We typically use the service provider's actual opex in a single year as the starting point for our assessment. While categories of opex can vary from year to year, total opex is relatively recurrent. We assess whether opex in that base year reasonably reflects the opex criteria. We now have a number of different techniques including economic benchmarking, by which can test the efficiency of opex in the base year. If necessary, we make an adjustment to the base year expenditure to ensure that it reflects the opex criteria. We can utilise the same techniques available to assess the efficiency of base year opex to make an adjustment to base year opex. As the opex of an efficient service provider tends to change over time due to price changes, output and productivity, we trend the adjusted base year expenditure forward over the regulatory control period to take account of those changes. We refer to this as the rate of change. We then adjust the base year expenditure to account for any other forecast cost changes over the regulatory control period that would meet the opex criteria. This may be due to new regulatory obligations and efficient capex/opex trade-offs. We call these step changes. Finally we add any additional opex components which have not been forecast using this approach. For instance, we forecast debt raising costs based on the costs incurred by a benchmark efficient service provider. If we removed a category of opex from the selected base year, we will need to consider what additional opex is needed for this category of opex in forecasting total opex. Underlying our approach are two general assumptions: the efficiency criterion and the prudence criterion in the NER are complementary actual expenditure was sufficient to achieve the expenditure objectives in the past. We have used this general approach in our past decisions. It is a well-regarded top-down forecasting model that has been employed by a number of Australian regulators over the last fifteen years. We refer to it as a ‘revealed cost method’ in our Guideline (and we have sometimes referred to it as the method in our past regulatory decisions). While these general steps are consistent with our past determinations, we have adopted a significant change in how we give effect to this approach, following the major changes to the NER made in November 2012. Those changes placed significant new emphasis on the use of benchmarking in our expenditure analysis. We will now issue benchmarking reports annually and have regard to those reports. These
We typically use the service provider's actual opex in a single year as the starting point for our assessment. While categories of opex can vary from year to year, total opex is relatively recurrent. We assess whether opex in that base year reasonably reflects the opex criteria. We now have a number of different techniques including economic benchmarking, by which can test the efficiency of opex in the base year. If necessary, we make an adjustment to the base year expenditure to ensure that it reflects the opex criteria. We can utilise the same techniques available to assess the efficiency of base year opex to make an adjustment to base year opex. As the opex of an efficient service provider tends to change over time due to price changes, output and productivity, we trend the adjusted base year expenditure forward over the regulatory control period to take account of those changes. We refer to this as the rate of change. We then adjust the base year expenditure to account for any other forecast cost changes over the regulatory control period that would meet the opex criteria. This may be due to new regulatory obligations and efficient capex/opex trade-offs. We call these step changes. Finally we add any additional opex components which have not been forecast using this approach. For instance, we forecast debt raising costs based on the costs incurred by a benchmark efficient service provider. If we removed a category of opex from the selected base year, we will need to consider what additional opex is needed for this category of opex in forecasting total opex. Underlying our approach are two general assumptions: the efficiency criterion and the prudence criterion in the NER are complementary actual expenditure was sufficient to achieve the expenditure objectives in the past. We have used this general approach in our past decisions. It is a well-regarded top-down forecasting model that has been employed by a number of Australian regulators over the last fifteen years. We refer to it as a ‘revealed cost method’ in our Guideline (and we have sometimes referred to it as the method in our past regulatory decisions). While these general steps are consistent with our past determinations, we have adopted a significant change in how we give effect to this approach, following the major changes to the NER made in November 2012. Those changes placed significant new emphasis on the use of benchmarking in our expenditure analysis. We will now issue benchmarking reports annually and have regard to those reports. These