Better Regulation Expenditure Forecast Assessment Guideline Category analysis workstream

1. Better Regulation Expenditure Forecast Assessment Guideline Category analysis workstream 28 February 2013

2. Agenda

3. 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

4. Where are we today?

5. Objective for today • Identification of major capex and opex categories • Consider Transmission/Distribution • Consider initial definitions • Identify possible drivers and measures • Identify challenges and issues

6. Expenditure Forecasting Assessment • The AER has identified a number of existing techniques1: • engineering review • trend analysis • governance and policy reviews • modelling • The AER must also have regard to capex and opex benchmarks [NER] 1. Issues Paper - Better Regulation, Expenditure forecast assessment guidelines for electricity distribution and transmission, December 2012

7. Category benchmarks • Previously underdeveloped • Used in almost all recent reviews • No consistency • Improve • Consistency of definition • Consistency of collection • Consistency of reporting • Consistency of use in determinations

8. Principles and approach • Transparent • Predictable • Adaptive • Accountable • Fit for purpose • Cost effective • Activity/driver focus • Consistency with existing structures

9. Capex • Interactive session to • Identify categories • Consider Transmission/Distribution • Consider initial definitions • Identify possible drivers and measures • Identify challenges and issues

10. Capex categories discussion session • Attendants of the workshop discussed the capex categories NSPs consider important. • Attendants of the workshop also explored possible definitions and measures for these categories, and issues in using such data. • The following slides summarise these discussions.

11. Nominated capex categories • Reinforcement/augmentation of shared network • Demand • Other issues • Customer connection • Replacement

12. Nominated capex categories (cont’d) • Support the business (overheads; not allocated to projects or other drivers) • Land and Easements • IT • Fleet vehicles • Legal obligations • E.g. Security

13. Nominated capex categories (cont’d) • Safety and environmental • Service standards (maintain / change) • SCADA and network control (link with IT?) • Net market benefits (for transmission) • Non demand driven augmentation

14. Capex category 1 : Reinforcement/augmentation • Applicable to Transmission and Distribution • Definition: • Shared network reinforcement • Drivers & Measures: • Driven by load growth impacting security, reliability, market benefits • Challenges and issues: • Different drivers for transmission and distribution • Incorporating effects of solar PV (distribution)

15. Capex category 2 : Customer connections • Applicable to Transmission and Distribution • However, there are significant differences between transmission and distribution • Definition: • New customers connecting to network • Inclusive of customer contributions (before the shared network) • Distinction between shared and sole use network

16. Customer connections (cont’d) • Drivers & Measures: • Sum of connections: customer growth, customer movement • Energy intensity of connections • Type of connection • Challenges and issues: • Definition of shared network differs • Service classification and contestability

17. Capex category 3 : Replacement • Applicable to Transmission and distribution • Definition: • Drivers and measures: • Condition is the main driver (age may be used as a proxy • Obsolescence • Safety? • Third party (accidents)

18. Replacement (cont’d) • Issues: • NSPs at different stages of life cycle • Are age profiles and condition profiles correlated? • Hard to compare condition • Different risk assessment approaches, standards • Different risk averseness profiles • STPIS trade-off (which differs between transmission and distribution)

19. Replacement (cont’d) • Replace vs maintain • Exogenous factors (e.g. Environment, geography)

20. Break

21. Opex • Interactive session to • Identify categories • Consider Transmission/Distribution • Consider initial definitions • Identify possible drivers and measures • Identify challenges and issues

22. Opex categories discussion session • Attendants of the workshop discussed the opex categories NSPs consider important. • Attendants of the workshop also explored possible definitions and measures for these categories, and issues in using such data. • The following slides summarise these discussions.

23. Opex categories • Maintenance • Emergency maintenance • Vegetation management • Step changes

24. Opex Category 1 : Maintenance • Applicable to Transmission/Distribution • Definition: • Routine e.g. inspections • Condition-based • Type of asset (substations, lines, etc) • By feeder • By voltage • Drivers & Measures: • Geography, climate, topography • Scale of network • Reliability

25. Maintenance (cont’d) • Challenges and issues: • Breakdown between routine and condition • Breakdown between asset types • Breakdown by location (particularly for distribution) • Allocations play an important role in capturing maintenance expenditure • Legacy issues • Network design • Asset management strategies

26. Opex category 3: Vegetation management • Applicable to Transmission/Distribution • Definition: • Cutting for easements, lines (including undergrowth and clearances) • Scoping, audit & control of contractors • Easement management: including roads and access ways • Aerial inspections • Allocations

27. Vegetation management (cont’d) • Drivers & Measures: • Number of trees • Fire starts from tree contact • Emergency response due to vegetation contact • Cutting cycle • Standards and regulations • Tree types

28. Vegetation management (cont’d) • Challenges and issues: • In-house vs contract out? What gets contracted out? What gets bundled with other services? • Data available based on billing? • Changes in legislative requirements may not be easily captured • Terrain affects access, travel times. • Climate (refer to Economic Insights paper). • Some NSPs do not separately categorise vegetation management for regulatory reporting • Bushfire risk rating

29. Opex category 2: Emergency maintenance • Applicable to Transmission/Distribution • Definition: • Response to an unplanned event • Suggest move from term “Emergency” to Fault response/unplanned response • Drivers & Measures: • Number of outages • Severity of outages

30. Emergency maintenance (cont’d) • Challenges and issues: • Immediate vs deferred activities and responses • NSPs may not distinguish between above • Appropriate definition for transmission? • Topology, distance, etc. affect unit costs • Measuring severity of outages (CAIDI, SAIFI, MAIFI?) • Effects on subtransmission network not felt by customers though affects NSPs • Condition of network: is running to failure emergency response?

31. Issues capture The following issues were raised during the capex and opex discussion sessions. These issues will be discussed in other workshops. • Metering/AMI • Expenditure forecast and additions to RAB • Interaction between EBSS (and other incentive schemes) with benchmarking • Will the current process affect the existing submission guidelines for transmission?

32. Next steps