Legislative Council, Tuesday 21 March, 2023

Ms FORREST question to LEADER of the GOVERNMENT in the LEGISLATIVE COUNCIL, Mrs HISCUTT

With regard to the recent sale of Basslink, the government and Hydro Tasmania have stated they are committed to assist with Baslink becoming a regulated asset:

(1) What is the process in Basslink becoming a regulated asset;
(2) what roles will the government and Hydro Tasmania play in this process;
(3) what commitment and/or undertakings have they made at this stage;
(4) which other parties need to be consulted before the AER will consider making a draft determination for Basslink to become a regulated interconnector;

(5) what factors will comprise the AER’s assessment of the maximum allowable revenue recoverable by the owner of a regulated interconnector; and
(6) is it likely that Basslink’s Regulated Asset Base (RAB) will be much different to the $770m+ that APA has already outlaid to gain control of Basslink?

ANSWERS:

Question 1

The Australian Energy Regulator (AER) is the entity responsible for determining whether or not Basslink will become a regulated interconnector.

The National Electricity Market rules expressly provide the opportunity for Basslink to apply to become a regulated link, following in the path of the other two interconnectors that commenced as market network services providers (Directlink and Murraylink).

Basslink Pty Ltd (BPL), as owner and operator of Basslink, will need to make an application to the AER for regulatory conversion. The AER has to consider whether or not there is a net customer benefit in Basslink moving from its current operating model, to becoming a regulated interconnector. BPL has not as yet prepared an application that would commence the process.

Assuming that the AER was to assess that there is a net benefit to customers in Basslink becoming a regulated interconnector, the AER would then be required to complete a revenue determination for Basslink. That process also has yet to commence.

The AER processes will be open and public, with all interested parties having the opportunity to make submissions and take part in the process.

The approach taken by the AER for the conversion of Murraylink in 2002 provides useful guidance to how it might approach Basslink’s conversion application. Information can be found at: https://www.aer.gov.au/networks-pipelines/determinations-access-arrangements/murraylink-regulatory-conversion-and-revenue-cap-2003-12/proposal.

As a precursor to the application for regulatory conversion, BPL has initiated a consultative process to assist it framing its regulatory application, as is the AER’s preference.
 
Question 2

It is noted that while the State Government is a key stakeholder in the regulatory process, the decision to seek regulation is a matter for BPL, as the owner and operator of the cable. The Government is not leading or sponsoring the regulatory application.

The Government will take up all opportunities presented throughout the regulatory process to advance the State’s position in respect of Basslink’s regulation, having regard to the objectives it has set out for the conversion process (see Question 3).

Question 3

The State has entered into an agreement (called the Regulatory Conversion Deed) with BPL as part of the Basslink sale process that provides for a ‘no surprises’ approach between the parties in relation to Basslink’s regulatory process.

As documented in the RCD, the State's objectives for Basslink’s conversion to a regulated link are as follows:
• for Basslink to achieve conversion in a manner consistent with the National Electricity Objective and National Electricity Law and having regard to the interests of Tasmanian consumers, including by achieving a transmission cost allocation outcome to Tasmania that is minimised and no more than the benefits that Tasmanian customers receive;
• for BPL to seek conversion to optimise the reliability, efficiency in maintenance and operation, availability and performance of Basslink;
• for BPL to use its reasonable endeavours to submit the Application as soon as possible and by no later than the nine months after it was acquired by APA; and
• for the Application Documentation and any submissions either the State or BPL intends to make regarding the Application or Conversion to be not inconsistent with the Operational Requirements set out in the Basslink

Operations Agreement as they applied prior to any conversion.
BPL’s conversion objectives are:
• for BPL to achieve conversion to optimise the reliability, efficiency in maintenance and operation, availability and performance of Basslink;
• to the extent possible, for the costs of implementing any upgrades to the Basslink facilities to be incorporated into the regulatory asset base of Basslink upon conversion and/or in future capital and operating expenditure submissions;
• for the maximum allowable revenue as determined by the AER to be acceptable to BPL;
• incentive arrangements to maximise availability and reliability which are to be consistent with service target performance incentive scheme (as applied to Directlink); and
• for BPL to use its reasonable endeavours to submit the application as soon as possible and by no later than the 9 months from when APA acquired BPL.
The State has given the following commitments to BPL in relation to the regulatory application:
• to keep BPL informed regarding any submissions the State intends to make regarding the application or conversion, and give due consideration to any feedback received from BPL in relation to those matters prior to lodging any such submissions (with the same reciprocal commitment provided by BPL to the Government);
• to cooperate with BPL on early engagement with the AER to understand the AER's preliminary views on the process, timing, cost allocation methodology and key engineering and operational issues for conversion; and
• take reasonable steps to support BPL being able to recover the efficient costs of meeting the State’s conversion objectives (above), which may include, making submissions to the AER to this effect.
 
The State has agreed to (and again on a reciprocal basis with BPL):
• update BPL on the progress of the preparation of any submissions, supporting documentation and any key issues relating to BPL’s conversion application;
• when requested by the BPL, provide it with draft copies of any submissions or supporting documentation in relation to the application documentation and provide BPL with an opportunity to comment on them;
• make available suitably qualified and experienced personnel to meet with BPL to discuss the documentation; and
• reasonably consider any comments BPL makes on the documentation and any key issues raised by the State and, where it considers it appropriate to do so having regarding to the Conversion Objectives (above), incorporate

BPL’s comments into that documentation as applicable.

Question 4

The AER will conduct an open and public process for its consideration of Basslink’s regulatory conversion application and in relation to the revenue determination. The AER places a high importance on consultation, and to provide an indication of the approach it takes, the AER network revenue determination engagement protocol provide an insight into its general approach – see: https://www.aer.gov.au/system/files/AER%20network%20revenue%20determination%20engagement%20protocol%20-%20September%202015.pdf

The design of the process the AER will use in relation to the Basslink conversion application and any revenue determination is a matter for the AER, and the AER has not published information about this at this time. Again, the material on the Murraylink conversion process is likely to provide some useful guidance (see Question 1).

 
Question 5

The factors that will comprise the AER’s assessment of Basslink’s maximum allowable revenue will the similar to those taken into account for all transmission pricing. Because of Basslink’s unique features (it is the only undersea HVDC link in the NEM), there will be some unique features that the AER will need to consider that are not relevant for other interconnectors (eg. marine disaster recovery arrangements). At the highest level, the core matters are:
• efficient and prudent operating costs;
• the return on capital – including capital asset pricing elements and the regulatory asset base;
• the return of capital (depreciation)
• efficient and prudent capital expenditure
• performance incentive regimes.

The AER uses the following diagram to explain the building-block model it uses to calculated allowable network revenues.
More information is available by examining the AER’s process for other interconnectors, such as the Murraylink determination and process -see https://www.aer.gov.au/networks-pipelines/determinations-access-arrangements/murraylink-determination-2023%E2%80%9328.
 
Question 6

The AER is unlikely to place material weight on the price paid by APA to acquire Basslink in setting the regulated asset base under the regulatory model. Government should not make predictions on this at any time. BPL has not submitted a regulatory application at this time.