The Australian Energy Regulator

1. The Australian Energy Regulator Expenditure Forecast Assessment Guideline Category analysis Operating and maintenance expenditure

2. 9:00 - Introductions and objectives • 9:15 - Context and framework considerations • 9:30 - Opex categories and working definitions • 9:45 - Maintenance • 10:30 - Break • 10:45 - Emergency response • 11:15 - Vegetation management • 12:15 - Summary & next steps Agenda

3. Where are we today?

4. Provide context for benchmarking opex • Discuss potential categorisations that better align with cost drivers and provide a framework for: • Volume/ trend analysis • Unit cost analysis • Benchmarking across businesses • Discuss other firm specific normalisation and supporting data Objectives for today

5. Context and framework considerations– opex

6. Revealed costs most relevant for setting opex– recurrent/ predictable expenditures • AER’s preferred, “light handed” approach • Strong theoretical grounds– in practice: • Concern around NSPs responding differently to incentives – needs to be tested • Attempts to break the link between historic and forecast conditions • Non-recurrent opex and inflating/ choice of “base” year The revealed cost approach

7. Public reporting of comparative performance – efficiency of sector/ NSP/ activity • Backing up the revealed cost framework – time series and cross sectional analysis • Confidence in proposed base year, otherwise adjustments to proposed base year • Adjustments/ decisions relying on a combination of evidence (economic benchmarking, top down trends, detailed review) • Links with revealed cost trend assessment where quantitative/ driver based analysis already used What does benchmarking mean for opex?

8. Use of benchmarking: • Filtering vs deterministic approach • Value/ limitations of benchmarking and NSP differences • Value/ limitations of other techniques • Importance of clear data definitions • Boundary issues – activities don’t neatly align with (AER) categories • Non-standard and packaging of works Comments in previous workshops

9. Focus on activities and unit rates • Activity/ volume units • Cost per unit • Internal and external benchmarking • Requires expenditure & volumes data • standardised cost categories • identification and measurement of material drivers • normalisation for/ keeping in mind idiosyncratic factors • Recurrent opex – relationships to drivers easier to identify than for capex Category based benchmarking

10. Opex categories and working definitions

11. Maintenance involves many activities not always neatly reported eg by asset • More clarity required on suggested (non-emergency) prevention and rectification • Support to split emergency rectification and planned actions to address asset deterioration Key issues – submissions

12. 3rd party expenditures unlikely to be robustly measured in sub-categories, though ENA suggests for discussion: • geographic location • level of construction activity • level of traffic • seasonal climate of the network area • socio-economic profiles of the network area • MEU suggests feeder splits (rural, urban etc) Key issues – submissions

13. Non-routine activities not predictable • Support splitting vegetation management from 3rd party • Vegetation management affected by a variety of factors • Limited support for deterministic routine maintenance model Key issues – submissions

14. Maintenance • Routine • Non-routine • Emergency response • Vegetation management Just “direct” expenditures, no overheads (corporate or network/ direct) Proposed opex categories

15. Driven by active asset management practices or to address deterioration in asset condition, risk and reliability What’s in: • Routine and non-routine • Inspections • Maintenance • Preventive – planned or programmed, to reduce the probability of asset failure or performance degradation • Corrective – Planned repair work carried out following defects being identified during an inspection/condition assessment Maintenance – Definition (1)

16. What’s out: • Reactive / emergency works • Emergency response to actions of third parties (accidents, vandalism, theft, wildlife damage) • Vegetation management Maintenance – Definition (2)

17. activities that are primarily directed at maintaining asset condition or distribution system functionality, and for which immediate rectification work is necessary • due to extreme weather events, vandalism, traffic accidents, or interference by a non-related entity • other/ general asset failure Emergency Response – Definition (1)

18. What’s in: • Asset condition (failure) • accidents • vandalism • theft • wildlife damage • extreme weather events What’s out: • Vegetation management Emergency Response – Definition (2)

