DBP CEO Stuart Johnston spoke at the CHOGM Business Forum at the Partership Roundtable “Energy Infrastructure in WA: the way forward in a growing economy”

November 21, 2011

Ladies, Gentlemen, distinguished guests,
I’m pleased to be on this panel today representing DBP Transmission – the owner and operator of the Dampier to Bunbury Natural Gas Pipeline. Firstly, congratulations to the Commonwealth Business Forum organisers for putting together this comprehensive programme; and thanks to the Agent General of the Government of Western Australia, Kerry Sanderson AO for chairing this session.

I will summarise the things I believe are needed to secure continued private sector investment in the infrastructure required to keep WA on its successful growth trajectory. My remarks are from the perspective of my own business in gas transmission but most of the points would equally apply to water, power and transport – and hopefully are relevant to other jurisdictions.

This is a list of Australia’s most trusted brands. I, probably like many of you, am not surprised by the names you see here. These companies spend a great deal more on advertising their wares than those of us involved in providing in the poles, pipes and wires as infrastructure providers

If you pause to think about “trust” in terms of reliability of the service provided – and the consequences if its not there – then perhaps the names of some infrastructure companies should be up there?

The reality is that most of these companies, including my own – operate their businesses out of sight and out of mind for most people most of the time. The only time the broader public become aware of infrastructure service providers is on the rare occasion where there has been an interruption to service, or where there is media attention on the need to replace or upgrade infrastructure and what that will mean for prices.

A report for the Commonwealth Minister for Energy and Resources published in April this year stated that the investment in Australia from now until 2030 for electricity generation, distribution networks, gas pipelines and associated infrastructure will be $240 billion – which leads to some big questions about who will do the work, and who is going to fund it.

History shows that bold positive decisions can have long term benefits for jobs and investment.

In the case of DBP this was achieved by the State Government through the State Energy Commission (SECWA) that designed and constructed the pipeline in the early 1980’s.  For those not from WA  – the DBNGP is WA’s key gas transmission pipeline stretching almost 1600 kilometres from the gas fields located in the Carnarvon Basin off the Northern coast with population centres and industry in the south-west of the State. Natural gas first flowed in 1984 and the pipeline has been transporting gas every day since and it’s got at least another 70 years or so life left in it!

As well as funding the pipeline project, SECWA was a customer for the new supply of natural gas – entering into a long term contract with the North West Shelf Partners to purchase fixed volumes of gas at prices that at the time were considered high. The pipeline was also developed with the support of Alcoa as its initial foundation customer – still an employer of several thousand people in WA today.

Today over 50% of all energy produced in WA is derived from Gas.

Since the mid 90’s Government has been keen to transfer much of the risk of developing infrastructure away from taxpayers to the private sector. This was born out of the National Competition Policy reforms, developed by Professor Fred Hilmer in the early 1990s and subsequently endorsed by all Australian Governments.  Many state owned monopoly assets were privatised but on the basis that a form of economic regulation would apply to ensure access could be achieved by customers on fair and reasonable terms and that the owners of these assets would be incentivised to continue to invest – i.e. “incentive based regulatory oversight”.

Broadly this has benefited all parties,

  • Private sector infrastructure operators are generally better equipped to manage the risks in projects which are their bread and butter;
  • Government infrastructure providers are being benchmarked against their private sector counterparts which has led to lower costs of service provision;
  • Governments have been able to apply their financial resources to areas of community infrastructure  – such as schools and hospitals

I believe these factors have led to lower overall increase in the costs for infrastructure provision than would have been the case had the “public sector provides everything” model of the 1960’s and 1970’s had continued.

So what is needed to encourage continued investment in infrastructure?
In these 5 points I am making an assumption that there is a desire to see a continued public/ private partnership combined with an appropriate level and form of regulatory oversight.

1. Stability – a clear rule set with an expectation that it is broadly fixed for the long term is essential for being able to raise capital and attract investment.

Surprises are bad, for investors, bad for companies especially where the capital requirements are huge and investment timelines run for decades, and in the long run bad for the State – as it increase risks of underinvestment.

