Gas Week

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SP AusNet, Envestra related-company contracts not acceptable for regulated cost as inter-company billing not tested by tender

Posted by gasweek on 26 September, 2007

In the Gas Access Arrangement Review 2008-2012, The Victorian Essential Services Commission, Draft Decision, 28 August 2007 explained why the Commission may not be able to accept a contract payment as evidence of the prudent and efficient costs of providing services as SP AusNet and Envestra had achieved significant reductions in expenditure in 2005 which continued into 2006.

As a result, aggregate industry expenditure was around 86 per cent of the benchmarks in these two years.

Contracts not valid: The Commission “found that for each of the distributors, it is not satisfied that reported payments or allocated group or related party costs provide a reasonable basis on which to approve the expenditure benchmarks for the next regulatory period. It therefore concluded that it cannot simply rely on payments made by the distributors as evidence that the costs are consistent with requirements under the Code”.

Case by case: The Commission adopted a case approach in its evaluation of reported costs by each distributor and set out the adjustments that need to be made to whose benchmarks in order to be approved. In relation to operating expenditure, all of the distributors have spent less than the benchmark;

• under certain circumstances a distributor may be prepared to pay more under an outsourcing contract than the cost of providing services itself particularly if it could potentially recover the higher contract price from its customers and/or retain a greater than intended proportion of the benefits of any efficiency gains;

• in considering the proposed Access Arrangement revisions, before the Commission can approve Total Revenue proposals based on historical contract payments (or the allocation of other group or related party costs) the Commission need to be satisfied that:

• the reported costs represent actual costs incurred in providing the outsourced services and not costs or payments for other matters and;

• the distributor has acted prudently in contracting on the basis of paying for an efficient level of costs so as to achieve the lowest sustainable cost of providing the services.

Reference: Gas Access Arrangement Review 2008-2012, Essential Services Commission, Draft Decision, Executive Summary, 28 August 2007.

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