18 June 2015

Networks NSW

Supplier Forum 2015 Industry Partners Briefing

Networks NSW

2

Safety Message – Evacuation Procedure

If the “Whoop Whoop” alarm siren sounds, everyone is to evacuate the

building.

DO NOT use the lifts.

Proceed to the clearly marked green exit signs, located at:

two side passageways of this room OR

back of this room (then proceed downstairs)

These lead to the emergency exits from the building:

1. main entry from which you came in (Reservoir St)

2. the opposite end (Wrights Lane)

3. if you are in the tea & coffee area, the double doors near the toilets

will take you out to Mary St

Networks NSW

Networks NSW Industry Partners Briefing

Objectives of this briefing

Highlight recent achievements and ongoing reforms of Networks NSW

including the Procurement & Logistics Improvement Program

Explain the future of NNSW and the Joint Venture

Introduce key personnel from Networks NSW, Ausgrid, Endeavour Energy

and Essential Energy

Provide a networking forum and build relationships

Gather feedback from NNSW key suppliers

3

Networks NSW

Agenda

Networks NSW Overview John Hardwick 1

4

Future of NNSW & Joint Venture Daniel Lucas 2

NNSW Procurement & Logistics Improvement Program Kate Gunton 3

Ausgrid Procurement Trevor Armstrong 4

Endeavour Energy Procurement Rod Howard 5

Essential Energy Procurement Gary Humphreys 6

Open Forum All/Panel 7

Networking and Light Refreshments All 8

1 Networks NSW Overview

Networks NSW

5

Networks NSW

6

Networks NSW Overview – Strategic Objectives

To be of service to our communities by efficiently distributing

electricity to our customers in a way that is safe, reliable and

sustainable.

Safety – Improve safety performance for employees, contractors

and the community

Reliability – Maintain the reliability, security and sustainability of

the network

Improvement – Deliver forecast improvement in performance,

productivity and efficiency

Networks NSW 7

Network NSW

operations

Networks NSW Operations

7

Networks NSW

Networks NSW Overview – Statement of Business Ethics

8

Networks NSW

STANDING COUNCIL

ON ENERGY AND RESOURCES

AUSTRALIAN

COMPETITION &

CONSUMER

COMMISSION

AUSTRALIAN

ENERGY

REGULATOR

AUSTRALIAN ENERGY

MARKET COMMISSION

AUSTRALIAN

ENERGY MARKET

OPERATOR

“The AEMC is an independent national body with two roles, as

statutory rule maker for the energy market and expert advisor for

federal, state and territory governments.”

Networks NSW Overview – Regulatory Framework

9

Networks NSW

Networks NSW Overview – Regulatory Determination Background

The Australian Energy Regulator (AER) is the independent

national regulator for electricity networks in Australia (except

WA and NT)

The AER, every five years, issues a regulatory determination for

each network using a four step process:

Initial Proposal from the network – May 2014;

A Draft Determination by the AER – November 2014;

A Revised Proposal by the network – January 2015;

A Final Determination by the AER – April 2015.

The AER’s Final Determination is subject to legal appeals.

A legal appeal was lodged on 21 May 2015.

10

Networks NSW

AER Final Decision – Dashboard compared to DNSP Revised Proposals

Ausgrid Endeavour

Energy

Essential

Energy

Network Revenue

(33%) (28%) (31%)

Operating Expenditure

(25.6%) (16.9%) (30%)

Capital Expenditure

(14.8%) No change (6.8%)

Customer Benefits FY16 reduction in average electricity bills

Residential

(8%) (5.3%) (11.9%)

Small Business

(8%) (5.3%) (11.9%)

Networks NSW

AER Final Determination – AER criticisms of NSW networks

Too many employees.

Restrictive enterprise agreements.

Insufficient outsourcing (eg: AER propose Local Service Agents for Essential Energy small depots).

Lack of forced redundancy

12

Networks NSW

AER Final Determination – NNSW issues of concern

Limited evidence of AER safety risk assessment.

Reliability and robustness of benchmarking.

Retrospective revenue cuts of $870m for 2014/15 financial year.

Cuts to operating expenditure.

Disproportionate cuts to operating expenditure at Essential

Energy.

Major storm response capability – a transitional issue.

Skills retention.

