Final decision

Shortened forms

Shortened form	Extended form
AEMC	Australian Energy Market Commission
AEMO	Australian Energy Market Operator
AER	Australian Energy Regulator
augex	augmentation expenditure
capex	capital expenditure
CCP	Consumer Challenge Panel
CESS	capital expenditure sharing scheme
CPI	consumer price index
DRP	debt risk premium
DMIA	demand management innovation allowance
DMIS	demand management incentive scheme
distributor	distribution network service provider
DUoS	distribution use of system
EBSS	efficiency benefit sharing scheme
ERP	equity risk premium
Expenditure Assessment Guideline	Expenditure Forecast Assessment Guideline for electricity distribution
F&A	framework and approach
MRP	market risk premium
NEL	national electricity law
NEM	national electricity market
NEO	national electricity objective
NER	national electricity rules
NSP	network service provider
opex	operating expenditure
PPI	partial performance indicators
PTRM	post-tax revenue model
RAB	regulatory asset base
RBA	Reserve Bank of Australia
repex	replacement expenditure
RFM	roll forward model
RIN	regulatory information notice
RPP	revenue and pricing principles
SAIDI	system average interruption duration index
SAIFI	system average interruption frequency index
SLCAPM	Sharpe-Lintner capital asset pricing model
STPIS	service target performance incentive scheme
WACC	weighted average cost of capital

22. 
    
    
23. 
    
    

1.Operating expenditure

24. 
    Operating expenditure (opex) refers to the operating, maintenance and other non-capital expenses, incurred in the provision of network services. Forecast opex for standard control services is one of the building blocks we use to determine a service provider's total revenue requirement.
    
25. 
    This attachment provides an overview of our assessment of opex. Detailed analysis of our assessment of opex is in the following appendices:
    

Appendix A—base opex

Appendix B—rate of change

Appendix C—step changes.

1.1Final decision

26. 
    We are not satisfied that SA Power Networks' forecast opex reasonably reflects the opex criteria.¹ We therefore do not accept the forecast opex SA Power Networks included in its building block proposal.² We compare our substitute estimate of SA Power Networks' opex for the 2015–20 regulatory control period with its initial regulatory proposal, our preliminary decision and SA Power Networks' revised regulatory proposal in Table 7..³
    

Table 7. Our preliminary and final decision on total opex ($ million, 2014–15)

	2015–16	2016–17	2017–18	2018–19	2019–20	Total
SA Power Networks' initial proposal	280.9	293.8	310.5	318.8	323.1	1527.2
AER preliminary decision	240.5	243.0	245.1	247.4	249.7	1225.8
SA Power Networks' revised proposal	269.8	281.1	284.8	290.8	295.5	1422.0
AER final decision	241.5	250.2	250.1	253.3	256.3	1251.4

Source: AER analysis.

Note: Excludes debt raising costs.

Figure 7. shows our final and preliminary decision compared to SA Power Networks' past actual opex, previous regulatory decisions and its initial and revised proposals.

Figure 7. AER final decision compared to SA Power Networks' past and proposed opex ($ million, 2014–15)

Source: SA Power Networks, Regulatory accounts 2010–11 to 2013–14; SA Power Networks, Economic benchmarking - Regulatory Information Notice response 2005–06 to 2012–13; SA Power Networks, Regulatory proposal for the 2015–20 period - Attachment 21 11; AER analysis; SA Power Networks, 2015–20 revised regulatory proposal, July 2015, p. 186

As outlined above, SA Power Networks proposed a significant increase in its opex forecast above recent historical levels. However, SA Power Networks did not identify any cost drivers which we consider will cause its opex to depart significantly from its historical opex. For instance:

SA Power Networks faces few expected changes in its regulatory obligations in the 2015–20 regulatory control period.

We would typically expect opex to materially increase if a service provider faced material increases in input prices and expected customer growth. However, we forecast that the price of the main input affecting opex, labour, will only be marginally above CPI in the 2015–20 regulatory control period. SA Power Networks' customer numbers are also not expected to change substantially in the 2015–20 regulatory control period either.

We could not identify any other cost drivers likely to significantly affect the efficient opex required to operating and maintain SA Power Networks' poles and wires in the 2015–20 regulatory control period.

For these reasons we are not satisfied SA Power Networks' opex forecast would reasonably reflect the opex criteria. We consider an opex forecast which is more closely aligned with SA Power Networks' most recent audited actual opex would reasonably reflect the opex criteria. Our substitute opex forecast is based predominantly on SA Power Networks' actual audited opex in 2013–14.