1 Draft decision
We accept APTPPL’s proposal to use the real straight-line method to calculate the regulatory depreciation allowance. However, we do not approve APTPPL’s proposed regulatory depreciation allowance of $18.1 million ($nominal) for the 2017–22 access arrangement period. This is mainly because of our decision to update APTPPL's calculation of the remaining asset lives as at 1 July 2017 (section 5.4.3.2) and due to the effect of our determinations on other components of APTPPL’s proposal. Discussed in other attachments, these determinations include the opening capital base (attachment 2) and the forecast capex (attachment 6).
We approve APTPPL’s proposed asset classes and the standard asset lives assigned to each of its asset classes for the 2017–22 access arrangement period. This is because they are consistent with the approved standard asset lives for the 2012–17 access arrangement period. They are also broadly comparable with the standard asset lives approved in our recent decisions for other gas transmission service providers.5

1 NGR, r. 76(b). 2 Regulatory depreciation allowance is the net total of the straight-line depreciation (negative) and the annual
inflation indexation (positive) on the projected capital base. 3 The term ‘standard asset life’ may also be referred to as ‘standard economic life’, ‘asset life’, ‘economic asset life’
or ‘economic life’. 4 The term ‘remaining asset life’ may also be referred to as ‘remaining economic life’ or ‘remaining life’. 5 For example, AER: Access arrangement final decision APA GasNet Australia (Operations) Pty Ltd 2013–17 Part 2:
Attachments, March 2013, p. 149; AER: Final decision Amadeus Gas Pipeline access arrangement attachment 5 — Regulatory depreciation, May 2016, p. 9.

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

We accept APTPPL’s proposed weighted average method to calculate the remaining asset lives as at 1 July 2017.6 In accepting the weighted average method, we have updated the proposed remaining asset lives as at 1 July 2017 due to the input changes we made to APTPPL’s proposed roll forward model (RFM). These input changes affect the remaining asset lives calculation and are discussed in section 5.4.3.2.
Our draft decision on APTPPL’s regulatory depreciation allowance is $19.9 million ($nominal) in total for the 2017–22 access arrangement period as set out in table 5.1.

Table 5.1 AER’s draft decision on APTPPL’s regulatory depreciation allowance for the 2017–22 access arrangement period ($million, nominal)

Straight-line depreciation Less: indexation on capital base Regulatory depreciation

2017–18 16.6 10.9 5.7

2018–19 17.9 11.3 6.6

2019–20 18.7 11.5 7.1

2020–21 12.8 11.5 1.3

2021–22 10.9 11.7 –0.8

Total 76.9 57.0 19.9

Source: AER analysis.

5.2 APTPPL's proposal
APTPPL used the AER's post-tax revenue model (PTRM) to calculate the forecast depreciation for the 2017–22 access arrangement period. APTPPL proposed to use the weighted average approach as set out in the AER's roll forward model for calculating the remaining asset lives as at 1 July 2017.
APTPPL proposed to consolidate its asset classes from the previous 25 asset classes to 11 asset classes, which affected the pipelines and compressors asset classes. The previous asset classes were broken down by projects which resulted in multiple classes with similar asset types that were assigned the same standard asset lives. It also proposed to allocate the assets in the 'RBP expansion 8' asset class to the 'Pipelines' and 'Compressors' asset classes.
Table 5.2 shows the mapping of the previous asset classes with the proposed consolidated asset classes.
APTPPL’s proposed regulatory depreciation for the 2017–22 access arrangement period is set out in table 5.3.

6 We note that the capex determined in this draft decision for 2015–16 and 2016–17 are estimates. As part of the final decision, we expect the estimate of capex for 2015–16 to be replaced by actuals and the estimate of capex for 2016–17 may be revised based on more up to date information by RBP in its revised proposal. The capex values are used to calculate the weighted average remaining asset lives. Therefore, we may recalculate RBP’s remaining asset lives using the method approved in this draft decision to reflect revisions to the 2015–16 and 2016–17 capex values for the final decision.

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

Table 5.2 APTPPL proposed asset class consolidation

Asset class in previous access arrangement period Original pipeline Looping 1 Looping 2 Looping 3 Looping 4 Looping 5 Looping 6 Lateral Lytton lateral Pipelines/laterals Dalby Compressor Kogan compressor Oakey compressor Condamine compressor Yuleba compressor Gatton compressor Easements Communications Other Capitalised AA costs Group IT SIB capex PMA Regulators and meters RBP expansion 8

Proposed asset class Original pipeline (DN250)
Pipelines
Compressors
Easements Communications
Other Capitalised AA costs
Group IT SIB capex
PMA Regulators and meters
n/a

Source: APTPPL, Access arrangement revision submission 2017–22, September 2016, pp. 116 and 117.