13

Networks NSW

AER Final Determination – Changes in capital programs

Changes in capital programs 2009/14 period v’s

2014/19 period ($2013/14):

4.40

3.13

9.00

2.45

1.60

3.32 -44%

-49%

-63%

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0 $-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

Essential Endeavour Ausgrid

CA

PE

X (

$b

2013/1

4,

real)

CAPEX COMPARISONS

2009/14 AER approved

2014/19 AER approved

% reduction

14

Actual Expenditure

7.0

2.8

3.5

Networks NSW

AER Final Determination – Changes in operating programs

Changes in operating programs 2009/14 period v’s

2014/19 period ($2013/14):

2.34

1.73

3.00

1.74

1.29

2.10 -26%

-25%

-30%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10% $-

$1

$1

$2

$2

$3

$3

$4

Essential Endeavour Ausgrid

OP

EX

($b

2013/1

4,

real)

OPEX COMPARISONS

2009/14 AER approved

2014/19 AER approved

% reduction

15

Actual Expenditure

2.9

1.5

2.3

2 Future of NNSW and Joint Venture

Networks NSW

16

Networks NSW

De-merging network governance and NNSW organisation structures

On 3 June 2015 the NSW Legislative Council passed a bill to

allow transactions to transfer some of the State’s electricity

network assets to the private sector.

The NSW Government will deliver on the policy it took to the

recent election to lease 49% of the State’s electricity networks

and use the proceeds to build new infrastructure.

Our working assumption on the transaction sequence is

Transgrid (100%), Ausgrid and then Endeavour Energy (50.4%)

Essential Energy will become a stand-alone State Owned

Corporation.

17

Networks NSW

Ausgrid &

Endeavour Energy

50.4%

Networks NSW Operations

18

Transgrid

100%

Networks NSW

COO COO COO Group

Finance Network

Strategy

People and

Services DCEO DCEO DCEO

Chief

Engineer

Network Development

Network

Operations

HSE

People and

Services

Finance

and

Compliance

ICT

Chief

Engineer

Network Development

Network

Operations

HSE

People and

Services

Finance

and

Compliance

ICT

Chief

Engineer

Network Development

Network

Operations

HSE

People and

Services

Finance

and

Compliance

ICT

CEO

Group

Control

Regulation

Strategy

and Performance

Group PMO

Asset

Strategy

Asset

Programs

Technology

&

Innovation

P/F/L and Procurement

Human

Resources

Technical

Training

Corp

Comms

Audit

Governance HSE

Chief

Engineer

Network Development

Network

Operations

HSE

People and

Services

Finance and

Compliance

ICT

Chief

Engineer

Network Development

Network

Operations

HSE

People and

Services

Finance and

Compliance

ICT

Chief

Engineer

Network Development

Network

Operations

HSE

People and

Services

Finance and

Compliance

ICT

Current Future

Board

Secretary

Transforma

tion

New Executive (Level 2)

19

CEO

Transition to stand-alone organisation structures

Networks NSW

De-merging network governance and NNSW organisation structures

Joint Venture procurement

All current Joint Venture (JV) procurement projects will be completed with an

aim to finalise them by end of 2015

Contracts established under the JV have been established with the individual

network businesses and will remain in place when stand-alone businesses

are re-established

Transition work is underway to ensure that all suppliers with contracts

established via the JV will be notified of the relevant contacts in each

business

20

3 NNSW Procurement & Logistics Improvement

Program

Networks NSW

21

Networks NSW

Joint Venture Procurement Program

Completed JV projects

Aerial Patrol & Analysis

Audit Services

Legal Services

Conduits

Contract Labour Hire

Security Services

Overhead Line Fittings

Timber Poles

Concrete Poles

Cables

Power Transformers

Traffic Management

Services

In market / evaluation

End-User Computing

Hardware

Street Lamps &

Luminaires

Telecommunication

Carriage Services

Electricity Meters

Electricity Supply

Vegetation Management

Services

22

Coming to completion

Multi-Function Print

Devices

End-User Computing

Services

Metering Services

Fleet Services

Networks NSW

Common Procurement Framework established

A common procurement framework has been established across the

three network businesses with key principles of:

Commercially

Focused

Governance

Focused

Adaptable

Integrated

Practical

Change

Aware

Drives value for money and achieves sustainable benefits

Embeds effective controls and approvals to manage risk, probity

and compliance

Guides network business Sourcing activities of varying complexity

and value

Integrates seamlessly with interdependent business processes

Is efficient and easy to use

Considers change management implications and benefits of

proposed amendments

23

Networks NSW

Contract Delivery – HSE Whole of Life

• Safety is our priority for workers, members of the public, and industry partners

