Final decision

FINAL DECISION

SA Power Networks determination 2015−16 to 2019−20
Attachment 7 − Operating expenditure

October 2015

© Commonwealth of Australia 2015

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1. Note

1. 
   This attachment forms part of the AER's final decision on SA Power Networks' 2015–20 distribution determination. It should be read with other parts of the final decision.
   
2. 
   The final decision includes the following documents:
   
3. 
   Overview
   
4. 
   Attachment 1 – Annual revenue requirement
   
5. 
   Attachment 2 – Regulatory asset base
   
6. 
   Attachment 3 – Rate of return
   
7. 
   Attachment 4 – Value of imputation credits
   
8. 
   Attachment 5 – Regulatory depreciation
   
9. 
   Attachment 6 – Capital expenditure
   
10. 
    Attachment 7 – Operating expenditure
    
11. 
    Attachment 8 – Corporate income tax
    
12. 
    Attachment 9 – Efficiency benefit sharing scheme
    
13. 
    Attachment 10 – Capital expenditure sharing scheme
    
14. 
    Attachment 11 – Service target performance incentive scheme
    
15. 
    Attachment 12 – Demand management incentive scheme
    
16. 
    Attachment 13 – Classification of services
    
17. 
    Attachment 14 – Control mechanism
    
18. 
    Attachment 15 – Pass through events
    
19. 
    Attachment 16 – Alternative control services
    
20. 
    Attachment 17 – Negotiated services framework and criteria
    
21. 
    Attachment 18 – Connection policy
    

2. Contents

1.Operating expenditure 9

1.1Final decision 9

1.2SA Power Networks' revised proposal 10

1.3AER’s assessment approach 12

1.the efficient costs of achieving the operating expenditure objectives 12

2.the costs that a prudent operator would require to achieve the operating expenditure objectives 12

3.a realistic expectation of the demand forecast and cost inputs required to achieve the operating expenditure objectives. 12

1.meeting or managing the expected demand for standard control services over the regulatory control period 13

2.complying with all applicable regulatory obligations or requirements associated with providing standard control services 13

3.where there is no regulatory obligation or requirement, maintaining the quality, reliability and security of supply of standard control services and maintaining the reliability and security of the distribution system 13

4.maintaining the safety of the distribution system through the supply of standard control services. 13

2.We develop an alternative estimate to assess a service provider's proposal at the total opex level. We recognise that a service provider may be able to adequately explain any differences between its forecast and our estimate. We take into account any such explanations on a case by case basis using our judgment, analysis and stakeholder submissions. 16

3.We assess whether the service provider's forecasting method, assumptions, inputs and models are reasonable, and assess the service provider's explanation of how its method results in a prudent and efficient forecast. 16

4.We assess the service provider's proposed base opex, step changes and rate of change if the service provider has adopted this methodology to forecast its opex. 16

1.the efficiency criterion and the prudency criterion in the NER are complementary 17

5.actual operating expenditure was sufficient to achieve the opex objectives in the past. 17

5.1Reasons for final decision 20

5.1.1Base opex 21

5.1.2Rate of change 21

5.1.3Step changes 22

5.1.4Debt raising costs 25

5.1.5Interrelationships 25

5.1.6Assessment of opex factors 26

6.Base opex 31

6.Base opex 31

6.1Position 31

6.2SA Power Networks' revised proposal and submissions 31

6.3Assessment approach 31

6.4Response to submissions 32

6.4.1Assessment of base opex 32

6.4.2Response to SA Power Networks 34

6.5Inflation of base opex 35

7.Rate of change 37

7.Rate of change 37

A.1Position 37

7.1Preliminary position 38

7.2SA Power Networks' revised proposal and submissions 39

7.3Reasons for position 39

7.3.1Labour price growth 40

1.SA Power Networks' current EA is efficient because it was negotiated at arm's length and in a commercial manner. 41

8.SA Power Networks' current EA and Frontier Economics' benchmark EA wage increases are similar to wage increases in historical EAs. 41

8.1.1Price weightings 49

8.2Output growth 51

8.3Productivity growth 53

1.Economic Insights identified negative productivity growth between 2006 and 2013. SA Power Networks considered step changes only partially explain the negative growth across the industry. It considered we provided little conclusive evidence to support why we expect productivity growth to not continue to be negative in the 2015–20 regulatory control period. 53

9.Other regulators have adopted a negative productivity growth rate. Specifically it identified the New Zealand Commerce Commission (NZCC) adopted a negative 0.25 per cent productivity forecast. 53

10.SA Power Networks identified several factors where it will have to find productivity improvements in the 2015–20 regulatory control period. This includes asset aging, spatial network growth, increasing weather events, demand for data, increasing safety requirements and increasing customer expectation and services. 53

11.Step changes 56

11.Step changes 56

A.1Final position 56

11.1Preliminary position 56

11.2SA Power Networks' revised proposal and submissions 58

11.3Assessment approach 62

11.4Reasons for position 64

3.