ACCC Workshop on the DRP Incentive Mechanisms and Benchmarking

1. ACCC Workshop on the DRP Incentive Mechanisms and Benchmarking

2. Structure of presentation Observations on ACCC proposals on efficiency incentives and benefit sharing mechanisms Proposed framework for assessing the most appropriate expenditure benchmarking approach Way forward

3. ACCC Incentive Mechanism — Observations Based on the ESC Scheme in Victoria developed for use on distribution companies expenditure. Proposed incentive scheme seems a reasonable starting point for opex: Delivers even incentives over time; Simple to apply and administer; Reasonable sharing ratios; and Similar schemes successfully in operation elsewhere.

4. ACCC Incentive Mechanism — Observations TNSP expenditures are more volatile (lumpy) than distribution expenditures No reason is put forward for the less generous proposed treatment of capex efficiencies For the successful implementation of a such a scheme for TNSPs the sharing mechanism itself will not be the key determinant Rather, it will depend on how the benchmark for expenditure is set in the current period and in future periods

5. Framework for Suitable Benchmark Technique Two important considerations when considering how to set expenditures for a regulated business Degree of predictability with-in a 5-year reset period Types of cost exposures can be predictable or unpredictable with-in the reset period Degree of variability from reset to reset The quantum of expenditure can be variable or stable (including a consistent trend) from one five year period to the next (therefore, allows averaging of annual variability)

6. Expenditure characteristics matrix

7. Assessment of Expenditure in Framework Types of expenditures can be assessed against these two factors and placed in one of the quadrants. For example: Planned maintenance of the transmission network tends to be both highly predictable and stable from reset to reset; Unplanned maintenance is, by its nature, unpredictable, however, is also relatively stable when averaged over a five year period; and Replacement Capex is predictable for a given five year period , however, it is highly variable from one five year period to the next

8. How does this help? By placing an expenditure type in its appropriate quadrant the TNSP and Regulator can strike a regulatory bargain on how expenditures are to be set both with-in the regulatory period and in future regulatory periods This is helped by the fact that there is some broad agreement on the appropriate treatment to be used in each quadrant This allows a reduction of regulatory risk by helping minimise arguments at the next revenue review

9. Setting ACCC Benchmarks (1) Suitable for benchmarking against historical expenditure and possibly long term against industry averages

10. Setting ACCC Benchmarks (2) Need for ex-ante review to set benchmarks for each reset period

11. Setting ACCC Benchmarks (3) Should be excluded from the cap in case of capex Should be handled via pass-through in case of opex

12. Possible Way Forward This frame work allows this issue to separated into two questions: What type of benchmark or revenue setting mechanism is appropriate for each quadrant? What types of expenditure belongs in which quadrant?