• A consistent approach to safety is being adopted for the evaluation of our

contractor and service partners, and forms the basis for the award of contracts

• This approach includes an increased focus on key safety risks during the

tender evaluation process, awarding of contracts, and operational monitoring

(including audit and compliance)

• The purpose is to work with our industry partners to establish a demonstrated

capability / capacity in the identification, assessment, and effective mitigation of

the safety risks and hazards associated with working in and around our

networks

• Will provide a better and more informed outcome for all stakeholders involved

Networks NSW

Approved Materials List (AML) Policy

A common policy across Networks NSW has been developed for

the Approved Materials List

Purpose

To control materials & equipment used on the electricity distribution network

in order to safely and reliably manage, maintain and operate the network in

accordance with the Electricity Supply Act

Scope

Sets out the process for the approval of materials and equipment that are

permitted for use on the network by Accredited Service Providers (ASP) and

NSW Network Service Providers (NSP)

The policy and AML will be available on each network business

website

25

Networks NSW

Approved Materials List (AML) Policy

How it works

The tender process will inform the AML

Product approval review periods will be aligned to the contract lifecycle

Removal or addition of suppliers to the AML in intervening periods will be

based on safety or operational needs of the businesses

Applications outside of a tender process will be subject to an application or

processing fee

The number of suppliers added to the AML will be based on the risk

assessment (criticality of items) at a category level and at the discretion of

the network businesses

A suitable transition period will be provided for existing suppliers who are not

awarded a contract

26

4 Ausgrid Procurement

Networks NSW

27

Networks NSW

Australia’s largest electricity network

• 1.6 million customers - households

and businesses

• Our network covers 22,275 sq km

– 30,000 substations

– 48,000km of power lines and

– 500,000 power poles

• Building our network today would

cost an estimated $38 billion

• Owned by the NSW Government

28

Networks NSW

29

Future reforms and challenges

Commercial in Confidence

Safety &

Wellbeing Efficiency Customer

focus

AER Enterprise

Agreement Long-term

lease

Workforce

planning

Procurement

Logistics

1 Main warehouse

7 Satellite stores 12 Pole yards

22 Regional depots

11,210 SKUs and

spares

$98m Inventory

50 Logistics & Print

shop staff

Suppliers 2,534 Suppliers

36 Suppliers: 80%

spend

1,206 Active contracts

$4.7bn Total contract

value

1,200 Contracts

General $780m Spend

4 Portfolios

280 Categories

200,000 Invoices

30,000 Purchase

Orders

58 Procurement &

Inventory control staff

Networks NSW

31

Achievements - Ausgrid

Fleet savings of

$41.4 million Vehicle total reduced by 1,026

Includes tolls,

parking, energy costs

This year’s discretionary

spend saving of $1.5

million

Savings of $4 billion over

the past 3 years Reform & management-led savings

Labour savings of

$150 million per year 1,250 FTE reduction, incl.

labour hire

Networks NSW

32

Priority actions and plans

Top operating expenditures

Vegetation management $40 million p.a.

Telecommunications services $14 million p.a.

Pole inspection $ 9 million p.a.

Top capital expenditures

Underground cable laying $100-125 million p.a. (2015-2017)

$45-50M (2018-2019) per year

Pole Replacement $55-60 million p.a. = 5,000 poles per year

Civil construction $40 million p.a.

(depots & substations) 10 to 15 major sites over the next 5 years

Networks NSW

33

Procurement and Logistics – future initiatives

To Date Jul-Dec 2015 Jan-Jun 2016 Jul-Dec 2016 Jan 2017 +

► JV sourcing

► Analytics &

spend cube

► Assessing

contracts

► New team

► Quick wins

► Pipeline

► Category

planning

► Category

initiatives

► Supplier tiering

► Supplier

development

and

scorecarding

► Spend under

management

► Driving

contracts &

relationships

► Framework

development

► Team skill

evaluation

► Capability &

upskilling

► Policy training

► Standard

contracts

► Standard

procurement

across Ausgrid

► Consistent

approach to

suppliers

► Maturing

contracting

► Integrated

supplier

engagement

► Contract

management

continuous

improvement

► Regional focus

► Gap analysis ► Tendering

► Implementat’n

► Purchasing

system

► Sourcing

system

► Tighter spend

& contract

compliance

► Contract mgt

system

► Supplier portal

► E-sourcing use

► Inventory

baseline

► Stock

reduction

► Depot

optimisation

► Network

review

► Site

rationalisation

Category &

Supplier

Strategy

Procurement

Framework

IT systems

Logistics

Networks NSW

34

Procurement and Logistics – pipeline of major opportunities

►At least $260 million of opportunities in the next 12 months, more to be identified by end

of the year

The opportunity

The environment

►AER environment has us even more focused on savings and value

The team

►Procurement & Logistics team capability will be significantly upgraded

►Stimulate competition with more open market tendering and multi-stage negotiations

