The Australian Energy
Regulator
Expenditure Forecast Assessment Guideline
Category analysis
Operating and maintenance expenditure
Agenda
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9:00 9:15 9:30 9:45 10:30 10:45 11:15 12:15 -
Introductions and objectives
Context and framework considerations
Opex categories and working definitions
Maintenance
Break
Emergency response
Vegetation management
Summary & next steps
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Where are we today?
20 Dec 2012
•Issues paper
12 Feb 2013
•Initial Roundtable
28 Feb 2013
•Category selection
7/8 Mar 2013
19/20Mar 2013
•Replacement/Demand
•Connection/Customer driven capex
27Mar 2013
•Repex/Augex models, demand forecasting
11 Apr 2013
•Opex category assessment
24 Apr 2013
•Overheads
8 May 2013
•Base-step-trend/Productivity change
16 May 2013
•Overheads, Cost allocation and accounting
30 May 2013
•Expenditure setting process
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Objectives for today
Provide context for benchmarking opex
 Discuss potential categorisations that
better align with cost drivers and provide
a framework for:
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◦ Volume/ trend analysis
◦ Unit cost analysis
◦ Benchmarking across businesses
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Discuss other firm specific normalisation
and supporting data
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Context and framework
considerations– opex
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The revealed cost approach
Revealed costs most relevant for setting opex–
recurrent/ predictable expenditures
 AER’s preferred, “light handed” approach
 Strong theoretical grounds– in practice:
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◦ Concern around NSPs responding differently to incentives
– needs to be tested
◦ Attempts to break the link between historic and forecast
conditions
◦ Non-recurrent opex and inflating/ choice of “base” year
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What does benchmarking mean
for opex?
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Public reporting of comparative performance –
efficiency of sector/ NSP/ activity
Backing up the revealed cost framework – time
series and cross sectional analysis
◦ Confidence in proposed base year, otherwise
adjustments to proposed base year
◦ Adjustments/ decisions relying on a combination of
evidence (economic benchmarking, top down trends,
detailed review)
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Links with revealed cost trend assessment where
quantitative/ driver based analysis already used
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Comments in previous workshops
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Use of benchmarking:
◦ Filtering vs deterministic approach
◦ Value/ limitations of benchmarking and NSP
differences
◦ Value/ limitations of other techniques
Importance of clear data definitions
 Boundary issues – activities don’t neatly
align with (AER) categories
 Non-standard and packaging of works
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Category based benchmarking
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Focus on activities and unit rates
◦ Activity/ volume units
◦ Cost per unit
◦ Internal and external benchmarking
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Requires expenditure & volumes data
◦ standardised cost categories
◦ identification and measurement of material drivers
◦ normalisation for/ keeping in mind idiosyncratic factors
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Recurrent opex – relationships to drivers easier
to identify than for capex
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Opex categories and working
definitions
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Key issues – submissions
Maintenance involves many activities not
always neatly reported eg by asset
 More clarity required on suggested (nonemergency) prevention and rectification
 Support to split emergency rectification
and planned actions to address asset
deterioration
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Key issues – submissions
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3rd party expenditures unlikely to be
robustly measured in sub-categories,
though ENA suggests for discussion:
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geographic location
level of construction activity
level of traffic
seasonal climate of the network area
socio-economic profiles of the network area
MEU suggests feeder splits (rural, urban
etc)
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Key issues – submissions
Non-routine activities not predictable
 Support splitting vegetation management
from 3rd party
 Vegetation management affected by a
variety of factors
 Limited support for deterministic routine
maintenance model
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Proposed opex categories
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Maintenance
◦ Routine
◦ Non-routine
Emergency response
 Vegetation management
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Just “direct” expenditures, no overheads
(corporate or network/ direct)
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Maintenance – Definition (1)
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Driven by active asset management practices
or to address deterioration in asset condition,
risk and reliability
What’s in:
◦ Routine and non-routine
◦ Inspections
◦ Maintenance
 Preventive – planned or programmed, to reduce the probability
of asset failure or performance degradation
 Corrective – Planned repair work carried out following defects
being identified during an inspection/condition assessment
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Maintenance – Definition (2)
What’s out:
◦ Reactive / emergency works
◦ Emergency response to actions of third parties
(accidents, vandalism, theft, wildlife damage)
◦ Vegetation management
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Emergency Response – Definition (1)
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activities that are primarily directed at
maintaining asset condition or distribution
system functionality, and for which
immediate rectification work is necessary
◦ due to extreme weather events, vandalism, traffic
accidents, or interference by a non-related entity
◦ other/ general asset failure
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Emergency Response – Definition (2)
What’s in:
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Asset condition (failure)
accidents
vandalism
theft
wildlife damage
extreme weather events
What’s out:
◦ Vegetation management
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Vegetation Management Definition (1)
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Expenditure associated with the trimming and
removal of trees and vegetation around NSP’s
field assets (i.e. overhead lines) and access
areas.