Table 5.3 APTPPL’s proposed regulatory depreciation for the 2017–22 access arrangement period ($million, nominal)

Straight-line depreciation Less: indexation on capital base Regulatory depreciation

2017–18 15.4 9.0 6.4

2018–19 16.7 9.4 7.3

2019–20 17.8 12.0 5.7

2020–21 11.4 12.1 –0.7

2021–22 11.8 12.3 –0.6

Total 73.1 55.0 18.1

Source: APTPPL, Proposed PTRM, September 2016.

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

5.3 AER’s assessment approach
In its access arrangement proposal, APTPPL must provide a forecast of depreciation for the 2017–22 access arrangement period, including a demonstration of how the forecast is derived on the basis of the proposed depreciation method.7
The depreciation schedule sets out the basis on which the pipeline assets constituting the capital base are to be depreciated for the purpose of determining a reference tariff. The depreciation schedule may consist of a number of separate schedules, each relating to a particular asset or class of asset.8 In making a decision on the proposed depreciation schedule, we assess the compliance of the proposed depreciation schedule with the depreciation criteria set out in the NGR.9 We must also take into account the NGO and the revenue and pricing principles.10
Our discretion under the depreciation criteria is limited.11 The depreciation criteria state that the depreciation schedule should be designed:
 so that reference tariffs will vary, over time, in a way that promotes efficient growth in the market for reference services12
 so that each asset or group of assets is depreciated over the economic life of that asset or group of assets13
 so as to allow, as far as reasonably practicable, for adjustment reflecting changes in the expected economic life of a particular asset, or a particular group of assets14
 so that (subject to the rules about capital redundancy), an asset is depreciated only once15
 so as to allow for the service provider's reasonable needs for cash flow to meet financing, non-capital and other costs.16

7 NGR, r. 72(1)(c)(ii). 8 NGR, rr. 88(1), 88(2). 9 NGR, r. 89. 10 NGL, s 28; NGR r. 100(1). The NGO is set out in NGL, s. 23. The revenue and pricing principles are set out in
NGL, s. 24. 11 NGR, rr. 89(3) and 40(2). The example provided in r. 40(2) states: The AER has limited discretion under r. 89. Rule
89 governs the design of a depreciation schedule. In dealing with a full access arrangement submitted for its
approval, the AER cannot, in its draft decision, insist on change to an aspect of a depreciation schedule governed
by r. 89 unless the AER considers the change is necessary to correct non-compliance with a provision of the Law
or an inconsistency between the depreciation schedule and the applicable criteria. Even though the AER might
consider change desirable to achieve more complete conformity between the depreciation schedule and the
principles and objectives of the Law, it would not be entitled to give effect to that view in the decision making
process. 12 NGR, r. 89(1)(a). 13 NGR, r. 89(1)(b). 14 NGR, r. 89(1)(c). 15 NGR, r. 89(1)(d). 16 NGR, r. 89(1)(e).

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

The depreciation criteria also provide that a substantial amount of depreciation may be deferred.17
The rules also require that any forecast must be arrived at on a reasonable basis and must represent the best forecast or estimate possible in the circumstances.18
The regulatory depreciation allowance is the net total of the real straight-line depreciation (negative) and the annual inflation indexation (positive) on the projected capital base. Our standard approach is to employ a straight-line method for calculating depreciation. We consider that the straight-line method satisfies the NGR’s depreciation criteria.19 This is because the straight-line method smooths changes in the reference tariffs, promotes efficient growth of the market, allows assets to be depreciated only once and over its economic life, and allows for a service provider's reasonable needs for cash flow.
In assessing APTPPL’s proposed regulatory depreciation allowance, we have analysed APTPPL’s proposed inputs to the PTRM for calculating depreciation for the 2017–22 access arrangement period. These inputs include:
 the opening capital base as at 1 July 2017
 the forecast net capex in the 2017–22 access arrangement period
 the forecast inflation rate for the 2017–22 access arrangement period
 the standard asset life for each asset class—used for calculating the depreciation of new assets associated with forecast net capex in the 2017–22 access arrangement period
 the remaining asset life for each asset class—used for calculating the depreciation of existing assets associated with the opening capital base as at 1 July 2017.
Our decisions affecting the first three inputs in the above list are discussed elsewhere: opening capital base (attachment 2), forecast inflation (attachment 3) and forecast net capex (attachment 6). Our decision on the required amendments to APTPPL’s proposed regulatory depreciation allowance reflects our determinations on these building block components. Our assessment approach on the remaining two inputs in the above list is set out below.
In general, we consider that consistency in the standard asset life for each asset class across access arrangement periods will allow reference tariffs to vary smoothly over time. This will promote efficient growth in the market for reference services.20 Our standard method for determining the remaining asset lives is the weighted average

17 NGR, r. 89(2). 18 NGR, r. 74(2). 19 NGR, r. 89. 20 NGR, r. 89(1)(a).

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Attachment 5 – Regulatory depreciation | Draft decision: Roma to Brisbane Gas Pipeline Access

Arrangement 2017–22

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DRAFT DECISION Roma to Brisbane Gas Pipeline Access