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Examples of capital expenditure models

Explore various capital expenditure models used by regulators worldwide, crucial in the price-setting process. Understand techniques & approaches, such as load-related expenditures and high-level forecasting models.

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Examples of capital expenditure models

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  1. Examples of capital expenditure models

  2. Overview Capex models developed and used by a number of regulators internationally Most commonly used as part of the price setting process Number of ways in which they are developed and applied • Set Capex allowance directly • Used to set a threshold for further review • In both cases usually applied alongside technical (engineering) advice Can also be used to simply assess forecasts • In the NZ context summary and analysis

  3. Choice of techniques Usually expenditure disaggregated • Load related (ie System growth and Consumer connection) • Non Load related (Asset replacement & renewal + other) This is broadly consistent with the approach proposed by the Commission Type of modelling and analytical technique depends on a number of factors • Materiality of the expenditure • Data availability and quality • Ability to benchmark • Resources and time available to the regulator • Previous approaches (ie at past resets) • Maturity of the regime

  4. Example of general techniques Simple high-level models like run rate analysis • Diversions or 11 kV network reinforcement • Any steady recurring expenditure Simple forecast volume * unit cost • LV customer connections (volume forecast via population growth, unit cost based on historical cost (specific supplier or industry average) Bespoke models for high value activities • Asset replacement & renewal (usually age based survivor models) • System growth (capacity models) • Tuned to historic expenditure and volumes • Can make use of benchmarking

  5. Age based survivor model Has been used by both AER (Australia) and Ofgem (UK) when forecasting asset replacement & renewal • Age based model but not as simple as a ‘birthday model’ • To account for variations in lives, a probabilistic asset replacement life is used asset life replacement unit cost (probability distribution) X Probabilistic model Volume replaced Forecast Capex Asset state volume of assets survived to age - a

  6. Age based survivor model

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