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, and the government and Hydro Tasmania stating that they are committed to assist with Basslink becoming a regulated asset and noting Basslink’s operating costs being well known and the weighted average cost of capital (WACC) figure can be reliably estimated;
(1) What does the Minister envisage the range of recoverable revenues from consumers to be?
(2) (a) With regard to the performance of Marinus Link as a regulated asset, what does the Marinus modelling assume about Basslink’s role;
(b) will it perform the same role as Marinus; or
(c) are there other assumptions?

(3) Where does AEMO receive the money from to pay the owner of the regulated asset Basslink?
(4) Once the AER has determined the maximum allowable revenue recoverable from consumers, how, from whom and to whom will the money flow occur including consumers, transmissions owners, AEMO and the owner of the regulated asset;
(5) (a) Is it likely 50% of the costs will be recoverable from Tasmanian consumers; and
(b) if apportioned on a per capita basis will Tasmanian consumers pay more than Victorian consumers, and
(c) how is the cost recovery is likely to work;
(6) What is the best estimate at this stage of the effects on Tasmanian consumers;
(a) In total; and
(b) on a per capita basis;

(7) (a) Is Basslink likely to become an asset that is predominantly used to send power northwards; and
(b) will Tasmanian consumers be contributing more to the costs even though there is no direct benefit?
(8) A figure of 6% of Marinus’ benefits will be ‘received’ by Tasmanians:
(a) What is the comparable figure for Basslink as a regulated asset;
(b) will this change over time; and
(c) is this dependent on how Basslink is used, that is whether it is exporting or importing.
(9) Is it the case that regardless of the level of use of the regulated asset, the owner retains the regulated fee.
(10) What is the current estimate of the time it will take to make Basslink a regulated asset?
ANSWERS:
Question 1
The Australian Energy Regulator (AER) is the entity responsible for pricing regulation of transmission assets in the National Electricity Market (NEM), including regulated interconnectors.
Before the AER will be in a position to consider the matter of revenue recovery for Basslink, the AER has to consider whether or not there is a net customer benefit in Basslink moving from its current operating model, namely a market network service provider, to becoming a regulated interconnector.
That process has not yet begun, and, Basslink Pty Ltd has not 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.
Accordingly, it is not possible to provide information on Basslink’s recoverable revenues.
There will be many factors the AER will consider in making any revenue determination for Basslink, as is the case with all such processes for transmission assets. It is not simply a matter of the AER passing through Basslink current (or historic) operating costs. The AER will go through a rigorous and detailed public process to determine those operating costs that it considers prudent for Basslink, not simply accepting Basslink’s current operating costs.
In relation to the WACC, these capital allowances are also dynamic over time, and it would be speculation to provide any estimate of these ahead of the AER process commencing, particularly as we are in a rising interest rate cycle.
Another key driver will be the regulated asset base the AER uses for the application of the WACC. Again, it is too early in the process to provide any reliable estimate of what the AER will allow for the regulated asset base – particularly in the absence of Basslink Pty Ltd putting forward a regulatory proposal.
Question 2
Modelling undertaken for the Project Marinus Regulatory Investment Test for Transmission (RIT-T) and AEMO’s Integrated System Plan (ISP) assumes that Basslink is operating throughout the entire modelling horizon until at least 2050. Both modelling sets assume Basslink continues to operate like a regulated interconnector, with flows dictated by relative pool prices (as will be the case for Project Marinus).
Question 3
AEMO plays a limited role in the payment arrangements for regulated interconnectors (see below).
Question 4
Regulated interconnectors have two sources of income that when combined, must not exceed the maximum allowable revenue determined by the AER for the asset.
The primary source of income is from transmission charges paid by electricity customers through network tariffs. The nature of this income stream is similar to that for other regulated transmission networks, such as TasNetworks’ regulated transmission business.
Those revenues are, in the first instance, collected by retailers as part of bundled retail tariffs, and eventually passed back to the interconnector. The exception is for customers that participate directly in the wholesale market, rather than through a retailer (such as a major industrial customer), and in this case, those customers pay transmission tariffs directly to regulated network owners.
The second source of income is from inter-regional settlements residues (this doesn’t apply to general transmission networks, rather, only to interconnectors). This stream of income is broadly the cumulative value of the price differences between the interconnecting regions multiplied by the volume of energy transmitted through the interconnector between the regions. These funds are collected by AEMO through the operation of the spot market.
AEMO conducts auctions for the rights to interregional settlements residues on a forward-looking basis, as they are one tool available to spot market participants to manage the risks in trading across regions. The revenue from those auctions is provided back to the regulated interconnector and counted towards its total allowable revenue. The actual value of those units as it accrues over time is passed to the successful bidder of those units (this may be more, less or equal to the value that the bidder paid at auction). If the auction is not fully exhausted, the actual value of the residues for the unsold portion is passed back to the interconnector. Information on the settlement residue auctions can be found at: https://www.aemo.com.au/-/media/Files/Electricity/NEM/Settlements_and_Payments/Settlements/2019/Guide-to-the-Settlements-Residue-Auction.pdf
Question 5
It is not possible to provide information on the share of costs recoverable from Tasmanian consumers and those in Victoria.
Basslink has some unique features that were not considered as part of previous regulatory conversions (for Directlink and Murraylink). In both previous cases, the cost allocation arrangements between the interconnected regions was settled ahead of the regulatory process commencing.
The approach the AER will take to determining the cost allocation between Victoria and Tasmania will be part of the AER’s public process.
The Government’s position is that Tasmanian electricity customers should pay in proportion to the benefits they receive from Basslink, and we will be making that case to the AER through its public process but always ensuring that the end result will be in the public interest.
Question 6
It is not possible to provide information at this stage on the effect of Basslink’s regulation on different classes of Tasmanian electricity customers but at all times the Government will act to protect the public interest.
Question 7
As a regulated interconnector, Basslink’s flows at any point in time will be driven by price differences between the Victoria and Tasmania spot markets. Just as we see today, Basslink will flow in both directions over the course of a day, week and year.
Looking over a broad time horizon, Basslink’s flows will tend to reflect the underlying supply/demand balance in Tasmania and hydrological circumstances in Tasmania.
Where supply and demand are broadly in balance, as is the case currently, and assuming a normal inflow sequence to Hydro Tasmania’s storages, Basslink would be expected to operate in balanced manner over an annual cycle, with the volume of energy exported and imported being broadly similar in aggregate over time. However, in practice, hydrology plays a major part in determining Basslink flows, because in most years, inflows are not ‘average’. This is demonstrated in the chart below, which shows Basslink flows 2010 to August 2022.

