Final Decision
SA Power Networks cost pass through application
for
Vegetation management costs arising from an
unexpected increase in vegetation growth rates
AER Decision | SA Power Networks' vegetation clearance cost pass through
1
July 2013
© Commonwealth of Australia 2013
This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be reproduced without permission of the
Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should be addressed to
the Director Publishing, Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT 2601.
Inquiries about this final decision should be addressed to:
Australian Energy Regulator
GPO Box 520
Melbourne Vic 3001
Tel: (03) 9290 1444
Fax: (03) 9290 1457
Email: AERInquiry@aer.gov.au
AER reference: 50720, D13/29251
Amendment record
Version
Date
Pages
1.0
30 July 2013
35
AER Decision | SA Power Networks' vegetation clearance cost pass through
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Contents
Contents .................................................................................................................................................. 3
Shortened forms ...................................................................................................................................... 4
1
Summary .......................................................................................................................................... 5
2
Cost pass through application .......................................................................................................... 9
3
4
2.1
Cost pass through regulatory requirements ................................................................................ 10
2.2
SA Power Networks' pass through application ........................................................................... 12
Assessment approach .................................................................................................................... 21
3.1
Pass through amount requirements ........................................................................................... 23
3.2
Submissions ............................................................................................................................. 24
Occurrence of a general nominated pass through event ................................................................ 26
4.1
AER decision ............................................................................................................................ 26
4.2
AER reasons ............................................................................................................................ 26
5
Positive change event .................................................................................................................... 35
6
Assessment of the costs likely to be incurred ................................................................................. 36
6.1
Vegetation clearance costs ....................................................................................................... 36
7
Conclusion...................................................................................................................................... 43
A
Compliance with section 6.6.1(c) of the NER ................................................................................. 44
AER Decision | SA Power Networks' vegetation clearance cost pass through
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Shortened forms
AER
Australian Energy Regulator
BFRA
Bush Fire Risk Area
CPI
Consumer Price Index
DNSP
Distribution Network Service Provider
EDPR
Electricity Distribution Price Review
HBFRA
High Bushfire Risk Area
HV
High Voltage
NER
National Electricity Rules
NEL
National Electricity Law
NBFRA
Non-Bushfire Risk Area
AER Decision | SA Power Networks' vegetation clearance cost pass through
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1
Summary
The Australian Energy Regulator (AER) regulates electricity distributors in the National Electricity
Market, including in South Australia. We do so under the National Electricity Law (NEL) and the
National Electricity Rules (NER). In May 2010, the AER made a distribution determination for SA
Power Networks (formerly ETSA Utilities), the South Australian electricity distributor, for the
regulatory control period 1 July 2010 to 30 June 2015. The AER’s principal task was to set the
revenue that ETSA Utilities can recover from the provision of direct control services during the
period.
The AER's distribution determination for SA Power Networks provided an amount of $108.6 million
($2009-10) for vegetation management costs as part of its total operating expenditure allowance.
This amount was distributed evenly over the five years, with a maximum allowance of $22.8 million
($2009-10) in 2014-15 and a minimum allowance of $20.5 million in 2011-12 ($2009-10). Of all
the operating expenditure categories, only emergency response was provided a greater allowance
for the period. SA Power Networks' vegetation management allowance represents almost 11 per
cent of its total operating expenditure allowance for the 2010-15 distribution determination period.
The AER's distribution determination for SA Power Networks also included a pass through
mechanism for a 'general nominated pass through event'. This event allows SA Power Networks to
pass through incremental costs arising from uncontrollable and unexpected events which could not
have been prevented or mitigated by prudent risk management and which materially changes the
cost of providing distribution services. Clause 6.6.1(a1) of the NER specifies that a pass through
event includes any event specified in a distribution determination as a pass through event for the
determination. The pass through mechanism recognises that an efficient revenue allowance cannot
account for matters that are uncertain and outside the control of the electricity distribution networks
to manage through their revenue allowance.
The vegetation clearance costs allowed for by the AER in its determination were forecast by SA
Power Networks based on the actual frequency and level of vegetation inspection and clearance
undertaken during 2008-09, which was used by SA Power Networks as the base year to forecast
its operating expenditure. Added to this expenditure was a step change increase of 20 per cent,
AER Decision | SA Power Networks' vegetation clearance cost pass through
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which the AER approved, to take into account the need to improve the vegetation management
program to meet SA Power Networks legislative requirements for South Australia. SA Power
Networks' vegetation management policy during 2008-09 was to focus on a three yearly cycle for
bushfire risk areas and only clear vegetation from around high voltage and high risk low voltage
powerlines in the Adelaide metropolitan area, pending the resolution of proposed changes to the
vegetation clearance regulations. No further adjustment was made to account for the drought
conditions experienced in the base year, and the three prior years during the previous regulatory
control period 2005-10. At the time that the AER made SA Power Networks' current regulatory
determination, South Australia had experienced an extended period of below average rainfall and
above average temperatures.
SA Power Networks submitted its pass through application to the AER on 11 April 2013. SA Power
Networks' application is for a material increase in vegetation management costs as a result of an
uncontrollable and unexpected increase in vegetation growth rates which followed the breaking of
the drought in mid-2010. SA Power Networks has proposed that the additional vegetation
management costs be considered as a general nominated pass through event as specified by the
AER in its 2010-15 distribution determination and in clause 6.6.1 of the NER.
SA Power Networks is seeking to recover an additional amount of $40.53 million ($2009-10) in
respect of the occurrence of a general nominated pass through event in the form of a step change
increase in vegetation growth rates. SA Power Networks stated that the above average rainfall that
was experienced in South Australia since mid-2010 caused a material increase in vegetation
growth rates and therefore vegetation management costs. SA Power Networks' increase in
vegetation growth rates commenced in about September 2011 but the increase in growth rates only
came to the attention of its vegetation management operational staff in November 2011. SA Power
Networks application also stated that the increase in vegetation growth rates caused a significant
increase in its vegetation inspection and clearance that has and will be required in 2012 and 2013
in order to meet its legislative obligations to manage vegetation in the vicinity of its assets within
prescribed clearance zones.
SA Power Networks has sought to mitigate the effect of the pass through event by utilising prudent
operational risk management, but the strict nature of the legislative vegetation and clearance
AER Decision | SA Power Networks' vegetation clearance cost pass through
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obligations prevents the deferral of most vegetation inspection and clearance activities and also
limits the extent to which vegetation can be cleared.
The AER has assessed SA Power Networks’ application in accordance with the requirements of its
determination and clause 6.6.1 of the NER. The AER considers that the application satisfies the
definition of a pass through event (pass through event requirements) under clause 6.6.1 of the
NER. In particular, the AER is satisfied that a general nominated pass through event has occurred
and that all the necessary requirements have been met. These requirements include that the event
described in SA Power Networks' cost pass through application is uncontrollable and unexpected,
and that the effect of the event could not have been prevented or further mitigated by SA Power
Networks.
The AER considers that a well-informed DNSP in the circumstances of SA Power Networks, acting
reasonably, would not have considered that the increase in vegetation growth rates experienced in
2013 and forecast for 2014, at the time that it submitted its regulatory proposal in April 2009,
would have been more likely than not to occur in the regulatory control period. Further, the AER
considers that the change in costs of providing distribution services as a result of the event are
material.
For the reasons discussed in Section 6 of this decision, the AER has reduced SA Power Networks'
proposed pass through by $5.47 million ($2009-10) and hence approves a total pass through
amount of $35.06 million ($2009-2010).
The AER does not accept SA Power Networks’ assumption that high vegetation growth rates will
persist into the second half of 2013. The AER also made an adjustment to SA Power Networks’
forecast rate for power lines requiring clearance for years of average vegetation growth in bush fire
risk areas. The AER used the midpoint of the range of the observed rate for power lines requiring
clearance in high and low growth years, rather than a point based on the rate for power lines
requiring clearance for high vegetation growth. The AER also amended SA Power Networks'
forecast inflation for 2012-13 and the manner in which SA Power Networks applied the labour cost
escalators approved as part of the current regulatory determination. The AER has used this
approved operating expenditure to calculate the building block costs and determined the amount to
AER Decision | SA Power Networks' vegetation clearance cost pass through
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pass through to Distribution Network Users in each year of the remainder of the regulatory control
period. This amounts to $39.79 million ($ nominal) which will be passed through to customers in
2014-15, which is the final year of the current 2010-15 regulatory control period. The effect of this
pass through is that the average residential customer bill is likely to increase by around 1.5 per
cent in 2014-15.
AER Decision | SA Power Networks' vegetation clearance cost pass through
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2
Cost pass through application
The AER considers that SA Power Networks' pass through application meets the criteria of a
general nominated pass through event as specified in the AER's distribution determination and that
its application conforms with the pass through requirements of the NER. We consider that a pass
through event has occurred. The reasons for this decision are:

an uncontrollable and unexpected event has occurred during the course of the regulatory
control period, the effect of which could not have been prevented or mitigated by prudent
operational risk management

the change in costs of providing distribution services as a result of the event is material

the event does not fall within the definition of any of the pass through events defined in r. 6.6.1
of the NER or any other pass through event specified in SA Power Networks' distribution
determination

a general nominated pass through event is a specified pass though event in SA Power
Networks' distribution determination.
Although the AER considers that a pass through event has occurred, the AER has reduced SA
Power Networks' proposed pass through by $5.47 million ($2009-10) because SA Power
Networks':

assumed that high vegetation growth rates will persist into the second half of 2013, which is
not evident based on available data

forecast equivalent find rate for years of average vegetation growth in bush fire risk areas is
considered too high, and

forecast inflation for 2012-13 required updating and the manner in which SA Power Networks
applied the labour cost escalators approved as part of the current regulatory determination was
incorrect.
AER Decision | SA Power Networks' vegetation clearance cost pass through
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The following sections discuss the regulatory requirements of the pass through in greater detail.
Section 3 discusses the detail of the AER’s reasoning for each element that must be satisfied for a
positive pass through event to be determined.
2.1
Cost pass through regulatory requirements
Clause 6.6.1(a1) of the NER allows a cost pass through for DNSPs:
6.6.1(a1)
Any of the following is a pass through event:
(1)
a regulatory change event;
(2)
a service standard event;
(3)
a tax change event;
(4)
a retailer insolvency event, and
(5)
any other event specified in a distribution determination as a pass through
event for the determination.
In its distribution determination for SA Power Networks, the AER has nominated the following
general pass through event for SA Power Networks: 1
A general nominated pass through event occurs in the following circumstances:
1.
An uncontrollable and unexpected event occurs during the next regulatory control period, the effect of which
could not have been prevented or mitigated by prudent operation risk management.
2.
The change in costs of providing distribution services as a result of the event is material.
3.
The event does not fall into any of the following definitions:
‘regulatory change event’ in the NER (read as if paragraph (a) of the definition was
not part of the definition)
‘service standard event’ in the NER
‘tax change event’ in the NER
‘terrorism event’ in the NER
1
AER, Final decision - SA distribution determination 2010-11 to 2014-15, May 2010, pp. 241-242.
AER Decision | SA Power Networks' vegetation clearance cost pass through
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‘smart meter event’ in this draft decision
‘CPRS event’ in this draft decision
‘feed–in tariff event’ in this draft decision
‘native title event’ in this draft decision
For the purposes of this definition,
‘material’ means the costs associated with the event would exceed 1 per cent of the
smoothed forecast revenue specified in the final decision in each of the years of the
regulatory control period that the costs are incurred.
If a pass through event materially increases the DNSP’s costs of providing direct control services,
then a positive change event occurs. 2
If a positive change event occurs, the DNSP may seek AER approval to pass through to
Distribution Network Users a positive pass through amount. 3
A DNSP’s cost pass through application must also conform to the timing and information
requirements outlined under clause 6.6.1(c) of the NER. If the AER determines4 a positive change
event has occurred, the AER must determine:

the approved pass through amount; and

the amount of the approved pass through amount which should be passed through to
Distribution Network Users in each regulatory year of the regulatory control period.
The NER requires the AER to make a determination within 40 business days from receipt of a
DNSP’s application and all necessary supporting information.5
2
Chapter 10 of the NER. A negative change event under clause 6.6.1(b) is not discussed in this AER decision as SA Power
Networks' application refers to a positive change event only.
3
Clause 6.6.1(a) of the NER.
4
Clause 6.6.1(d) of the NER and taking into account the matters set out in clause 6.6.1(j) - see Section 3.1 of this decision.
5
Clause 6.6.1(e).
AER Decision | SA Power Networks' vegetation clearance cost pass through
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2.2
SA Power Networks' pass through application
On 1 March 2013, SA Power Networks submitted its initial pass through application to the AER to pass
through additional expenditure to its distribution network users, under clause 6.6.1 of the NER. The AER,
however, identified issues related to the technical compliance of SA Power Networks' written statement in
relation to the terms of rule 6.6.1(c) of the NER. These issues were in relation to SA Power Networks'
definition of the positive change event, in particular the timing of the event in relation to the pass through
event. As a result, SA Power Networks withdrew its application and submitted a revised version to the AER
on 11 April 2013. SA Power Networks has applied the general nominated pass through provisions specified
in the AER's determination for its pass through application rather than any of the prescribed events set out
in the NER.
The expenditure relates to a material increase in vegetation management costs as a result of an
uncontrollable and unexpected increase in vegetation growth rates, which followed the unexpected breaking
of the 'Millennium drought' in mid-2010 and the above average rainfall that has been experienced in South
Australia since that time.
In particular, SA Power Networks submitted that:
The occurrence of an uncontrollable and unexpected increase in vegetation growth rates during the 2011/2012
and 2012/2013 regulatory years has entailed SA Power Networks incurring materially higher costs in providing
distribution services (and, in particular, direct control services) during the 2011/2012 and 2012/2013 regulatory
years than it would have incurred but for the occurrence of this event.
SA Power Networks has been advised that this uncontrollable and unexpected increase in vegetation growth
rates is likely to continue during the 2013/2014 and 2014/2015 regulatory years and the associated increase in
the costs of providing direct control services solely caused by the ongoing occurrence of this uncontrollable and
unexpected increase in vegetation growth rates is also likely to continue to be experienced by SA Power
Networks during the 2013/2014 and 2014/2015 regulatory years.
The likely increase in the costs of providing distribution services (and, in particular, direct control services) during
the 2012/2013, 2013/2014 and 2014/2015 regulatory years has been caused solely by an uncontrollable,
unexpected and material increase in the frequency and extent of vegetation inspection and clearance required to
be undertaken by SA Power Networks in order to continue to meet its vegetation clearance obligations under the
Act and the Regulations (for example, the frequency of vegetation inspection and clearance in bushfire risk areas
(BFRAs) has moved from a 3 year cycle to an ongoing 1 year cycle and the number of spans required to be
AER Decision | SA Power Networks' vegetation clearance cost pass through
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cleared each year in BFRAs has increased from 28,000 in 2008/2009 to an anticipated 76,000 in
2012/2013).
This uncontrollable and unexpected increase in vegetation growth rates has in turn been caused by a 'step
change' in climatic conditions during the 2010, 2011 and 2012 calendar years (i.e. the breaking of the
'Millennium drought' in mid-2010 and the occurrence of above-average rainfall since that time).
SA Power Networks submitted that the step change increase in vegetation growth rates probably
commenced in about September 2011 but that the increase in growth rates only came to the attention of its
vegetation management operational staff in November 2011. SA Power Networks stated that the increase in
vegetation growth rates has caused a significant increase in the frequency and extent of its vegetation
inspection and clearance that has and will be required in 2012 and 2013 in order to meet its vegetation
clearance obligations under the Electricity Act 1996 (SA) (Act) and Electricity (Principles of Vegetation
Clearance) Regulations 2010 (Regulations). Based on a review of information obtained from an inspection
of all spans located in bushfire risk areas and a representative sample of powerlines located in non-bushfire
risk areas (NBFRA), SA Power Networks revised its 2013 vegetation inspection and clearance program in
consultation with its vegetation management contractor.
SA Power Networks submitted that the breaking of the drought in mid-2010 and the sustained aboveaverage rainfall experienced during autumn, winter and spring of 2011 and 2012, resulted in a significant
and material increase in vegetation growth rates. This has led in turn to a material increase in the level of
vegetation inspection and clearance that needs to be undertaken by SA Power Networks during the balance
of the current regulatory control period in order to continue to meet its vegetation inspection and clearance
obligations under the Act and Regulations. Further, SA Power Networks submitted that the increased
vegetation inspection and clearance that will be required for the remainder of the 2010-15 regulatory control
period was unexpected and was neither foreseen nor anticipated at the time it submitted its 2010-15
regulatory proposal by itself, the AER or the AER's consultant Parsons Brinkerhoff Australia during the
distribution determination process.
2.2.1
Basis of vegetation management allowance forecast for 2010-15
SA Power Networks based the vegetation management component of its forecast operating expenditure in
its 2010-15 regulatory proposal (submitted in July 2009) on the actual frequency and level of vegetation
inspection and clearance undertaken during 2008-09. SA Power Networks stated that its expenditure on
AER Decision | SA Power Networks' vegetation clearance cost pass through
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vegetation management in 2008-09 was unusually low as its focus was on a three yearly cycle for bushfire
risk areas (BFRA) and only clearing vegetation from around high voltage and high risk low voltage
powerlines in the Adelaide metropolitan area, pending the resolution of proposed changes to the
Regulations. SA Power Networks' regulatory proposal sought to increase its vegetation management
allowance for the 2010-15 regulatory period based on its estimate of the likely increase in the level of
vegetation inspection and clearance that would be required to achieve full compliance with its regulatory
obligations in NBFRAs. SA Power Networks submitted that the number of BFRA spans cleared each year
during the 2005-10 regulatory period remained generally static and that on this basis the expectation was
that clearance volumes for BFRAs would continue at the same general rate during the 2010-15 regulatory
period. On this basis, it was considered that an increase of 20 per cent in the historical based expenditure
(which was seen as unusually low) would be sufficient to fully meet its compliance obligations.
SA Power Networks also submitted, as part of its July 2009 proposal, that its vegetation inspection and
clearance processes for the 2005-10 regulatory period, including a pre-summer check for all spans located
within BFRAs prior to the commencement of the declared fire danger season (DFDS), were in place during
2010-11.
2.2.2
Impact of increased vegetation growth
SA Power Networks submitted that although the 'Millennium drought' broke in the winter of 2010, this
change in climatic conditions did not impact on the frequency and extent of vegetation inspection and
clearance required to be undertaken during 2010-11. SA Power Networks stated that above average rainfall
continued during autumn, winter and spring of 2011 and that the scoping process in October 2011 and presummer checks identified an unusually high level of intrusions of vegetation into the clearance zone for
BFRA spans. SA Power Networks stated that these intrusions were addressed during the summer of 201112.
SA Power Networks submitted that they continued to monitor the required level of vegetation clearance
during January and February 2012, including steps to identify the potential cause of the increase, and
decided in March 2012 to move to:

an annual inspection and clearance cycle in BFRAs, and
AER Decision | SA Power Networks' vegetation clearance cost pass through
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
focus available resources on ensuring that it met its vegetation inspection and clearance obligations in
relation to, firstly, BFRAs and secondly, high voltage and high risk low voltage powerlines in NBFRAs.
SA Power Networks acknowledged that it had not yet conclusively identified the reason for the increase in
vegetation inspection and clearance activity. SA Power Networks submitted that above average rain fall
continued during autumn, winter and spring of 2012.
SA Power Networks submitted that based on information from inspections from the previous 12 months and
its vegetation management contractor's inspection of 430,000 spans in BFRAs and a representative
sample of powerlines located in NBRAs, in October 2012 it was able to determine the level of vegetation
inspection and clearance likely to be required for 2013 and beyond.
2.2.3
SA Power Networks response to increased vegetation management costs
SA Power Networks submit that it has sought to mitigate the effect of the pass through event by utilising
prudent operational risk management. This is a consideration under 6.6.1(j) of the NER which we need to
have regard. SA Power Networks submitted that it considers that the strict nature of the legislative
vegetation and clearance obligations prevents the deferral of most vegetation inspection and clearance
activities and also limits the extent to which vegetation can be cleared.
SA Power Networks stated that the current per unit costs for its vegetation management contractor are
below the unit costs which were used to determine its vegetation management allowance for the 2010-15
distribution determination. SA Power Networks submitted that these (lower) costs were used to determine
its pass through cost amounts for 2012-13, 2013-14 and 2014-15. SA Power Networks also acknowledge
that changes to the Electricity (Principles of Vegetation Clearance) Regulations 2010 in February 2010 and
the associated adoption by SA Power Networks of a 'risk based approach' to the clearance of vegetation
around low risk powerlines in prescribed areas has not increased its vegetation management costs.
2.2.4
Pass through amount
SA Power Networks is seeking a pass through amount of $40.53 million ($2009-10) which includes an
amount of $1.61 million as provided for under clause 6.6.1(j)(4) of the NER to account for the time cost of
money based on SA Power Networks' allowed rate of return of 9.76 per cent. SA Power Networks proposes
to recover this amount in equal amounts of $20.26 million ($2009-10) through its distribution tariffs for the
AER Decision | SA Power Networks' vegetation clearance cost pass through
15
2013-14 and 2014-15 regulatory years. SA Power Networks expects this amount to increase residential
customers' bills by about 0.9 per cent.
The AER provided an allowance of $108.6 million ($2009-10) for SA Power Networks' vegetation
inspection and clearance program for the 2010-15 distribution determination period. Of all the operating
expenditure categories, only emergency response was provided a greater allowance for the current
regulatory control period. SA Power Networks' vegetation management allowance represents almost 11 per
cent of its total operating expenditure allowance for the 2010-15 distribution determination period.
2.2.5
Date of positive change event
In accordance with clause 6.6.1(c)(2), SA Power Networks submitted that the pass through event and
consequently the positive change event probably commenced to occur in or about September 2011 and has
continued since that time. SA Power Networks also submitted that its consultant advised that these
increased vegetation growth rates are likely to continue until at least the summer of 2013-14, assuming that
rainfall conditions return to average during 2013. SA Power Networks stated that it was not until early
November 2012 that it was able to recognise the ongoing nature of the event and was in a position to fully
quantify and extrapolate the level of vegetation inspection and clearance required to meet its regulatory
obligations.
2.2.6
General nominated pass through event
SA Power Networks' pass through application addressed various elements of the AER's general nominated
pass through event criteria. The AER has nominated the following general pass through event for SA Power
Networks:6
A general nominated pass through event occurs in the following circumstances:
1.
An uncontrollable and unexpected event occurs during the next regulatory control period,
the effect of which could not have been prevented or mitigated by prudent operation risk
management.
2.
6
The change in costs of providing distribution services as a result of the event is material.
AER, Final decision - SA distribution determination 2010-11 to 2014-15, May 2010, pp. 241-242.
AER Decision | SA Power Networks' vegetation clearance cost pass through
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3.
The event does not fall into any of the following definitions:
‘regulatory change event’ in the NER (read as if paragraph (a) of the definition was
not part of the definition)
‘service standard event’ in the NER
‘tax change event’ in the NER
‘terrorism event’ in the NER
‘smart meter event’ in this draft decision
‘CPRS event’ in this draft decision
‘feed–in tariff event’ in this draft decision
‘native title event’ in this draft decision
For the purposes of this definition,
‘material’ means the costs associated with the event would exceed 1 per cent of the
smoothed forecast revenue specified in the final decision in each of the years of the
regulatory control period that the costs are incurred.
Uncontrollable and unexpected event
SA Power Networks submitted that as the terms "uncontrollable" and "unexpected" are not defined in the
National Electricity Law, they should be given their ordinary meanings having regard to:

the context in which they are used;

the purpose of clause 6.6.1 of the NER; and

the national electricity objective and the revenue and pricing principles contained in the National
Electricity Law.
SA Power Networks interpreted the term uncontrollable as an event that is beyond the control of the
Electricity Distribution Network Service Provider (DNSP) and submitted that climatic conditions and
vegetation growth rates are clearly beyond its control. SA Power Networks also submitted that it has no
control over the inspection and clearance obligations imposed on it by the legislative requirements of the Act
and Regulations. SA Power Networks also stated that it did not anticipate there would be any significant
AER Decision | SA Power Networks' vegetation clearance cost pass through
17
difference in the climatic conditions during the 2010-15 regulatory period compared to those in 2005-2010
and, in particular, the 2008-09 reference year.
Evidence
SA Power Networks engaged consultants GHD to report on the weather patterns between 2002-03 to
2011-12.7 SA Power Networks submitted that GHD concluded that the wetter period after 2009 replenished
soil moisture levels and generated a ‘pulse’ of native vegetation regrowth across the landscape. GHD's
report also stated that the wave of regeneration across all vegetation strata that occurred over this two year
period would have impacted on SA Power Networks' vegetation clearance program, generating significantly
increased costs of compliance for meeting its vegetation management obligations.
SA Power Networks submitted that on the basis that there is likely to be a progressive return to average
climatic conditions and average vegetation growth rates during 2013-14, it has anticipated a reduction in the
vegetation inspection and clearance volumes required to meet its legislative obligations. For 2014-15, SA
Power Networks has forecast a likely return to average weather conditions noting that this still requires a
higher level of vegetation inspection and clearance than the level of vegetation inspection and clearance
that was used to determine its vegetation management allowance for the 2010-15 regulatory period.
Mitigation
SA Power Networks submitted that although it must adhere to the strict nature of its legislative vegetation
and clearance obligations, it has sought to reduce costs by:

ceasing pre-summer patrols after shifting to an annual clearance cycle;

obtaining independent advice on the unit costs of undertaking both vegetation inspection and clearance
work; and

deferring components of the NBFRA vegetation inspection and clearance to later regulatory years
where that is permitted under the Act and Regulations.
7
GHD, Report for SA Power Networks - Recent Seasonal Climate Variability and Vegetation Growth Effects, January, 2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
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SA Power Networks stated that it is investigating opportunities to have the Regulations amended to alter the
clearance zones (CZ) and buffer zones (BZ) and provide the ability to remove vegetation (such as saplings
under CZs so that future costs are avoided). SA Power Networks further stated that any such amendments
are unlikely to eventuate within the remainder of this regulatory control period.
Materiality
The AER's determination for SA Power Networks requires that the change in costs for a general nominated
pass through event be material. For SA Power Networks, this means that the costs associated with its
proposed general nominated pass through event must exceed one per cent of its smoothed forecast
revenue specified in the AER's final decision in each of the years of the regulatory control period that the
costs are incurred. Table 2.1 shows SA Power Networks' smoothed revenue requirement, materiality
threshold and proposed pass through amount for 2012-13, 2013-14 and 2014-15.
Table 2.1
SA Power Networks' smoothed revenue requirement, materiality threshold and
proposed pass through amount ($m nominal)
($m nominal)
2013
2014
2015
Smoothed revenue requirement
761.9
825.7
851.5
Materiality threshold (1%)
7.6
8.3
8.5
Pass through amount
14.9
16.2
12.1
Source: SA Power Networks Pass Through Application, 10 April 2013, p. 21.
2.2.7
Clause 6.6.1(c) requirements of the NER
SA Power Networks' application addressed each of the NER requirements under clause 6.6.1(c) for a
positive pass through amount in respect of a positive change event occurring, including:

details of the positive change event (6.6.1(c)(1))

date on which the positive change event occurred (6.6.1(c)(2))

eligible pass through amount (6.6.1(c)(3))
AER Decision | SA Power Networks' vegetation clearance cost pass through
19

eligible pass through amount claimed (6.6.1(c)(4))

amount to be passed through each regulatory year (6.6.1(c)(5)), and

evidence (6.6.1(c)(6)).
Discussion of the details of these requirements has largely been covered in this section of the AER's
decision. The AER's assessment of SA Power Networks' pass through application in respect of compliance
with section 6.6.1(c) of the NER is contained in Appendix A.
2.2.8
Relevant factors to be considered by the AER
SA Power Networks submitted that its application has addressed the matters listed in clause 6.6.1(j)(1)-(8)
of the NER that the AER must take into account for a cost pass through event application. As discussed
above, SA Power Networks stated that it has done and continues to do everything that it can to minimise
the magnitude of the eligible pass through amount. SA Power Networks submitted that the positive pass
through amounts include a saving of about $1.02 million ($2009-10) to reflect the decrease for the unit
rates since the 2008 reference year charged by its vegetation management services contractor.
AER Decision | SA Power Networks' vegetation clearance cost pass through
20
3
Assessment approach
The AER undertook a systematic process in conducting this review. First, the AER reviewed whether the
application received addressed the requirements of the NER for a general nominated pass through event.
Appendix A discusses this analysis.
The AER next undertook its own analysis. This involved a number of steps which included:

Comparing the proposal to earlier AER approved material submitted by SA Power Networks to support
its 2010 EDPR revised proposal

Testing if the proposal fell within a defined pass through category (i.e. a general nominated pass
through event)

Testing if the cost increases satisfied a test of materiality and whether the event affected direct control
services

Determining whether the AER should take into account any additional factors under r. 6.6.1(j) of the
NER in determining the positive pass through amount

Considering whether SA Power Networks had sought to minimise the magnitude of the cost pass
through amounts sought as required by clause 6.6.1(j)(3) of the NER

Consulting the Office of the Technical Regulator on the program to assess the regulatory obligations
and mandated activity volumes under the Electricity Act 1996 (SA) and Electricity (Principles of
Vegetation Clearance) Regulations 2010

Assessing the reasonableness of the cost estimates

Considering whether alternative work practices were feasible, and

Ultimately coming to a view on whether to accept or reject the proposal and, where relevant, to
substitute an alternative estimate.
The AER considers that this process is consistent with the requirements of the NER. The decision is
predicated on the material submitted by SA Power Networks, but subject to the AER’s own analysis.
AER Decision | SA Power Networks' vegetation clearance cost pass through
21
The AER had regard to all the factors set out in clause 6.6.1(j) of the NER. These requirements are set out
in section 3.1. Of particular relevance:

factor 6.6.1(j)(2) which requires consideration of the increase in costs that the DNSP has incurred and
is likely to incur as a result of the event. The AER interprets this to mean that, in addition to costs
already incurred, the threshold test for including forecast costs in the pass through amount is that such
costs must have been, or be likely to be, incurred and must be caused by the event.

factor 6.6.1(j)(3) concerns the risk of the pass through event and whether the service provider has
taken steps to minimise the cost of the event. The AER interprets this to mean service providers must
seek to minimise costs where possible.
Where the material SA Power Networks submitted was unclear or incomplete, the AER put questions to SA
Power Networks and had regard to its responses. In some instances this involved asking further follow-up
questions and considering SA Power Networks' further replies.
Important components of the AER’s analysis were:

reviewing current and historical weather patterns and climatic conditions

assessing the basis for SA Power Networks' forecast find rates and clearance volumes

comparing the proposed vegetation scoping and cutting unit rates with the approved rates implied in the
current regulatory determination and costs incurred by other DNSPs

considering whether SA Power Networks has failed to take any action that could reasonably be taken to
reduce the magnitude of the eligible pass through amount in respect of the positive change event; and

examining whether SA Power Networks will only recover its actual or likely incremental costs, and
confirming that the incremental costs occur solely as a consequence of a pass through event.
Clause 6.6.1(i) of the NER provides that, in assessing pass through applications, the AER may consult the
DNSP (applicant) and other relevant stakeholders.
AER Decision | SA Power Networks' vegetation clearance cost pass through
22
In the course of assessing SA Power Networks’ pass through application, the AER consulted with and
requested SA Power Networks to provide further information to clarify aspects of its application. 8
The AER considers that this analysis is consistent with the National Electricity Objective as it is in the long
term interests of customers for SA Power Networks to meet its regulatory requirements at an efficient cost.
The AER may take into account the Revenue and Pricing Principles of the NEL when making pass through
decisions.9 The AER has done so here. In particular, the AER considers that a regulated network service
provider should be provided with:

a reasonable opportunity to recover at least the efficient costs; 10 and

effective incentives to promote economic efficiency. 11
The AER has sought to balance these principles, where necessary.
3.1
Pass through amount requirements
Where the AER has determined that a positive change event has occurred in accordance with clause
6.6.1(d) of the NER, the AER must determine:
(1)
the approved pass through amount; and
(2)
the amount of that approved pass through amount that should be passed through to Distribution
Network Users in each regulatory year during the regulatory control period,
taking into account the matters referred to in paragraph (j).
Accordingly, in determining the approved pass through amount in accordance with section 6.6.1(d) of the
NER, the AER has considered the matters referred to in section 6.6.1(j). In assessing a particular element
of SA Power Networks' proposed costs, the AER has had regard to the matters in paragraph (j) that it
considers relevant to that element. However, in each case the AER has considered SA Power Networks'
8
AER, SAPN Vegetation clearance cost pass through - AER questions, 24 April 2013;
AER, SAPN Vegetation clearance cost pass through - AER information request no. 2, 22 May 2013.
9
NEL, s.16(2)(b).
10
NEL, s.7A(2).
11
NEL, s.7A(3).
AER Decision | SA Power Networks' vegetation clearance cost pass through
23
pass through application, taking into account all additional information received from SA Power Networks.
The matters which the AER must consider as set out in clause 6.6.1(j) are: 12
(1)
the matters and proposals set out in any statement given to the AER by the provider under
paragraph (c) or (f); and
(2)
in the case of a positive change event, the increase in costs in the provision of standard control
services that the provider has incurred and is likely to incur until the end of the regulatory control
period as a result of the positive change event; and
(3)
in the case of a positive change event, the efficiency of the provider's decisions and actions in
relation to the risk of the positive change event, including whether the provider has failed to take
any action that could reasonably be taken to reduce the magnitude of the eligible pass through
amount in respect of that positive change event and whether the provider has taken or omitted to
take any action where such action or omission has increased the magnitude of the amount in
respect of that positive change event; and
(4)
the time cost of money based on the weighted average cost of capital for the provider for the
relevant regulatory control period; and
(5)
the need to ensure that the provider only recovers any actual or likely increment in costs under
this paragraph (j) to the extent that such increment is solely as a consequence of a pass through
event; and
(6)
in the case of a tax change event, any change in the way another tax is calculated, or the
removal or imposition of another tax, which, in the AER's opinion, is complementary to the tax
change event concerned; and
(7)
whether the costs of the pass through event have already been factored into the calculation of the
provider's annual revenue requirement; and
(8)
3.2
any other factors the AER considers relevant.
Submissions
The AER received one submission in response to SA Power Networks’ pass through application. This was
a letter from the South Australian Minister for Mineral Resources and Energy, the Hon. Tom Koutsantonis
MP, dated 20 March 2013.13
12
Clause 6.6.1(j) of the NER
AER Decision | SA Power Networks' vegetation clearance cost pass through
24
The Minister expressed two key concerns:

the breaking of the 'Millennium Drought' and the above average rainfall experienced since that time
could not be classified as unexpected events as South Australia's climatic conditions include an
unpredictable and varied rainfall pattern

the incentive based regulatory framework provides businesses with strong incentives to manage costs
and realise efficiency gains, and more than adequately rewards electricity distributors for managing their
costs. As such, customers should not be forced to pay additional costs for vegetation clearance.
The AER considered this submission in evaluating whether the proposed pass through event was
uncontrollable and unexpected in accordance with the general nominated pass through event definition.14
13
SA Minister for Mineral Resources and Energy, submission in response to the AER, 20 March 2013.
14
See section 4.2.
AER Decision | SA Power Networks' vegetation clearance cost pass through
25
4
Occurrence of a general nominated pass through event
The AER considers that a general nominated pass through event has occurred.
4.1
AER decision
The AER is satisfied that a general nominated pass through event has occurred. All the necessary
circumstances have been met. These circumstances are:

an uncontrollable and unexpected event has occurred during the course of the regulatory control period,
the effect of which could not have been prevented or mitigated by prudent operational risk management

the change in costs of providing distribution services as a result of the event is material

the event does not fall within the definition of any of the pass through events defined in r. 6.6.1 of the
NER or any other pass through event specified in SA Power Networks' distribution determination.
The AER’s considerations are discussed in the following section.
4.2
AER reasons
4.2.1
Uncontrollable and unexpected event
The AER considers the event described in SA Power Networks' cost pass through application is
uncontrollable and unexpected, and that the effect of the event could not have been prevented or further
mitigated by SA Power Networks.
SA Power Networks described the event as an uncontrollable and unexpected increase in vegetation growth
rates, causing a material increase in the level of vegetation inspection and clearance required to comply
with its regulatory obligations. The increased vegetation growth rates are reflected in increased 'find rates' –
the percentage of spans15 inspected which require cutting. The increased vegetation growth rates were in
turn caused by the breaking of the drought with a sustained period of significantly above average rainfall.
15
A span means the part of the power line that lies between two poles or other supports for that line.
AER Decision | SA Power Networks' vegetation clearance cost pass through
26
Uncontrollable
The rate at which vegetation grows within SA Power Networks' distribution area is not controllable by SA
Power Networks. While there are many variables affecting the growth rates of individual trees, in general
terms, vegetation growth rates are typically driven by moisture availability and temperature. These climatic
factors are beyond the control of SA Power Networks.
Unexpected
In the context of the general nominated pass through event that applies in SA Power Network's distribution
determination, the AER considers an event to be 'unexpected' if, despite the occurrence of the event being
a possibility, there was no reason to consider that the event was more likely than not to occur during the
regulatory control period. This test is an objective one. That is, the question is not whether SA Power
Networks expected the event. Rather, the AER must consider whether a well-informed distribution network
service provider in the circumstances of SA Power Networks, acting reasonably, would have considered the
increase in vegetation growth rates experienced by SA Power Networks to be more likely than not to occur
in the regulatory control period.
Vegetation growth rates
SA Power Networks has experienced a significant increase in vegetation growth rates since approximately
September 2011. In order to continue to meet its regulatory obligations for vegetation clearance, SA Power
Networks had to increase the frequency of its inspections and clearance cycle in BFRAs, and focus
available resources on high voltage and high risk low voltage powerlines in NBFRAs.
The AER reviewed the extent of the change in vegetation growth rates from 2010-11 to 2011-12, measured
by the observed find rate of spans requiring cutting. The find rate in BFRAs increased by 173 per cent in
2011-12. While we would expect to see some fluctuation in find rates from year to year as a result of
variable climatic conditions and vegetation growth rates, the extent of the change observed from 2010-11 to
2011-12 is significant.
The AER therefore sought additional information from SA Power Networks concerning find rates observed in
the 2005-2010 regulatory control period, to provide an insight into the extent of variability typically
AER Decision | SA Power Networks' vegetation clearance cost pass through
27
observed from year to year. SA Power Networks advised that this historical data was not readily available
and in any case may not be comparable due to changes in how vegetation clearance activities are
undertaken.16 In the absence of historical find rate data, the AER reviewed the observed variability in
historical vegetation management expenditure. The level of expenditure is driven by other factors in addition
to find rates, such as variations in labour costs. Nonetheless, the AER considers the typical variability of
expenditure from year to year provides some indication of the variability in vegetation clearance volumes
that might reasonably be expected to occur.
In the period for which data is available, from 1999-00 to 2011, the average variability in vegetation
management expenditure from year to year was approximately 21 per cent. For the 2011-12 year, this figure
was 63 per cent or approximately three times the historical average. This, combined with the observed
increase in find rates in BFRAs of 173 per cent, suggests that the change in vegetation clearance volumes
and costs experienced in 2011-12, and persisting in 2012-13, was unusual. Such a significant increase in
vegetation clearance volumes and costs would not reasonably have been considered to be more likely than
not to occur in the regulatory control period.
Climatic conditions
SA Power Networks, and its consultant GHD, submitted that the significant increase in vegetation growth
rates and clearance costs experienced since 2011-12 was caused by the breaking of the drought in South
Australia in 2010 and the above average rainfall experienced since that time. The AER has therefore
reviewed the nature of the climatic conditions experienced at that time in South Australia to assess whether
such conditions could have been reasonably expected to occur within the regulatory control period.
At the time that the AER made SA Power Networks' current regulatory determination, South Australia had
experienced an extended period of below average rainfall and above average temperatures. These
conditions affected the vegetation growth rates and clearance volumes experienced by SA Power Networks
in the previous regulatory control period. The vegetation management forecast for the 2010-2015 regulatory
control period was based on the level of vegetation inspection and clearance undertaken by SA Power
Networks in the first three years of the 2005-2010 regulatory control period. Table 4.1 shows the extent to
16
SA Power Networks, Response to AER information request, 3 May 2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
28
which rainfall and temperature varied from the long term average in South Australia during the current and
previous regulatory control periods.
Table 4.1
Rainfall and temperature variability in South Australia 2005 to 2012
2005
2006
2007
2008
2009
2010
2011
2012
87
64
95
75
88
161
157
77
+1.0
+0.8
+1.1
+0.5
+1.3
-0.1
+0.5
+0.5
Rainfall
(% of long term
average)
Temperature
(oC above or below
long term average)
Source: Bureau of Meteorology, Australian climate variability time series data, viewed at www.bom.gov.au.
The level of rainfall experienced in South Australia in 2010 and 2011 clearly varies from the conditions
experienced in the 2005-2010 regulatory control period. The breaking of the drought, or indeed the
occurrence of any particular level of rainfall, cannot of itself be considered a pass through event.
Nevertheless, given that the level of rainfall in 2010 and 2011 was a key driver of the increase in vegetation
growth rates and clearance costs experienced by SA Power Networks, the AER has examined whether the
level of rainfall could reasonably be considered to be unexpected.
As noted by the South Australian Minister for Energy, South Australia's climatic conditions include an
unpredictable and varied rainfall pattern, with periods of drought conditions. 17 Some variability in climatic
conditions across regulatory control periods is likely to occur, and therefore cannot be considered to be
unexpected. History suggests that all droughts break at some stage. However, although some variability in
climatic conditions is to be expected, it does not necessarily follow that a specific variation in conditions can
be expected within a regulatory control period. The AER must therefore consider the nature of the specific
circumstances experienced by SA Power Networks to determine whether such circumstances meet the
definition of 'unexpected'.
17
SA Minister for Mineral Resources and Energy, Submission to the AER, 20 March 2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
29
Figure 1 shows the annual rainfall anomaly for South Australia since 1900. This depicts the extent to which
rainfall in each year departed from the long term average. As can be seen in the figure, 2010 and 2011
were both significantly wetter than average. Both years are in the top five wettest years on record in South
Australia.
Figure 1
Annual rainfall anomaly for South Australia (1900-2012)
Source: Bureau of Meteorology, Australian climate variability time series graphs, viewed at www.bom.gov.au.
At the time that SA Power Networks submitted its regulatory proposal to the AER in 2009, rainfall of the
level subsequently experienced in 2010 had occurred only twice since 1900. A two year period of rainfall
such as that experienced in 2010-2011 had occurred only once before, in 1973-1974. The AER is therefore
satisfied that there was no historical information available in 2009 that would have led a reasonable person
to consider that a rainfall event such as that experienced in 2010-2011 was more likely than not to occur
within the current regulatory control period.
AER Decision | SA Power Networks' vegetation clearance cost pass through
30
The AER has also considered the availability of forecast information on likely climatic conditions. The
Bureau of Meteorology produces seasonal outlooks for rainfall and temperature covering periods
approximately three months ahead. These seasonal outlooks indicate the probability of exceeding median
rainfall and temperature in the forecast period. The Bureau of Meteorology also publishes reports on the El
Niño-Southern Oscillation (ENSO) and Indian Ocean Dipole, which can provide information on the chances
of above or below median rainfall over a three to six month outlook period. At different times of the year, the
reports reflect varying levels of confidence in the forecast presented. Overall, the AER considers the
forecasting information typically available is not useful in anticipating climatic conditions across a five year
regulatory control period due to the short forecasting horizon and, in any event, cannot predict the nature of
specific weather events.
Having considered the quantum of the change in vegetation growth rates observed by SA Power Networks,
and the nature of the rainfall event experienced in South Australia in 2010-2012, the AER is satisfied that
the increase in vegetation growth rates and clearance costs was unexpected. A well-informed DNSP in the
circumstances of SA Power Networks, acting reasonably, would not have considered the increase in
vegetation growth rates experienced by SA Power Networks to be more likely than not to occur in the
regulatory control period.
4.2.2
Effect of the event could not be prevented or mitigated
The AER considers that the effect of the event described by SA Power Networks could not have been
prevented or mitigated beyond the extent to which SA Power Networks has already done so. The AER
interprets the 'effect of the event' as meaning the effect of the event on the costs of providing distribution
services.
The AER considers that the costs of SA Power Networks' vegetation clearance activities are driven by the
following key factors:

the regulatory obligations for vegetation clearance around powerlines imposed by the Electricity Act
1996 (SA) and Electricity (Principles of Vegetation Clearance) Regulations 2010, including:

mandatory minimum and maximum clearance requirements

maximum inspection intervals
AER Decision | SA Power Networks' vegetation clearance cost pass through
31

actual vegetation growth rates, and

unit costs for inspection and clearance activities, including with regard to internal and contractor costs.
In considering whether the effect of the event could have been prevented or mitigated, the AER has
examined in particular those factors which are controllable by SA Power Networks.
Regulatory obligations
SA Power Networks is required to comply with regulatory obligations regarding vegetation management.
These requirements aim to maintain safe clearances between vegetation and powerlines, in both BFRAs
and NBFRAs. Compliance with these obligations is audited by the Office of the Technical Regulator. SA
Power Networks must inspect all powerlines at least once every three years. The extent to which vegetation
clearance work can be deferred is therefore limited. Also, the extent to which trees in the vicinity of
powerlines can be trimmed is limited by the Regulations. This means SA Power Networks cannot increase
the extent to which it trims trees in order to account for higher growth rates or to extend the trimming cycle.
The AER also acknowledges that SA Power Networks' response to changes to the Regulations in February
2010 by adopting a 'risk based approach' to the clearance of vegetation around low risk power lines in
prescribed areas has not increased its vegetation management costs and has been taken into account in
estimating the efficient pass through cost amounts.
Vegetation growth rates
As noted in section 4.2.1, the rate at which vegetation grows within SA Power Networks' distribution area is
not controllable by SA Power Networks. Over an extended period of time, there are actions that a DNSP
may pursue to reduce the overall growth and find rates affecting its network. These include tree
replacement programs and information programs for councils and customers, to replace unsuitable trees
with lower and slower growing species and encourage appropriate plantings in future. SA Power Networks
already pursues some aspects of these programs, for example the publication of an approved tree list for
planting in the vicinity of powerlines. The costs and benefits of such programs, for any DNSP, should be
considered in the context of the regulatory determination process. However, in the short term, SA Power
AER Decision | SA Power Networks' vegetation clearance cost pass through
32
Networks cannot control the growth rate of the existing vegetation stock in response to a change in climatic
conditions.
Unit costs
SA Power Networks uses contractors to undertake all scoping and cutting work for its vegetation clearance
program. SA Power Networks' staff then undertake audits of contractor performance to ensure compliance
with its regulatory obligations. The basis of engagement is a $/hour rate for scoping work and then a fixed
price per span (BFRAs) or per tree (NBFRAs) for cutting work.
The unit rates charged by SA Power Networks' vegetation management services contractor are less than
those included in SA Power Networks' regulatory proposal for the current regulatory control period. As such,
SA Power Networks' vegetation management services contractor rates have not contributed to the increase
in vegetation management costs but rather contributed to the mitigation of these costs.
Actual operating expenditure
The AER reviewed SA Power Networks' actual operating expenditure for 2011-12 to determine what scope
SA Power Networks had to shift resources between operating expenditure categories in order to provide
some capacity to meet unexpected costs. Although SA Power Networks incurred additional vegetation
management costs of $16.7 million ($ nominal) above its allowance, which SA Power Networks are not
seeking to pass through to customers, SA Power Networks' total operating expenditure was only $6.2
million ($ nominal) greater than its allowance. This suggests that SA Power Networks was able to at least
partially absorb part of the vegetation management overspend in 2011-12 through reductions in other
operating expenditure categories. The cost pass through regime, however, does not require a DNSP to
exhaust its operating or capital expenditure allowances in order to apply for a pass through. Operating
expenditure data for SA Power Networks was not available for 2012-13.
4.2.3
Material change in costs
The AER considers that the magnitude of the increase in SA Power Networks' costs to provide distribution
services is material.
AER Decision | SA Power Networks' vegetation clearance cost pass through
33
The definition of the general nominated pass through event includes the definition of 'material' for the
purposes of this event. For the purposes of the general nominated pass through event, 'material' means:18
the costs associated with the event would exceed 1 per cent of the smoothed forecast revenue specified in the
final decision in each of the years of the regulatory control period that the costs are incurred.
The AER interprets this to mean that the incremental costs incurred in each regulatory year will be
considered to be material if they exceed 1 per cent of the smoothed forecast revenue for that year. The
incremental costs associated with the event forecast by SA Power Networks, the forecast costs approved by
the AER, and SA Power Networks' smoothed forecast revenue for each regulatory year are shown in table
4.2.
Table 4.2
Materiality of pass through costs
($m nominal)
2012-13
2013-14
2014-15
761.9
825.7
851.5
7.6
8.3
8.5
Proposed pass through amount
14.9
16.2
12.1
Approved incremental opex
14.9
11.4
9.4
Smoothed revenue requirement
Materiality threshold (1%)
As shown in table 4.2, the actual and forecast costs incurred as a result of the pass through event exceed
the materiality threshold in each year for which costs are incurred.
The AER agrees that the increased vegetation growth rates experienced by SA Power Networks have
materially increased SA Power Networks' costs of providing direct control services. This conclusion is on the
basis of the AER’s analysis of the financial metrics presented by SA Power Networks.
18
AER, Final decision - SA distribution determination 2010-11 to 2014-15, May 2010, p. 242.
AER Decision | SA Power Networks' vegetation clearance cost pass through
34
5
Positive change event
The NER defines a positive change event as19:
For a Distribution Network Service Provider, a pass through event that materially increases the costs of providing
direct control services.
The AER has concluded that SA Power Networks' pass through application meets the criteria of a general
nominated pass through event (and therefore, of a pass through event). As part of that consideration, the
AER also considered materiality.20 It found that the pass through event did materially increase the costs to
the service provider of providing direct control services during the regulatory control period. Therefore, the
AER considers that a positive change event has occurred.
Clause 6.6.1(d) of the NER provides that if the AER determines that a positive change event has occurred,
the AER must determine:

the approved pass through amount; and

the amount to pass through to Distribution Network Users each year during the regulatory control
period.21
The remainder of this decision deals with the AER’s determinations on these matters.
19
Chapter 10 of the NER.
20
See section 4.2.3.
21
Clause 6.6.1(a) of the NER.
AER Decision | SA Power Networks' vegetation clearance cost pass through
35
6
Assessment of the costs likely to be incurred
The AER has determined that the approved pass through amount to be passed through to network users is
$35.1 million ($2009-10). This is approximately $5.5 million or about 13.5 per cent less than that proposed
by SA Power Networks.
Table 6.1 sets out the approved incremental opex costs and pass through amount.
Table 6.1
Approved incremental opex costs and pass through amount ($2009-10)
Incremental vegetation clearance opex
Approved pass through amount
6.1
2012-13
2013-14
2014-15
13.8
10.3
8.2
-
-
35.1
Vegetation clearance costs
SA Power Networks' application detailed what it considered to be the likely incremental vegetation clearance
costs arising from the pass through event. The AER has identified a number of issues with SA Power
Networks' proposed forecasts, and has amended the forecasting methodology accordingly. These issues
are discussed in turn below.
6.1.1
Inflation and labour cost escalation
The AER has amended SA Power Networks' forecast inflation for 2012-13.
SA Power Networks' forecast inflation of 2.52 per cent for 2012-13 is consistent with the forecast rate of
inflation set out in its current regulatory determination. For the purposes of SA Power Networks' regulatory
determination, the rate of inflation for 2012-13 is measured by the change in the eight capital cities
weighted average consumer price index (CPI) from March 2012 to March 2013.
The Australian Bureau of Statistics published the quarterly CPI data for March 2013 on 24 April 2013, after
SA Power Networks submitted its pass through application. The AER has therefore updated the model
AER Decision | SA Power Networks' vegetation clearance cost pass through
36
proposed by SA Power Networks to forecast its vegetation clearance costs to reflect the actual CPI figure.
The actual rate of inflation for 2012-13 is 2.50 per cent.
The AER has also amended the manner in which SA Power Networks applied the labour cost escalators
approved as part of the current regulatory determination. The model submitted by SA Power Networks
incorrectly applied the approved escalators in different years to those approved. The AER has corrected this
minor error in modelling the approved pass through amount.
The model submitted by SA Power Networks also incorrectly applied the joint impact of the CPI and labour
cost escalator forecasts. The AER has corrected this minor error in modelling the approved pass through
amount.
6.1.2
High vegetation growth rates in 2013-14
The AER does not accept SA Power Networks' assumption that high vegetation growth rates will persist into
the second half of 2013. The AER considers it likely that vegetation find rates in this period will reflect an
average rate of growth, and that forecast vegetation clearance costs for this period should be reduced
accordingly. In coming to this conclusion, the AER has had particular regard to r. 6.6.1(j)(2) of the NER,
which requires the AER to take into account costs the DNSP 'is likely to incur'.
The relationship between rainfall conditions and vegetation growth rates is discussed in SA Power
Networks' pass through application, particularly in the report prepared by GHD entitled Recent Seasonal
Climate Variability and Vegetation Growth Effects. SA Power Networks has forecast that above average
vegetation growth rates will persist until at least the end of 2013, assuming that 'rainfall conditions return to
average in 2013' and noting that 'GHD has advised that a change in rainfall conditions will take
approximately 12 months to manifest itself in a change in vegetation growth rates'.
22
In response to
questions from the AER, SA Power Networks subsequently stated it had actually assumed an 18 month lag
between a change in rainfall conditions and a material impact on growth rates.23
22
SA Power Networks, Vegetation clearance pass through application, 11 April 2013, p. 23.
23
SA Power Networks, Response to AER information request, 3 May 2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
37
The AER considers SA Power Networks' assumption that high vegetation growth rates will persist
throughout 2013 is not reasonable, and fails to have regard to actual rainfall conditions experienced in
South Australia since April 2012. The incremental costs forecast by SA Power Networks for the period from
1 July to 31 December 2013, to the extent they reflect assumed above average growth rates, are not likely
to be incurred and therefore should not be passed through to customers. The AER's reasons for this
conclusion are set out below.
SA Power Networks' pass through application states on a number of occasions that above average rainfall
continued to occur in South Australia throughout 2012.24 This is not the case. The AER's analysis of rainfall
conditions in South Australia in 2012 and 2013, based on information from the Bureau of Meteorology,
shows that:

the 2011-2012 La Niña event concluded in March 2012, and ENSO indicators have remained generally
neutral since that time

2012 was the driest year since 2006, with temperatures 0.5 degrees warmer than average

spring 2012 was the third driest spring on record, and the driest since 1967, with temperatures
1.8 degrees above the long term average

the 2012-13 summer was the driest summer since 1985-86, with temperatures averaging 1.5 degrees
above the long term average, and