►Category planning, savings targets and functional specifications in our approach

Your role as our suppliers

► Present quick wins, savings, innovation, opportunities to remove time and cost in our

dealings with you

► Play an active part in our supplier development journey

Networks NSW

35

Procurement and Logistics team

Procurement and Logistics is managed across 3 divisions within Ausgrid

Guy Ferrier

Manager

Procurement & Logistics

People & Services Div

Damon Taylor

Manager

Inventory &

Materials

Simon Bell

Manager

Indirect Goods &

Services

Paul Hartley

Manager

Network Services

Giles Curtin

Manager

Network

Equipment

David Stanfield

Manager

PMO &

Governance

Martin O’Brien

Manager

Warehouse &

Distribution

George Kowalski

Project Manager

Network Materials

. . . . . .

.

Ross Matheson

Manager

ICT Vendor &

Sourcing

Peter Eedy

Manager

Portfolio Management

Office

Network Developm’t Div

Sharron Kennedy

GM

ICT

ICT Div

5 Endeavour Energy Procurement

Networks NSW

36

Networks NSW

Network Business Overview

Endeavour is now a network business serving

940,028 customers or 2.2 million people

Supply area covers Sydney’s Greater West, the

Illawarra and South Coast, the Blue Mountains and

the Southern Highlands

We have 2,470 staff over 19 locations

Network length :

Overhead lines = 23,412km

Underground cables = 11,617km

Number of poles :

Endeavour owned = 308,252

Average regulated revenue = $826 million

Regulated asset base = $5.6 billion

37

Networks NSW

INHERENT FEATURES OF ENDEAVOUR ENERGY’S FRANCHISE AREA

• Serve some of Australia’s fastest growing communities

• Land use shifting from rural and semi-rural to urban and light commercial,

driving increasing customer expectations of reliability – albeit at a slower rate

than in the past

• Peak temperatures typically higher and more sustained than those of coastal

regions and experienced more consistently

Network Business Overview

38

Networks NSW

Network Reform Program – Achievements and Future Challenges

39

Networks NSW

40

Future reforms and challenges

Safety &

Wellbeing Efficiency Customer

focus

AER Enterprise

Agreement Long-term

lease

Workforce

planning

Networks NSW

Priority actions and plans

41

Networks NSW

PROCUREMENT

• Spend $447m Invoices 55334

• Portfolios 4 Purchase orders 13105

• Categories 49 General

• Suppliers 1637

• Suppliers: 80% spend 110

• Active contracts 305

• Total contract value $2.7b

Suppliers

• Main warehouse 1

• Pole yards 1

• Regional depots 17

• SKUs and spares 3580

• Inventory $22m

Logistics

42

Networks NSW

ACHIEVEMENTS

Procurement savings of $80 million over past 3

years

Improved cycle times for market engagements

Improvements in category knowledge and

supplier management

43

Networks NSW

44

Procurement and Logistics – future initiatives

To Date 2016 2017

► JV sourcing

► Analytics & spend cube

► Supplier tiering

► Revised Supplier

Management program

► Category planning

► Increased industry

engagement through RFI

and alternate bids

► Improve specification

► Driving contracts &

relationships

► Framework implemented ► Capability & upskilling

► Standard contracts

► New contract and supplier

prequalification tool

► Maturing contracting

► Integrated supplier

engagement

► Inventory baseline

► Testing of Demand

Planning initiatives

► Standardisation of process

► Stock reduction

► Forecasting provided to

suppliers

Category &

Supplier

Strategy

Procurement

Framework

Logistics

Networks NSW

45

Procurement and Logistics – pipeline of major opportunities

►At least $108 million of opportunities in the next 12 months, more to be identified by end

of the year

The opportunity

The environment

►AER environment has us even more focused on savings and value

The team

►Procurement & Logistics team capability will continued to be enhanced

►Stimulate industry engagement through RFI and encourage alternate bids

►Category planning, savings targets and functional specifications in our approach

