network. The opex forecast has already been increased (from the base year) to account for forecast network growth. By applying the rate of change to the base year opex, we also adjust our opex forecast to account for real price increases. A step change should not double count price increases already compensated through this adjustment. Applying a step change for costs that are forecast to increase faster than CPI is likely to yield a biased forecast if we do not also apply a negative step change for costs that are increasing by less than CPI. A good example is insurance premiums. A step change is not required if insurance premiums are forecast to increase faster than CPI because within total opex there will be other categories whose price is forecast to increase by less than CPI. If we add a step change to account for higher insurance premiums we might provide a more accurate forecast for the insurance category in isolation; however, our forecast for total opex as a whole will be too high. Further to assessing whether step changes or change factors are captured in other elements of our opex forecast, we will assess the reasons for, and the efficient level of, the incremental costs (relative to that funded by base opex and the rate of change) that the service provider has proposed. In particular we have regard to: whether there is a change in circumstances that affects the service provider's efficient forecast expenditure what options were considered to respond to the change in circumstances whether the option selected was the most efficient option––that is, whether the service provider took appropriate steps to minimise its expected cost of compliance the efficient costs associated with making the step change and whether the proposal appropriately quantified all costs savings and benefits when this change event occurs and when it is efficient to incur expenditure, including whether it can be completed over the regulatory period whether the costs can be met from existing regulatory allowances or from other elements of the expenditure forecasts. One important consideration is whether each proposed step change or change factor is driven by an external obligation (such as new legislation or regulations) or an internal management decision (such as a decision to increase maintenance opex). Step changes should generally relate to a new obligation or some
network. The opex forecast has already been increased (from the base year) to account for forecast network growth. By applying the rate of change to the base year opex, we also adjust our opex forecast to account for real price increases. A step change should not double count price increases already compensated through this adjustment. Applying a step change for costs that are forecast to increase faster than CPI is likely to yield a biased forecast if we do not also apply a negative step change for costs that are increasing by less than CPI. A good example is insurance premiums. A step change is not required if insurance premiums are forecast to increase faster than CPI because within total opex there will be other categories whose price is forecast to increase by less than CPI. If we add a step change to account for higher insurance premiums we might provide a more accurate forecast for the insurance category in isolation; however, our forecast for total opex as a whole will be too high. Further to assessing whether step changes or change factors are captured in other elements of our opex forecast, we will assess the reasons for, and the efficient level of, the incremental costs (relative to that funded by base opex and the rate of change) that the service provider has proposed. In particular we have regard to: whether there is a change in circumstances that affects the service provider's efficient forecast expenditure what options were considered to respond to the change in circumstances whether the option selected was the most efficient option––that is, whether the service provider took appropriate steps to minimise its expected cost of compliance the efficient costs associated with making the step change and whether the proposal appropriately quantified all costs savings and benefits when this change event occurs and when it is efficient to incur expenditure, including whether it can be completed over the regulatory period whether the costs can be met from existing regulatory allowances or from other elements of the expenditure forecasts. One important consideration is whether each proposed step change or change factor is driven by an external obligation (such as new legislation or regulations) or an internal management decision (such as a decision to increase maintenance opex). Step changes should generally relate to a new obligation or some
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