also declines through the regulatory control period when it is expected a single base year will be used to forecast opex. The EBSS also addresses this and provides a continuous incentive throughout the regulatory control period. In assessing forecast opex, we must have regard to whether the opex forecast is consistent with any opex incentive scheme. Of importance here is our assessment of base opex. We may make base year adjustments for two reasons: a NSP's recurrent expenditure is inefficient compared to its peers a NSP's base year expenditure is not reflective of efficient recurrent expenditure due to a one-off factor in the base year. We consider below the impacts of these adjustments on the incentive a NSP has to improve opex efficiency. A number of NSPs also raised concerns that including a productivity forecast in the opex forecast could undermine the operation of the EBSS. We also consider this below. Efficiency of recurrent expenditure and the EBSS As stated, we will use a single year revealed cost forecasting approach to assess opex forecasts. However, if the base year opex reflects inefficient costs, then continuing with a revealed cost approach may not result in a prudent, efficient forecast of costs consistent with the opex criteria. This situation may arise because a NSP does not respond to incentives or appropriate incentives were not in place for efficient expenditure decisions. Where a NSP does not respond to incentives, the sharing of rewards or penalties would not be in the long term interests of consumers. Where a NSP responds to incentives, it will make efficient expenditure decisions regardless of the forecast. These efficient (historic) expenditures can then be used as the basis for opex forecasts. Where there is an EBSS in place, there is a continuous incentive across a regulatory period for a NSP to pursue efficiency gains. Hence, when there is an EBSS in place and a NSP appropriately responds to incentives, revealed costs provide a good indication that forecasts will be efficient. However, we will not assume a NSP is appropriately responding to incentives simply because an EBSS is in place. We must test the NSP's efficiency before relying on its revealed costs. We will likely use a number of techniques to assess the efficiency of a NSP's base year, including economic benchmarking techniques.
also declines through the regulatory control period when it is expected a single base year will be used to forecast opex. The EBSS also addresses this and provides a continuous incentive throughout the regulatory control period. In assessing forecast opex, we must have regard to whether the opex forecast is consistent with any opex incentive scheme. Of importance here is our assessment of base opex. We may make base year adjustments for two reasons: a NSP's recurrent expenditure is inefficient compared to its peers a NSP's base year expenditure is not reflective of efficient recurrent expenditure due to a one-off factor in the base year. We consider below the impacts of these adjustments on the incentive a NSP has to improve opex efficiency. A number of NSPs also raised concerns that including a productivity forecast in the opex forecast could undermine the operation of the EBSS. We also consider this below. Efficiency of recurrent expenditure and the EBSS As stated, we will use a single year revealed cost forecasting approach to assess opex forecasts. However, if the base year opex reflects inefficient costs, then continuing with a revealed cost approach may not result in a prudent, efficient forecast of costs consistent with the opex criteria. This situation may arise because a NSP does not respond to incentives or appropriate incentives were not in place for efficient expenditure decisions. Where a NSP does not respond to incentives, the sharing of rewards or penalties would not be in the long term interests of consumers. Where a NSP responds to incentives, it will make efficient expenditure decisions regardless of the forecast. These efficient (historic) expenditures can then be used as the basis for opex forecasts. Where there is an EBSS in place, there is a continuous incentive across a regulatory period for a NSP to pursue efficiency gains. Hence, when there is an EBSS in place and a NSP appropriately responds to incentives, revealed costs provide a good indication that forecasts will be efficient. However, we will not assume a NSP is appropriately responding to incentives simply because an EBSS is in place. We must test the NSP's efficiency before relying on its revealed costs. We will likely use a number of techniques to assess the efficiency of a NSP's base year, including economic benchmarking techniques.
AER%20explanatory%20statement%20-%20expenditure%20forecast%20assessment%20guideline%20-%20November%202013.DOCX