2. A high degree of certainty in being able to allow prudent capital expenditure and operating costs in the calculation of regulatory tariffs. Appropriate expenditure on maintenance to preserve asset integrity is not an area where it’s in anyone’s interest to cut corners. Benchmarking is possible and indeed desirable to prevent “gold plating” on one hand, and under-investment on the other.

3. Equally important is the need to avoid frameworks that require regulators to focus solely on theories of economic efficiency. This means owners should have the opportunity to earn a return that is commensurate with the prevailing conditions in the market for funds. This applies for both debt and equity – as well as being commensurate with the risks that are inherent in operating the asset and providing services to customers. There is no one size fits all approach here – and current proposals by the Australian Energy Regulator don’t have one rate of return for all regulated electricity and gas infrastructure businesses which will lead to an outcome that is in the better long term interests of customers and infrastructure owners.  A “one size fits all approach” based solely on a theoretical financial model cannot deliver an outcome that reflects risks specific to a particular market or asset

4. From a Government viewpoint there should be sufficient interest and appetite from the private sector to ensure a sufficient number of companies pursuing every new project to create competition which will lead to efficient allocation of resources.

5. and finally from a general public viewpoint – transparency & accountability, in terms of where their money is going – both to “de-politicise” the debate and to generate a greater understanding of the costs and benefits of  infrastructure development.

When there are sufficient incentives growth can be achieved quickly.

Since 2004 the owners of the DBNGP have invested over $1.8 bln into the pipeline in three expansion projects. Each project has been completed ahead of schedule and within budget – and each stage of the expansion has been completed in advance of customer needs.

The pipeline is now 83% duplicated (or looped) throughout its length – so really it should be thought of as two parallel pipelines. The additional capacity has helped improve the overall integrity of the system and we continue to work with shippers and producers and government to play our part in ensuring that the system is robust and supply is secure.

We’re now capable of transporting 845TJ/d into the market in the South West. July 7 was a record for throughput on the pipeline of almost 800TJ/d – the highest ever delivery in the 26 years of the pipeline’s operation. For those not familiar with the units – one joule is the energy released as heat by a person at rest, every 17 seconds (thank you Wikipedia). Collectively you’d have to sit in this audience for the next 2500 years or so to burn off a TJ.

This growth has happened through negotiated contracts outside the regulatory framework but demonstrates that if the conditions are right it’s possible to develop significant growth in infrastructure capacity in a short period of time.

In the current market environment the terms and conditions around securing investment are much tougher than they were a few years ago. Financiers are concerned about businesses being punished with poor regulatory decisions.

They in turn look for higher returns to cover the perceived risk, are less willing to fund for the long term, and also seek additional covenants on the money they do lend – transferring much of this risk onto the equity holders. This means that the overall cost of funding is driven up. So, regulatory uncertainty drives a worse outcome for everyone.

I firmly believe that Regulation should not act as a disincentive to investment
and there are some good aspects about the Regulatory framework in Australia today.

– It has effectively broken up the old inefficient government-owned vertically integrated utilities and provided the basis for private investment in the sector and capped price increases for the public.

– an ability to secure binding, up front rulings from regulators ahead of making significant investment decisions, although the framework must recognise the fact that projects evolve right up to the time of FID and so regulatory processes must not take too long

– mechanisms that, on the one hand, provide certainty that asset owners will earn a base level of revenue that can not be taken away from them after the event by subsequent regulatory decisions while, on the other hand, providing for any additional revenue to be shared between the owners and customers.

My final point is to stress that despite these uncertainties DBP is open for new business and we’re prepared to invest in further expansion anywhere along our line – if the incentive remains in place for us to do so. There’s no doubt that domestic gas has played a vital role historically in meeting these challenges; and has the potential to continue to supply much of the State’s energy needs for many decades – especially as I firmly believe that natural gas is the only energy source that can efficiently underpin Australia’s transition to a low carbon economy and provides an essential complementary service to support renewable power generation technologies. We look forward to playing a constructive part in meeting WA’s energy challenges in the coming years.

Thank you

DBP CEO

Stuart Johnston

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