rainfall for the 12 month period from April 2012 to March 2013 was the third lowest on record in South
Australia.
Figures 2 and 3 below show the level of rainfall received in South Australia for the most recent 12 month
and 18 month periods. As can be seen, for the significant majority of the geographical area covering SA
Power Networks' distribution network, rainfall in the 12 month period to 30 April 2013 has been either below
or very much below average. In the 18 month period to 30 April 2013, rainfall in SA Power Networks'
24
SA Power Networks, Vegetation clearance pass through application, 11 April 2013, pp. 3, 4, 11 and 13.
AER Decision | SA Power Networks' vegetation clearance cost pass through
38
distribution area has been mostly average or below average, with small areas of very much below average
and above average rainfall.
Figures 2 & 3
South Australian rainfall deciles: 1 June 2012 - 31 May 2013 and 1 December 2011 31 May 2013
Source: Bureau of Meteorology, viewed at www.bom.gov.au on 6 June 2013.
It is clear that South Australia, and particularly the southern half of South Australia in which SA Power
Networks' distribution network is mostly located, has generally experienced either average, below average
or very much below average rainfall for the last 12 to 18 months. At the same time, maximum temperatures
in South Australia have been 0.5 - 1.5 degrees above average.25
Future rates of vegetation growth and required clearance work are difficult to predict. However, while above
average rates of vegetation growth are possible in the second half of 2013, the AER does not consider this
to be likely given recent climatic conditions. The AER considers it is more likely that the average or below
average rainfall and above average temperatures experienced for the last 12-18 months will reduce
vegetation growth and find rates in the second half of 2013. In accordance with r. 6.6.1(j)(2) of the NER,
the AER must only approve the pass through of costs which are likely to occur.
25
Bureau of Meteorology, Maximum temperature anomaly 1 June 2012 to 31 May 2013, viewed at www.bom.gov.au on 6 June
2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
39
The AER has amended SA Power Networks' forecast vegetation clearance model to reflect an assumption
of average vegetation growth and find rates for the whole of 2013-14. This forecast, however, is still higher
than that reflected in the AER's 2010-15 distribution determination for this category of costs.
6.1.3
Average find rates
The AER considers SA Power Networks' forecast equivalent find rate for years of average vegetation growth
in BFRAs is excessive. The AER considers the midpoint of the range of observed find rates in high and low
growth years is appropriate to forecast the likely find rate in a period of average growth.
The number of spans requiring clearance in average growth years is forecast by SA Power Networks at
11.9%, compared to a rate in high growth years of 14.6% and 5.5% in low growth years. That is, the find
rate in an average year is expected to be above the midpoint of the low and high growth years. The find
rate for an average growth year has been determined solely by reference to the high growth find rate. The
AER considers that, while this rate is possible, in forecasting 'likely' costs a more conservative find rate
should be utilised which references both the observed high and low growth period find rates. The AER
considers the midpoint of the range of observed find rates in high and low growth years is appropriate to
forecast the likely find rate in a period of average growth. Moreover, SA Power Networks has used the
midpoint for the average NBFRA find rate, but not for BFRAs.
In response to questions from the AER, SA Power Networks stated that as the low growth rate period was
associated with many years of drought, and the high growth rate period with a few years of well above
average rainfall, find rates during periods of average growth rates would be closer to the find rate for high
growth rates than low growth rates.26
The AER considered SA Power Networks' response but was not persuaded that the find rates during
periods of average growth should be closer towards the observed high growth rate find rates than to the low
growth rate find rates. The AER considers that SA Power Networks has not demonstrated that the impact
on growth of many years of drought is significantly different to the impact on growth from a few years of
26
SA Power Networks, Response to AER information request, 3 June 2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
40
above average rainfall. On this basis, the AER does not accept SA Power Networks' forecast equivalent find
rate for years of average vegetation growth in BFRAs.
6.1.4
Use of 'optimised' find rates in 2012
SA Power Networks has used their 'optimised' find rate of 17.1% in BFRAs in 2012-13 rather than the
actual 2012 cyclic find rate of 16.2%. SA Power Networks justified the increase in the actual 2012 cyclic
find rate for 2012-13 on the basis that the actual 2012 cyclic find rate is likely to have been under-reported
because of the inspection method used in 2012.27 SA Power Networks stated that the inspection method in
2012 used a lower proportion of ground inspections than an optimal inspection method and that it was
required to employ a higher proportion of aerial inspections in 2012 than optimal because of resource
constraints.
Based on data supplied by SA Power Networks, the AER was able to confirm that in 2012 the average find
rate for aerial inspections was less than the average find rate for ground inspections in BFRAs. SA Power
Networks also stated that the overall (cyclic and pre-DFDS) find rate forecast of 14.6% is lower than the
overall find rate of 14.9% for 2011-12 on the basis of a reduction in the pre-DFDS find rates from 12.5% in
2011-12 to 1.3% in 2012-13.
The AER considers that the find rate forecast for 2012-13 in BFRAs is reasonable.
6.1.5
Application of the incremental overhead rate to the total forecast expenditure
The incremental overhead rate of 1.5% has been applied to the total forecast vegetation clearance
expenditure. In response to questions from the AER, SA Power Networks stated that the incremental
overheads were for additional personnel and administrative costs due to significantly increased volumes in
respect of vegetation management activity. 28 In particular, SA Power Networks stated that it appointed a
new Vegetation Manager, Programme Manager/Analyst, Vegetation Support Officer and additional staff to
27
SA Power Networks, Response to AER information request, 3 June 2013.
28
SA Power Networks, Response to AER information request, 3 June 2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
41
process and verify the invoices prior to payment. 29 The total value of these incremental overheads forecast
by SA Power Networks is approximately $1.5 million ($2009-10).
The AER considers that given the additional volume of vegetation management activity as a consequence
of an increase in vegetation growth rates, the employment of additional resources is reasonable. The level
and cost of these additional resources is also considered reasonable.
29
SA Power Networks, Response to AER information request, 3 May 2013.
AER Decision | SA Power Networks' vegetation clearance cost pass through
42
7
Conclusion
The amount the AER has determined for SA Power Networks' vegetation management costs arising from
the general nominated pass through event is $35.1 million ($2009-10). This represents a reduction of
approximately $5.5 million ($2009-10) or about 13.5 per cent less than that proposed by SA Power
Networks. Table 7.1 summarises the AER's decision.
Table 7.1
AER decision - SA Power Networks vegetation clearance pass through application
Millions $2009-10
SA Power Networks' pass through proposal
Adjustment for SA Power Networks' assumption that high vegetation growth rates will persist into the second
half of 2013
Adjustment for SA Power Networks' forecast equivalent find rate for years of average vegetation growth in
bush fire risk areas
Adjustment for amendments to SA Power Networks' forecast inflation for 2012-13 and the manner in which
SA Power Networks applied the labour cost escalators
Time value of money adjustment (2013-14 pass through amount recovery delayed one year to 2014-15)
AER decision
AER Decision | SA Power Networks' vegetation clearance cost pass through
$40.53
($1.85)
($4.84)
$0.02
$1.20
$35.06
43
A
Compliance with section 6.6.1(c) of the NER
The AER has evaluated SA Power Networks' pass through application and finds that it conforms with the
requirements of section 6.6.1(c) of the NER. Section 6.6.1(c) of the NER specifies the timing and nature of
a DNSP’s pass through application. The AER’s considerations are set out below.
A.1.1
Requirements of section 6.6.1(c) of the NER
To seek the approval of the AER to pass through a positive pass through amount, a DNSP must submit to
the AER, within 90 business days of the relevant positive change event occurring, a written statement which
specifies:
1.
the details of the positive change event; and
2. the date on which the positive change event occurred; and
3. the eligible pass through amount in respect of that positive change event; and
4. the positive pass through amount the provider proposes in relation to the positive change event; and
5. the amount of the positive pass through amount that the provider proposes should be passed through to
Distribution Network Users in each regulatory year during the regulatory control period; and
6. evidence:
i.
of the actual and likely increase in costs referred to in subparagraph (3); and
ii.
that such costs occur solely as a consequence of the positive change event; and
7. Such other information as may be required under any relevant regulatory information instrument.
A.1.2
Written application made within 90 business days
A Distribution Network Service Provider must submit to the AER, within 90 business days of the relevant
positive change event occurring, a written statement which specifies the details of the pass through
application.
AER Decision | SA Power Networks' vegetation clearance cost pass through
44
SA Power Networks submitted its pass through application on 11 April 2013. The application satisfies the
requirement of a being a written statement. The relevant positive change event, the significant and
sustained increase in vegetation growth rates commencing in 2011, is continuous and ongoing. As such, the
application has been made within 90 business days of the event occurring.
The AER considers this requirement has been met.
A.1.3
Details of the positive change event
The pass through application must specify the details of the positive change event. SA Power Networks
nominated the material increase in vegetation management costs as a result of an uncontrollable and
unexpected increase in vegetation growth rates which followed above average rainfall that has been
experienced in South Australia since that time as the relevant positive change event.
The AER considers this requirement has been met.
A.1.4
Date of the positive change event
The pass through application must specify the date on which the positive change event occurred.
SA Power Networks’ pass through application states that the positive change event commenced in about
September 2011, and that the increased vegetation growth rates have been ongoing and continuous since
that time. The AER considers that whether or not an event occurs over an extended period of time is a
question of fact. The positive change event is therefore ongoing.
The AER considers this requirement has been met.
A.1.5
Eligible pass through amount
The pass through application must specify the eligible pass through amount in respect of that positive
change event.
SA Power Networks has identified the eligible pass through amount in respect of the positive change event
as $38,913,540 ($2009-10).
The AER considers this requirement has been met.
AER Decision | SA Power Networks' vegetation clearance cost pass through
45
A.1.6
Positive pass through amount
The pass through application must specify the positive pass through amount the provider proposes in
relation to the positive change event.
SA Power Networks has proposed the positive pass through amount to be a total of $40,518,130 ($200910).
The AER considers that this requirement has been met.
A.1.7
Positive pass through amount in each year of the regulatory control period
The pass through application must specify the amount of the positive pass through amount that the provider
proposes should be passed through to Distribution Network Users in each regulatory year during the
regulatory control period.
Table A.1
Positive pass through amount ($m 2009-10)
Positive pass through amount
Source:
2012-13
2013-14
2014-15
Total
-
20.3
20.3
40.5
SA Power Networks, Veg_Clearance_costs_pa_pass_thru_final_3_May_2013_final_insp_correction.xlsx , 3 May 2013.
The AER considers that this requirement has been met.
A.1.8
Evidence of actual and likely increase in costs
The pass through application must specify evidence of the actual and likely increase in costs and that such
costs occur solely as a consequence of the positive change event.
Section 3.4 of SA Power Networks’ pass through application details what SA Power Networks considers to
be the actual and likely increases in vegetation clearance costs. This is supported by both a description of
the costs and how they are derived. Section 3.7 further discusses the derivation of the costs and sets out
why SA Power Networks considers the costs have occurred solely as a consequence of the positive change
event. Additionally, attachment 5 (confidential) of SA Power Networks' application provides details of the
AER Decision | SA Power Networks' vegetation clearance cost pass through
46
volume and cost calculation of the forecast increase in vegetation management costs that it is likely to
occur.
The AER considers this requirement has been met, insofar as SA Power Networks has specified its forecast
costs. However, the AER has amended this forecast to ensure only likely costs caused by the event are
passed through to customers, as discussed in section 6 of this decision.
A.1.9
Such other information as may be required under any relevant regulatory information
instrument
The AER did not require any additional information under any relevant regulatory information instrument.
The AER considers this requirement has been met.
A.1.10 Conclusion regarding the compliance of SA Power Networks’ pass through application
with section 6.6.1(a) of the NER
The AER considers that SA Power Networks’ pass through application is compliant with the administrative
requirements of section 6.6.1(c) of the NER.
AER Decision | SA Power Networks' vegetation clearance cost pass through
47