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Better Regulation Expenditure Forecast Assessment Guideline 12 February 2013
Work program and AER Objectives • Guidelines • general techniques and information requirements • Annual reporting • monitoring of NSP efficiency • transparency of NSP performance vs expenditure • early identification of issues for network determinations • Network determinations • refine and use techniques to set allowances
Expenditure assessment approach Expenditure assessment guideline Framework and Approach RINs/RIOs RINs/RIOs Benchmarking Regulatory determinations reports Work program
Working group meetings • Frank and ‘off the record’ discussion – detailed minutes will not be taken, just key outcomes • Material considered by working group will be published • Not here to make decisions but consensus may be possible • Pending availability and importance of topic, may be chaired by AER board member otherwise senior AER staff • In addition to, and informed by, written submissions once received
AER Experience • Current practice • Revealed cost methodology (incentive tools of economic regulation, taking historic costs as the base) • Bottom-up engineering review • Limited use of benchmarking • Limitations • Response to incentives? • Technical appraisal and information asymmetry • Data integrity
AER’s objectives • Improve our approach to expenditure assessments under revised NER • Move from detailed, bottom up approach to overall reasonableness assessments • Greater focus on benchmarking • Open and transparent approach to regulation • Recognition of data limitations and forecasting error • Implementation costs have to be ‘worth it’
This is the first step in a process • Benchmarking is a big step • Continual refinement as better data become available • Gradual shift from current techniques • Flexibility provided in framework and approach • Guidelines subject to future revisions
Recap of issues paper Purpose • Objective – new benchmarking techniques • Principles for how to select techniques • Consultation approach (to be discussed next) • Request feedback
General considerations • Assessing efficiency as well as future circumstances (forecasting) • Identification of assessment techniques • Those that have worked well • Others that are new or we wish to improve • Potential for “first pass” model and more targeted assessments • Relationship with incentive arrangements
Two detailed work streams • Economic benchmarking • employs economic theory on the behaviour of firms to estimate relative efficiency and how this changes over time (TFP, DEA & SFA) • Category analysis • approach to the assessment of expenditure categories
Economic benchmarking • Holistic approach • Focus on data requirements • Outputs: what are they? • Inputs: how should they be measured? • Environmental factors: what else should be taken into account?
Category analysis • Categories matching factors that influence or explain costs – “driver” based approach • Focus on benchmarking and trend analysis • eg cost per connection, per km of line • Largely a continuation of existing reporting categories • New national definitions will require some change • Questions about level of detail required • Recognition of differences between NSPs • Are these quantifiable and supported by evidence? • How/ when should they be accounted for?
Implementation issues • Transition from existing reporting templates • Annual reporting concurrently with determinations • Different reporting years (calendar and financial years) • Different cost allocation methods • stakeholder engagement (guideline) • NSP forecasting methodologies
Break Recommence at 3pm
Forward work program • Timing of workshops • How to deal with dependencies • Treatment of gas, distribution and transmission • Workshop plan for economic benchmarking • Are the three phases appropriate? Are the individual workshop topics appropriate? • Forward work program for category analysis • Are the four phases appropriate? Are the individual workshop topics appropriate?