Other drivers of capex (such as replacement expenditure and connections works) may be recurrent. For such expenditure, we will attempt to identify trends in revealed volumes and costs as an indicator of forecast requirements. At the time of developing this guideline, capex is not currently subject to an incentive scheme like the EBSS. This means that although past actual expenditures and volumes may indicate a particular TNSP's likely future expenditure, we cannot presume it is efficient. The CESS may mitigate this issue to some extent. Consequently, and given the presence of non-recurrent expenditures, our assessment approach is typically more involved for capex than for opex. It may be necessary to review individual, or groups of, projects and programs to inform our opinion on total forecast capex (especially for TNSPs). Our approach for both opex and capex will place greater reliance on benchmarking techniques than we have in the past. We will, for example use benchmarking to assist us in determining the appropriateness of revealed costs. We will also benchmark TNSPs across standardised expenditure categories to compare relative efficiency. Assumptions Our general approach assumes that: the efficiency criterion and the prudence criterion in the NER are complementary past actual expenditure was sufficient to achieve the expenditure objectives in the past. Efficiency and prudence are complementary We consider that the notion of efficient costs complements the costs that a prudent operator would require to achieve the expenditure objectives. Prudent expenditure is that which reflects the best course of action, considering available alternatives. Efficient expenditure results in the lowest cost to consumers over the long term. That is, prudent and efficient expenditure reflects the lowest long term cost to consumers for the most appropriate investment or activity required to achieve the expenditure objectives. Past expenditure was at least sufficient to achieve objectives When we rely on past actual expenditure as an indication of required forecast expenditure, we assume that the past expenditure incurred by the TNSP was sufficient for it to achieve the expenditure objectives. That is, the TNSP’s past expenditure was the amount required to manage and operate its network at that time, in a manner that achieved the expenditure objectives.
Other drivers of capex (such as replacement expenditure and connections works) may be recurrent. For such expenditure, we will attempt to identify trends in revealed volumes and costs as an indicator of forecast requirements. At the time of developing this guideline, capex is not currently subject to an incentive scheme like the EBSS. This means that although past actual expenditures and volumes may indicate a particular TNSP's likely future expenditure, we cannot presume it is efficient. The CESS may mitigate this issue to some extent. Consequently, and given the presence of non-recurrent expenditures, our assessment approach is typically more involved for capex than for opex. It may be necessary to review individual, or groups of, projects and programs to inform our opinion on total forecast capex (especially for TNSPs). Our approach for both opex and capex will place greater reliance on benchmarking techniques than we have in the past. We will, for example use benchmarking to assist us in determining the appropriateness of revealed costs. We will also benchmark TNSPs across standardised expenditure categories to compare relative efficiency. Assumptions Our general approach assumes that: the efficiency criterion and the prudence criterion in the NER are complementary past actual expenditure was sufficient to achieve the expenditure objectives in the past. Efficiency and prudence are complementary We consider that the notion of efficient costs complements the costs that a prudent operator would require to achieve the expenditure objectives. Prudent expenditure is that which reflects the best course of action, considering available alternatives. Efficient expenditure results in the lowest cost to consumers over the long term. That is, prudent and efficient expenditure reflects the lowest long term cost to consumers for the most appropriate investment or activity required to achieve the expenditure objectives. Past expenditure was at least sufficient to achieve objectives When we rely on past actual expenditure as an indication of required forecast expenditure, we assume that the past expenditure incurred by the TNSP was sufficient for it to achieve the expenditure objectives. That is, the TNSP’s past expenditure was the amount required to manage and operate its network at that time, in a manner that achieved the expenditure objectives.
AER%20expenditure%20forecast%20assessment%20guideline%20-%20transmission%20-%20November%202013.DOCX