Better Regulation Expenditure Forecast Assessment Guideline 12 February 2013.

Better Regulation

Expenditure Forecast Assessment Guideline

12 February 2013

Agenda13:15 Introductions

13:30 Discussion of overall program and AER’s objectives

14:00 Recap of issues paper and opportunity for stakeholder feedback

14:45 Break

15:00 Proposed forward work program

16:00 Future meeting logistics

16:15 Any other business

2

Overall program and AER objectives

3

Work program and AER Objectives• Guidelines

– general techniques and information requirements• Annual reporting

– monitoring of NSP efficiency– transparency of NSP performance vs expenditure– early identification of issues for network

determinations• Network determinations

– refine and use techniques to set allowances4

Work program

Framework and Approach

RINs/RIOs

Benchmarking reports Regulatory determinations

Expenditure assessment guideline

Expenditure assessment approach

RINs/RIOs

5

Working group meetings• Frank and ‘off the record’ discussion – detailed

minutes will not be taken, just key outcomes• Material considered by working group will be

published• Not here to make decisions but consensus may

be possible• Pending availability and importance of topic,

may be chaired by AER board member otherwise senior AER staff

• In addition to, and informed by, written submissions once received

6

AER Experience• Current practice

– Revealed cost methodology (incentive tools of economic regulation, taking historic costs as the base)

– Bottom-up engineering review• Limited use of benchmarking

– Limitations– Response to incentives?– Technical appraisal and information asymmetry– Data integrity

7

AER’s objectives• Improve our approach to expenditure

assessments under revised NER• Move from detailed, bottom up approach to

overall reasonableness assessments• Greater focus on benchmarking• Open and transparent approach to regulation• Recognition of data limitations and forecasting

error• Implementation costs have to be ‘worth it’8

This is the first step in a process

• Benchmarking is a big step• Continual refinement as better data become

available• Gradual shift from current techniques• Flexibility provided in framework and approach• Guidelines subject to future revisions

9

Recap and discussion of issues paper

10

Recap of issues paperPurpose• Objective – new benchmarking techniques• Principles for how to select techniques• Consultation approach (to be discussed next)• Request feedback

11

• Assessing efficiency as well as future circumstances (forecasting)

• Identification of assessment techniques– Those that have worked well– Others that are new or we wish to improve

• Potential for “first pass” model and more targeted assessments

• Relationship with incentive arrangements

General considerations

12

Two detailed work streams

• Economic benchmarking – employs economic theory on the behaviour of

firms to estimate relative efficiency and how this changes over time (TFP, DEA & SFA)

• Category analysis– approach to the assessment of expenditure

categories

13

Economic benchmarking

• Holistic approach• Focus on data requirements

– Outputs: what are they?– Inputs: how should they be measured?– Environmental factors: what else should be taken

into account?

14

Category analysis• Categories matching factors that influence or explain

costs – “driver” based approach• Focus on benchmarking and trend analysis

– eg cost per connection, per km of line• Largely a continuation of existing reporting categories

– New national definitions will require some change– Questions about level of detail required

• Recognition of differences between NSPs– Are these quantifiable and supported by evidence?– How/ when should they be accounted for?

15

Implementation issues• Transition from existing reporting templates• Annual reporting concurrently with

determinations• Different reporting years (calendar and

financial years)• Different cost allocation methods• stakeholder engagement (guideline)• NSP forecasting methodologies

16

Break

Recommence at 3pm

17

Proposed forward work program

18

Forward work program• Timing of workshops

– How to deal with dependencies– Treatment of gas, distribution and transmission

• Workshop plan for economic benchmarking– Are the three phases appropriate? Are the

individual workshop topics appropriate?• Forward work program for category analysis

– Are the four phases appropriate? Are the individual workshop topics appropriate?

19

Category analysis meetingsdate topic

26 Feb Category selection

7 Mar Repex, augmentation

19 Mar Connections and customer driven

26 Mar opex

11 Apr overheads

23 Apr Use of actual data, base step trend, productivity change

7 May Cost allocation, accounting issues

16 May Repex, augex and demand forecasting

28 May RIN/RIO issues, first pass assessment, links with other guidelines,reconciliation of assessment methods

20

Economic benchmarking meetings

date topic

12 Mar Network outputs Dx

14 Mar Network Outputs Tx

19 Mar Network inputs

30 Apr Output measurement & environmental factors Dx

2 May Output measurement & environmental factors Tx

7 May Network input measurement

23 May Prescription in the guidelines

28 May RIN/RIO issues, first pass assessment, links with other guidelines,reconciliation of assessment methods

21

Other business

22