Broadly includes:
vegetation cutting
 undergrowth control
 waste disposal associated with line and easement
clearing
 Identification/inspection, coordination, supervision,
management and auditing
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Vegetation Management Definition (2)
What’s in
Inspections/audits e.g. Quality audits (including of
contractors), regulation based inspections
 Vegetation management related reports to state
regulators, Energy Safe etc
 Contractor overhead costs e.g. legal, admin
 Clearance and maintenance of access tracks
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Vegetation Management Definition (3)
What’s out
Emergency works
 Lawn mowing e.g. from nature strips
 Non-standard control services e.g. cutting trees on
customer request
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Maintenance assessment
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What do NSPs currently do?
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DNSP categories
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TNSP categories
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Preventive, Corrective (incl. Veg Mgt), Forced (incl. Emergency
response), Inspection, Pole Replacement, R&M, Other Network
Maintenance
Field Maintenance, Network Operations, Routine, Corrective,
Operational Refurbishment, Network Optimisation, Maintenance
Support
Expenditure proposals use combination of trend and
bottom-up estimation techniques
Some instances of routine maintenance models used
links to asset types, risk assessments/ management
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Issues for discussion
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Potential sub-categorisations
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Routine and non-routine. Materiality/ use of further splits?
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Maintenance, inspection
Preventative, corrective
By asset class (as per repex model)
 By region/ geography (urban, rural etc)
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Other supporting data for benchmarking
Volumes - inspections, by asset “maintained”?
 Fault rates
 Asset age/ risk data
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Potential routine maintenance model (non-deterministic)?
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Emergency response assessment
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What do NSPs currently do?
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DNSP categories
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Most report against emergency response or “reactive”
TNSP categories
Not many emergencies (immaterial as a separate category?)
 Included in field support/ maintenance?
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Relatively difficult to forecast
Expenditure proposals use combination of trend and
bottom-up estimation techniques
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Drivers and supporting measures
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Faults
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Number/ frequency
Severity (duration, customers affected)
Causes (animals, weather, asset condition)
Driven by location? (rural/ urban)
By voltage level?
Asset risk
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Age (average and profile)
Utilisation?
Environmental factors?
% overhead vs underground
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Normalisations and issues
Immediate vs deferred responses
 Cost impact of topology, distance, etc.
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Urban/rural short/long
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?
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Vegetation management
assessment
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What do NSPs currently do?
Similar categories, differences between Dx and Tx:
DNSPs - activities targeted at vegetation at risk of
contact with lines
 TNSPs - activities include management of access
tracks, right of ways, and easements
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Forecasting method aligned to general opex:
base-year/ trend approach
 ‘zero-base’ or bottom-up approach
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Drivers and supporting measures
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Number/ dimensions of easements
Number of trees trimmed/ removed
Number of spans
Fire starts from tree contact
Emergency response due to veg contact
Cutting cycle
Standards and regulations
Tree types
% overhead lines in bushfire risk zones
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Normalisations and issues
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Jurisdictional and changes to regulatory
requirements e.g. Tree clearance margins
Impact of contracting out vegetation
management works
Inaccurate/ aggregated recording of
activities performed
Measuring tree growth rates
Terrain affecting access and travel times
Climate
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Normalisations and issues (cont)
Bushfire risk rating
 Separation of expenditure associated with
tree replacement programs
 Separation of customer consultation/
negotiation
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◦ Notification – Advertising, Other
communication
◦ Complaints handling
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Proposed sub-categorisations
By work activity (with volumes for each):
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Audits/inspections
Tree cutting
Time spent travelling
Time on site- including set-up and cutting
trees cut per km basis
By region/ geographical factors:
◦ CBD, urban, short-rural, long-rural
◦ Terrain- forested area, farmland, elevation etc
◦ Tree types, including growth rates
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Next steps
date
 If
you topic
require more slides, right click on a
29 slide
April
Joint
expenditure
assessment
incentives workshop
to
the
left and
selectand
“Duplicate
8 May
- Base-step-trend,
productivity
change
Slide” Opex
to keep
the same
format.
16 May
Overheads, cost allocation, accounting issues
30 May
Expenditure setting process and general issues
35