Note data for 2022 is only to August 22
For Basslink to be predominantly used for export there would need to be a structural shift in Tasmania’s supply/demand balance that meant that there is a sustained oversupply of electricity in Tasmania.
Question 8
The Government has no modelling of the relative benefits of Basslink as a regulated interconnector between Victoria and Tasmania. This will be a central requirement for Basslink Pty Ltd to produce as part of its regulatory application, and will be the subject of public scrutiny and AER review as part of the AER public process.
The distribution of benefits is likely to vary over time, largely dependent on hydrological circumstances, and also having regard to the supply/demand balance in Tasmania. It is unclear at this time as to how the AER will treat the likely variation in the distribution of benefits over time in determining the cost allocation model between Victoria and Tasmania.
Question 9
The AER regulatory process is designed to ensure that electricity customers pay only for transmission services that are efficient and prudent. The framework is not ‘set and forget’, and the revenue requirements of the interconnector is revisited by the AER each five years. Like all transmission assets, the annual revenue requirement determined by the AER for Basslink is recoverable from customers, being an annual revenue amount the asset is entitled to recover. In practice, this is recovered on a per unit basis through network tariffs. Under- and over-recoveries will arise where the level of utilisaton differs from that assumed in setting the tariffs. These are adjusted accordingly through future revenue periods.
Question 10
Basslink Pty Ltd and APA have already commenced the preliminary phase of consultation leading to an application for regulatory conversion. It is expected that its application for regulation will be made in the first half of 2023. The timetable for the AER’s processes, once and application has been made, is a matter for the AER. The Government’s current understanding is that the process could take between 18 and 24 months.