Assessment approach The first part of our assessment involved identifying any differences between ActewAGL's forecasting method and our own method as outlined in our Guideline. This involved reviewing: the description of ActewAGL's opex forecasting method in its regulatory proposal the description of ActewAGL's opex forecasting method in its Expenditure forecasting methodology the opex model used by ActewAGL to forecast total opex. Having identified any differences we then examined the impact of them using ActewAGL's opex model. Reasons for position In assessing ActewAGL's forecasting method we sought to identify if and where ActewAGL's forecasting method departed from our guideline forecasting method. Where ActewAGL's forecasting method did depart from our guideline forecasting method we considered whether this departure explains the difference between ActewAGL's forecast of total opex and our own. Under our guideline forecasting method we start with the actual expenditure in a base year. If actual expenditure in the base year reasonably reflects the opex criteria we set base opex equal to actual expenditure. If not, we apply an efficiency adjustment to ensure base opex reflects the opex criteria. We then apply a forecast rate of change to capture forecasting changes in prices, output and productivity. We then add or subtract any step changes to account for any other efficient expenditure not captured in base opex or the rate of change. As noted above, ActewAGL's opex forecasting method differs from our guideline forecasting approach in that it used a combination of zero-based and base year methods. Using category specific forecasting methods (such as ActewAGL's zero-based method) for some opex categories may produce better forecasts of expenditure for those categories but this may not produce a better forecast of total opex. Generally it is best to use the same forecasting method for all cost categories of opex because hybrid forecasting methods (that is, combing revealed cost and category specific methods) can produce biased opex forecasts inconsistent with the opex criteria. This view is consistent with a view expressed by Frontier Economics in a previous determination process, which stated:
Assessment approach The first part of our assessment involved identifying any differences between ActewAGL's forecasting method and our own method as outlined in our Guideline. This involved reviewing: the description of ActewAGL's opex forecasting method in its regulatory proposal the description of ActewAGL's opex forecasting method in its Expenditure forecasting methodology the opex model used by ActewAGL to forecast total opex. Having identified any differences we then examined the impact of them using ActewAGL's opex model. Reasons for position In assessing ActewAGL's forecasting method we sought to identify if and where ActewAGL's forecasting method departed from our guideline forecasting method. Where ActewAGL's forecasting method did depart from our guideline forecasting method we considered whether this departure explains the difference between ActewAGL's forecast of total opex and our own. Under our guideline forecasting method we start with the actual expenditure in a base year. If actual expenditure in the base year reasonably reflects the opex criteria we set base opex equal to actual expenditure. If not, we apply an efficiency adjustment to ensure base opex reflects the opex criteria. We then apply a forecast rate of change to capture forecasting changes in prices, output and productivity. We then add or subtract any step changes to account for any other efficient expenditure not captured in base opex or the rate of change. As noted above, ActewAGL's opex forecasting method differs from our guideline forecasting approach in that it used a combination of zero-based and base year methods. Using category specific forecasting methods (such as ActewAGL's zero-based method) for some opex categories may produce better forecasts of expenditure for those categories but this may not produce a better forecast of total opex. Generally it is best to use the same forecasting method for all cost categories of opex because hybrid forecasting methods (that is, combing revealed cost and category specific methods) can produce biased opex forecasts inconsistent with the opex criteria. This view is consistent with a view expressed by Frontier Economics in a previous determination process, which stated:
AER%20draft%20decision%20ActewAGL%20distribution%20determination%20-%20Attachment%2007%20-%20Opex%20-%20November%202014.DOCX