19. Expenditure associated with the trimming and removal of trees and vegetation around NSP’s field assets (i.e. overhead lines) and access areas. • Broadly includes: • vegetation cutting • undergrowth control • waste disposal associated with line and easement clearing • Identification/inspection, coordination, supervision, management and auditing Vegetation Management Definition (1)

20. What’s in • Inspections/audits e.g. Quality audits (including of contractors), regulation based inspections • Vegetation management related reports to state regulators, Energy Safe etc • Contractor overhead costs e.g. legal, admin • Clearance and maintenance of access tracks Vegetation Management Definition (2)

21. What’s out • Emergency works • Lawn mowing e.g. from nature strips • Non-standard control services e.g. cutting trees on customer request Vegetation Management Definition (3)

22. Maintenance assessment

23. DNSP categories • Preventive, Corrective (incl. Veg Mgt), Forced (incl. Emergency response), Inspection, Pole Replacement, R&M, Other Network Maintenance • TNSP categories • Field Maintenance, Network Operations, Routine, Corrective, Operational Refurbishment, Network Optimisation, Maintenance Support • Expenditure proposals use combination of trend and bottom-up estimation techniques • Some instances of routine maintenance models used • links to asset types, risk assessments/ management What do NSPs currently do?

24. Potential sub-categorisations • Routine and non-routine. Materiality/ use of further splits? • Maintenance, inspection • Preventative, corrective • By asset class (as per repex model) • By region/ geography (urban, rural etc) • Other supporting data for benchmarking • Volumes - inspections, by asset “maintained”? • Fault rates • Asset age/ risk data • Potential routine maintenance model (non-deterministic)? Issues for discussion

25. Emergency response assessment

26. DNSP categories • Most report against emergency response or “reactive” • TNSP categories • Not many emergencies (immaterial as a separate category?) • Included in field support/ maintenance? • Relatively difficult to forecast • Expenditure proposals use combination of trend and bottom-up estimation techniques What do NSPs currently do?

27. Faults • Number/ frequency • Severity (duration, customers affected) • Causes (animals, weather, asset condition) • Driven by location? (rural/ urban) • By voltage level? • Asset risk • Age (average and profile) • Utilisation? • Environmental factors? • % overhead vs underground Drivers and supporting measures

28. Immediate vs deferred responses • Cost impact of topology, distance, etc. • Urban/rural short/long • Measuring severity of outages (CAIDI, SAIFI, MAIFI?) • Effects on subtransmission network not felt by customers though affects NSPs • Condition of network: is running to failure emergency response? Normalisations and issues

29. Vegetation management assessment

30. Similar categories, differences between Dx and Tx: • DNSPs - activities targeted at vegetation at risk of contact with lines • TNSPs - activities include management of access tracks, right of ways, and easements Forecasting method aligned to general opex: • base-year/ trend approach • ‘zero-base’ or bottom-up approach What do NSPs currently do?

31. Number/ dimensions of easements • Number of trees trimmed/ removed • Number of spans • Fire starts from tree contact • Emergency response due to veg contact • Cutting cycle • Standards and regulations • Tree types • % overhead lines in bushfire risk zones Drivers and supporting measures

32. Jurisdictional and changes to regulatory requirements e.g. Tree clearance margins • Impact of contracting out vegetation management works • Inaccurate/ aggregated recording of activities performed • Measuring tree growth rates • Terrain affecting access and travel times • Climate Normalisations and issues

33. Bushfire risk rating • Separation of expenditure associated with tree replacement programs • Separation of customer consultation/ negotiation • Notification – Advertising, Other communication • Complaints handling Normalisations and issues (cont)

34. By work activity (with volumes for each): • Audits/inspections • Tree cutting • Time spent travelling • Time on site- including set-up and cutting • trees cut per km basis By region/ geographical factors: • CBD, urban, short-rural, long-rural • Terrain- forested area, farmland, elevation etc • Tree types, including growth rates Proposed sub-categorisations

35. If you require more slides, right click on a slide to the left and select “Duplicate Slide” to keep the same format. Next steps