those forecast, the EBSS allows NSPs to retain less than 30 per cent of total efficiency gains. They imply this is inconsistent with the CESS which allows NSPs to retain 30 per cent of efficiency gains (losses). However, the CESS also rewards NSPs for efficiency gains (losses) relative to those included in the capex forecast. In considering whether incentives are balanced, the critical consideration is whether the marginal sharing ratios are similar, not the absolute sharing ratios. Both the EBSS and CESS provide a marginal sharing ratio of approximately 30:70 (NSP:customers). When marginal sharing ratios are balanced, a NSP will have no incentive to substitute a dollar capex with a dollar of opex (or vice versa). But if the opex marginal sharing ratio was, for example, higher than the capex marginal sharing ratio, then the NSP would have an incentive to substitute opex with capex, even if it was more costly. This incentive would remain even if the opex absolute sharing ratio was lower than that for capex. Timeframes Table 6.1 outlines our proposed timeframes and steps for determining whether we will consider making adjustments to base year expenditures under the revealed cost approach. Table 6.1 Timeframes for base year review Publication Decision F&A paper and Annual We will provide an initial view on whether we consider a NSP's historical costs are likely to reflect benchmarking report efficient costs. In the issues paper, we will publish our first pass assessment using data from the NSP's proposal and base year. This assessment will provide our preliminary view of the proposed opex forecast based upon analysis that can be undertaken within the issues paper timeframes. Issues paper We intend to run our benchmarking models as part of this process, including economic benchmarking (incorporating an econometric model of opex) and category analysis benchmarking. Draft determination We will set out the full base year assessment in the draft determination. Final determination We will consider our position in the draft in light of submissions. In advance of the reviews commencing in 2014, we cannot, at the F&A stage, provide an opinion on whether a NSP's costs reflect efficient costs based on the category analysis and economic benchmarking
those forecast, the EBSS allows NSPs to retain less than 30 per cent of total efficiency gains. They imply this is inconsistent with the CESS which allows NSPs to retain 30 per cent of efficiency gains (losses). However, the CESS also rewards NSPs for efficiency gains (losses) relative to those included in the capex forecast. In considering whether incentives are balanced, the critical consideration is whether the marginal sharing ratios are similar, not the absolute sharing ratios. Both the EBSS and CESS provide a marginal sharing ratio of approximately 30:70 (NSP:customers). When marginal sharing ratios are balanced, a NSP will have no incentive to substitute a dollar capex with a dollar of opex (or vice versa). But if the opex marginal sharing ratio was, for example, higher than the capex marginal sharing ratio, then the NSP would have an incentive to substitute opex with capex, even if it was more costly. This incentive would remain even if the opex absolute sharing ratio was lower than that for capex. Timeframes Table 6.1 outlines our proposed timeframes and steps for determining whether we will consider making adjustments to base year expenditures under the revealed cost approach. Table 6.1 Timeframes for base year review Publication Decision F&A paper and Annual benchmarking report We will provide an initial view on whether we consider a NSP's historical costs are likely to reflect efficient costs. Issues paper In the issues paper, we will publish our first pass assessment using data from the NSP's proposal and base year. This assessment will provide our preliminary view of the proposed opex forecast based upon analysis that can be undertaken within the issues paper timeframes. We intend to run our benchmarking models as part of this process, including economic benchmarking (incorporating an econometric model of opex) and category analysis benchmarking. Draft determination We will set out the full base year assessment in the draft determination. Final determination We will consider our position in the draft in light of submissions. In advance of the reviews commencing in 2014, we cannot, at the F&A stage, provide an opinion on whether a NSP's costs reflect efficient costs based on the category analysis and economic benchmarking
AER%20explanatory%20statement%20-%20expenditure%20forecast%20assessment%20guideline%20-%20November%202013.DOCX