►Testing of most effective engagement models

►Demand forecasting improvements

Your role as our suppliers

► Innovation, opportunities to remove time and cost in our dealings with you

► Play an active part in our supplier development journey

Networks NSW

PROCUREMENT AND LOGISTICS TEAM

ACTING MANAGER,

PROCUREMENT &

LOGISTICS

GREG ROSE

PMO &

GOVERNANCE

MANAGER

NICOLE CROAK

LEAD PORTFOLIO

MANAGER

JUSTIN ROBERTS

INVENTORY

MATERIAL &

PURCHASING

MANAGER

DEBBY SOUTH

WAREHOUSE &

DISTIBUTION

MANAGER

JUSTIN JENSEN

Rizwan Ullah

Portfolio Manager

Network Services

Antonela Ilic

Portfolio Manager

Regional Services

John Mifflin

Portfolio Manager

Civil &

Construction

Luis Da Costa

Portfolio Manager

Indirects

46

6 Essential Energy Procurement

Networks NSW

47

Networks NSW

48

Essential Energy is…

Australia’s largest electricity distribution network:

• 844,244 customers

• 737,000km² serviceable area

• 191,107kms of powerlines

• 1,377,483 powerpoles

• 1,447 feeders

• 3,950 employees

• $6.8b regulated asset base

Vast geographic area, large number of assets supported by a

relatively small number of customers

Networks NSW

Network Reform Program – Essential Energy Achievements

49

$1.7B cost savings

(2012-2016 forecast)

FT

E

Re

du

cti

on

s

806

Fleet

Reduced by

1004 vehicles

Networks NSW

AER Determination – Essential Energy’s Future Challenges

CAPEX Reduced by

7% from

Revised Proposal to

$2.36B

$313 in 2015/16

NETWORK CHARGES

2015-16 reduction of approx.

11.9%

REVENUE Reduced by

25% from

Revised Proposal to

$5.12B

OPEX Reduced by

30% from

Revised Proposal to

$1.63B

WACC Reduced by

2.11% from Revised Proposal.

Creates 2014-19 shortfall of

$865.6M

50

Networks NSW

51

Future reforms and challenges

Commercial in Confidence

Safety &

Wellbeing Efficiency Customer

focus

AER Enterprise

Agreement Blended

Delivery

Workforce

planning

Networks NSW

Current initiatives

• Supplier Prequalification scheme (commencing with construction)

• Team capability increasing through new operating model

Future initiatives

• Building Supplier Relationships

• Criteria based supplier tiering (criticality / spend / dependency)

• Articulates the relationship required with our suppliers

• Enhancing supplier interaction and communications:

• Visibility of upcoming demand pipeline on our website

• Investigate e-Supplier portal

• Implementation of GC21 and MW21 contract frameworks ( within 6 months)

Essential Energy – Procurement and Logistics initiatives

52

Networks NSW

Slide 6 – Pipeline of major opportunities

Major Planned Market Engagements will soon be available at our website

www.essentialenergy.com.au

Portfolio Requirement

Network Equipment

& Services

• Overhead Mains Accessories (Periodic Supply)

Eg: Surge Arrestors / Fasteners

Construction &

Regional Services

• Overhead Transmission Construction Services various locations

(5 separate projects)

• Transmission Substation Construction Services various locations

(2 separate projects)

• Visual Aerial Patrols

• Asset inspection services

Indirects • Supply and Install signs & buoys (Navigable Waterways)

• Document storage and shredding

Market Testing • Ongoing Organisational Program

53

Networks NSW

Slide 7 – Procurement and Logistics Team

Manager, Procurement &

Logistics

TONY LEAHY

PMO & Governance

Manager

ALICE PATERSON

Lead Portfolio Manager

OWEN EGGLESTONE

Warehouse &

Distribution Manager

PETER FREW

Inventory, Materials and

Purchasing Manager

RACHEL HARWOOD

(Acting)

• Planning and reporting

• Governance and controls

• Data intelligence and

analysis

• Improvement Program

• Tender demand

management

• Supplier relationship

management

• Commercial contract

management

• Category planning

• Distribution management

• Warehouse operations

• Regional stores

operations

• Inventory management

• Ordering and fulfilment

• External sales

Portfolio Managers

KARENE SHEPHERD

JANE HACKETT

54

7 Open Forum

Networks NSW

55

Networks NSW

56

Thankyou

A survey will be sent to you to gather feedback

Please join us for light refreshments and an opportunity

to meet the teams