Endogenous factors Capitalisation policy We are satisfied that it is not necessary to provide the NSW service providers with an operating environment adjustment for differences in capitalisation. An adjustment for differences in capitalisation policy between the NSW service providers and the comparison firms would not satisfy operating environment factor two. Differences in capitalisation policy will not lead to material differences in opex between the NSW service providers and the comparison service providers. The NSW service providers raised capitalisation as an issue that may affect benchmarking results. Capitalisation policies may affect the amount of opex recorded. Utilisation of capital will affect the amount of opex required. The relative efficiency of a service provider's opex and capex will also affect the opex to capex ratio, as will service providers' location in their asset replacement cycles. A high opex to capex ratio may simply reflect the efficient utilisation of opex and capital. For instance, SA Power Networks and United Energy, which are two of the best ranking service providers in our benchmarking results, have high opex to capex ratios. Where service providers are spending more on capex, we would also expect more overheads to be allocated to capex. We are satisfied that differences in capitalisation policies will not materially affect the NSW service providers' benchmarking results relative to the comparison service providers. This is because they expense a similar amount of their costs relative to most NEM service providers. However, the NSW service providers expense fewer costs, as a percentage of total expenditure, than all of the comparison service providers except for CitiPower. This is shown in Figure A.28 below. This suggests that it is likely that any operating environment adjustment to the NSW service providers' benchmarking results for capitalisation policies would be negative. Figure A.28 Average opex as a percentage of totex, 2006 to 2013 Source: Economic benchmarking RIN Risk appetite We are satisfied that it is not necessary to provide an operating environment adjustment for differences in the risk appetites of service providers' network owning corporations. Service providers choose their risk appetite.
Endogenous factors Capitalisation policy We are satisfied that it is not necessary to provide the NSW service providers with an operating environment adjustment for differences in capitalisation. An adjustment for differences in capitalisation policy between the NSW service providers and the comparison firms would not satisfy operating environment factor two. Differences in capitalisation policy will not lead to material differences in opex between the NSW service providers and the comparison service providers. The NSW service providers raised capitalisation as an issue that may affect benchmarking results. Capitalisation policies may affect the amount of opex recorded. Utilisation of capital will affect the amount of opex required. The relative efficiency of a service provider's opex and capex will also affect the opex to capex ratio, as will service providers' location in their asset replacement cycles. A high opex to capex ratio may simply reflect the efficient utilisation of opex and capital. For instance, SA Power Networks and United Energy, which are two of the best ranking service providers in our benchmarking results, have high opex to capex ratios. Where service providers are spending more on capex, we would also expect more overheads to be allocated to capex. We are satisfied that differences in capitalisation policies will not materially affect the NSW service providers' benchmarking results relative to the comparison service providers. This is because they expense a similar amount of their costs relative to most NEM service providers. However, the NSW service providers expense fewer costs, as a percentage of total expenditure, than all of the comparison service providers except for CitiPower. This is shown in Figure A.28 below. This suggests that it is likely that any operating environment adjustment to the NSW service providers' benchmarking results for capitalisation policies would be negative. Figure A.28 Average opex as a percentage of totex, 2006 to 2013 Source: Economic benchmarking RIN Risk appetite We are satisfied that it is not necessary to provide an operating environment adjustment for differences in the risk appetites of service providers' network owning corporations. Service providers choose their risk appetite.
AER%20%E2%80%93%20Draft%20decision%20Ausgrid%20distribution%20determination%20%E2%80%93%20Attachment%207%20%E2%80%93%20%20Operating%20expenditure%20%E2%80%93%20November%202014_0.DOCX