Note This attachment forms part of the AER's final decision on AusNet Services' distribution determination for 2016–20. It should be read with all other parts of the final decision. The final decision includes the following documents: Overview Attachment 1 – Annual revenue requirement Attachment 2 – Regulatory asset base Attachment 3 – Rate of return Attachment 4 – Value of imputation credits Attachment 5 – Regulatory depreciation Attachment 6 – Capital expenditure Attachment 7 – Operating expenditure Attachment 8 – Corporate income tax Attachment 9 – Efficiency benefit sharing scheme Attachment 10 – Capital expenditure sharing scheme Attachment 11 – Service target performance incentive scheme Attachment 12 – Demand management incentive scheme Attachment 13 – Classification of services Attachment 14 – Control mechanisms Attachment 15 – Pass through events Attachment 16 – Alternative control services Attachment 17 – Negotiated services framework and criteria Attachment 18 – f-factor scheme
We outline our detailed assessment of the rate of change in appendix B. Step Changes We have included step changes in our alternative opex forecast for the following proposals: Power of Choice metering contestability Power of Choice cost reflective tariffs Power of Choice customer access to data Power of Choice access to smart meter services and shared market protocol new connections charging framework. In total these step changes contribute $5.4 million ($2015) or 0.5 per cent to our total opex forecast for AusNet Services for the 2016–20 regulatory control period. We consider these step changes represent the efficient and prudent costs of meeting new regulatory obligations. We were not satisfied there were reasons to change our opex forecast for other step changes. Our position on AusNet Services' proposed step changes is summarised in Table 7.4. Table . Step changes ($ million, 2015) Initial proposal Preliminary decision Revised proposal Final decision New connections charging framework – – 2.1 1.4 Power of Choice: Customer access to data – – 0.6 0.6 Power of Choice: Cost reflective pricing – – 0.9 0.3 Power of Choice: Metering contestability – – 2.8 2.8 Power of Choice: Access to smart meter services and SMP/B2B integration – – 0.3 0.3 Power of Choice: Demand response mechanism – – 0.1 – Demand management 4.8 – – – Total 4.8 – 6.9 5.4 Source: AER analysis. We discuss each of the step changes AusNet Services in more detail in appendix C.
Base opex As opex is relatively recurrent, we typically forecast on a single year of opex. We call this the base opex amount. In this section, we set out our assessment of AusNet Services' base opex. Final decision We have used a base opex amount of $210.2 million ($2015) in our final decision opex forecast. The comparison of the base opex amount in our preliminary decision, AusNet Services' revised proposal and our decision is outlined below in Table A.1. Table . Base opex ($ million, 2015) Preliminary decision Revised proposal Final decision Reported 2014 opex 197.7 197.1 196.2 AMI cost reallocation - 20.4 9.1 Other adjustments 4.9 6.6 4.9 Base opex 201.0 224.2 210.2 Source: AER, AusNet Services preliminary decision opex model, October 2015; AusNet Services, 2016-20 Revised Regulatory Proposal Opex Model; AER, AusNet Services final decision opex model, May 2016. AusNet Services' revised proposal and submissions AusNet Services forecast base opex amount of $224.2 million ($2015) . The differences between AusNet Services' revised proposal and our preliminary decision reflected differences in: the allocation approach to AMI costs the forecasting approaches for self insurance and debt raising costs how base opex is inflated from nominal dollars to real $2015. We received several submissions in response to our preliminary decisions for the Victorian service providers either disagreed with our conclusions on base opex or requested further evidence to support our decision. In particular, VECUA considered there is extensive evidence of material inefficiencies in some Victorian distributors’ opex. It considered that this has been revealed by our benchmarking. As a result, it considered using a revealed cost method to be flawed and a benchmarking approach should be used. It considered CitiPower to be the benchmark provider. More generally, VECUA considered that in setting base opex we have had insufficient regard to:
regulatory control period. At the time, we forecast increases in opex of $206 million ($2015) from 2011 to 2015 due to these new regulations. Vegetation management expenditure across the industry was also likely affected by heavy rainfall during the period. The year 2010 was the fifth wettest year on record in Victoria following one of the wettest springs on record, and 2011 was the twelfth wettest year on record. While we have not collected evidence on the effects of this pattern on vegetation growth in Victoria, we did observe that above average rainfall in South Australia in 2010 and 2011 led to significant increases in vegetation growth and vegetation management expenditure. The moderate increase in maintenance expenditure across the industry in part also reflects other increases in regulatory obligations following the Black Saturday bushfires. For instance, one of the Victorian Bushfire Royal Commission's (VBRC) recommendations was to mandate maximum thirty seven-month inspection cycles of single wire earth return lines (SWER) and 22KV feeders in high bushfire risk areas. This came into force in the Electrical Safety Amendment (Bushfire Mitigation) Regulations 2011 and is now mandated by the Electrical Safety (Bushfire Mitigation) Regulations 2013. This has contributed to the increase in pole inspection expenditure in Figure A.4. Figure . Pole inspection and pole inspection expenditure ($ million, 2015) Source: AER analysis. Another factor contributing to the increase in maintenance opex and opex more generally is the strength in wage growth across the industry. Labour costs are the most significant component of opex for utility businesses. Since 2009, wage growth in the ABS' Electricity Gas Water and Wastewater (EGWWS) classification has been on average 3.7 per cent per annum in nominal terms. In real terms EGWWS wage growth has been on average 1.3 per cent. As indicated in Figure A.5, this has largely matched the rate of wage growth in the mining industry and has exceeded wage growth across the Australian economy. This, in part, is likely to reflect the impact of the mining boom on the EGWWS sector. The impact of the demand for mining labour has previously been recognised as a driver of utilities wages by Deloitte and BIS Shrapnel. Figure . Wage growth - ABS classifications Source: ABS, 6345.0 Wage Price Index, December 2015. In our view, the above drivers do not suggest that the Victorian service providers' operating efficiency has materially declined over the previous regulatory period. In our