On total customer cost per customer ActewAGL appears to have high costs relative to Powercor. These results are consistent with our economic benchmarking, which account for factors such as scale and customer density. As a result, these operating environment factors only explain a part of the cost differential between ActewAGL and Powercor. Table A.8 below compares ActewAGL's total customer cost per customer to Powercor's. Table . Comparison of ActewAGL's average total customer cost per customer to Powercor's for 2009 to 2013 ($2013) Service Provider Cost Difference in total customer cost per customer to Powercor Implied efficiency score ActewAGL $870 $332 62% Source: Economic Benchmarking RIN and AER Analysis. Total opex This metric measures the opex cost per customer of providing core 'network services'. As with the total customer cost metric, have excluded the costs associated with other services such as connections, metering and public lighting to prevent classification of services from influencing results. This measure does not include a capital component because it measures opex only. However, we can compare the results to Figure A.8 to ensure capitalisation approaches are not materially influencing the results. Figure . Average annual opex for 2009 to 2013 against customer density ($2013–14) Source: Economic benchmarking RIN data. Consistent with total user cost per customer, ActewAGL appears to have high costs relative to Powercor (and most other less dense service providers). These results are consistent with our economic benchmarking and the total cost PPI. When we consider capitalisation, comparison between Figure A.7 and Figure A.8 shows ActewAGL appears is relatively higher on the opex PPI than the total customer cost PPI. This suggests ActewAGL may allocate more of its costs to opex than capex. Table A.9 compares ActewAGL's opex per customer to Powercor.
One submission on ActewAGL's regulatory proposal suggests ActewAGL has spent 'millions of dollars in costly redundancies.' We consider the existence of the redundancy conditions may limit options for workforce planning and management. Such limitations may impact on management's ability to efficiently and prudently manage its labour costs. Conclusions We consider the information we have viewed presents evidence of material inefficiency in ActewAGL's labour practices in the 2009–14 period (including the base year, 2012–13). We are satisfied that ActewAGL's high labour costs are likely a key driver of ActewAGL's benchmarking performance. This level of expenditure is unlikely to be representative of the efficient and prudent base opex in future years. Further detail of our labour review is in a confidential appendix. Vegetation management ActewAGL's performance in vegetation management expenditure has increased markedly in the 2009–14 period. Its related performance measures, however, have deteriorated. ActewAGL has provided material to explain the cost requirements of its vegetation management program but we consider these do not provide a satisfactory explanation for cost increases over the period. Our analysis indicates that increasing contractor costs and a lack of risk management are the primary causes of inefficiency. Our view is that one of the sources of ActewAGL's high expenditure in its base year opex (identified with our benchmarking techniques) is likely due to vegetation management practices. While we are satisfied that backyard reticulation presents some challenges unique to ActewAGL, on the evidence before us, our view is that backyard reticulation is likely only to be part of the reason for high vegetation management expenditure in the base year. Analysis of expenditure and performance ActewAGL's actual vegetation management expenditure has more than doubled from $2.6 million in 2008-09 to $5.4 million ($2013–14) in 2012–13. For the purposes of assessing base year opex, we are interested in historical actual expenditure rather than forecast expenditure, but it is useful to compare the expenditure trend over time. Figure A.17 shows that ActewAGL has forecast this to decline slightly to $3.9 million ($2013–14) on average in the 2014–19 period, which remains well above 2008–09 levels.
its obligations in section 110, it may recover reasonable expenses associated with vegetation management if the land-holder does not comply with its responsibilities pursuant to the notice: (6) If the land-holder does not carry out the activity in accordance with a requirement in the notice mentioned in subsection (3)(c)— (a) the utility may carry out the activity; and (b) the reasonable expenses thus incurred by the utility are a debt due to the utility by the land-holder. In the cost pass through final determination, we considered that ActewAGL's reactive approach to vegetation management was the reason it incurred additional costs in purported "urgent circumstances". Had ActewAGL used a more prudent and efficient pre-emptive strategy, it would have had ample time to adopt a considered and managed response to the greater than normal vegetation regrowth before the 2012–13 bushfire season. That is, a more prudent approach would have eliminated the need for the "urgent" work. In addition, statements in ActewAGL's regulatory proposal suggest it seeks to minimise reactive work in some instances because customers are more comfortable with planned outages than unplanned outages. In 2003, ActewAGL and ACTEW Corporation commissioned NERA and AC Nielson to conduct a study on customers' willingness to pay over a twelve month period. ActewAGL submits: The study found that customers were less concerned with planned (than unplanned) outages of a given duration, as long as they were given sufficient notice of that outage (two to seven days prior notice). ActewAGL goes on to state: ActewAGL Distribution has continued to undertake a relatively high proportion of planned (rather than reactive) maintenance on the network in recognition of this finding and the difficulties associated with accessing backyard reticulation to address unplanned outages. In our view, this suggests that if ActewAGL adopted a more proactive approach to vegetation management it should be able to minimise undertaking "urgent" work on private land. In such cases, uncooperative land holders would be responsible for the costs rather than ActewAGL's entire customer base. However, ActewAGL's current reactive practices seem to be resulting in ActewAGL unnecessarily incurring inefficient expenditure.
Assessment approach The first part of our assessment involved identifying any differences between ActewAGL's forecasting method and our own method as outlined in our Guideline. This involved reviewing: the description of ActewAGL's opex forecasting method in its regulatory proposal the description of ActewAGL's opex forecasting method in its Expenditure forecasting methodology the opex model used by ActewAGL to forecast total opex. Having identified any differences we then examined the impact of them using ActewAGL's opex model. Reasons for position In assessing ActewAGL's forecasting method we sought to identify if and where ActewAGL's forecasting method departed from our guideline forecasting method. Where ActewAGL's forecasting method did depart from our guideline forecasting method we considered whether this departure explains the difference between ActewAGL's forecast of total opex and our own. Under our guideline forecasting method we start with the actual expenditure in a base year. If actual expenditure in the base year reasonably reflects the opex criteria we set base opex equal to actual expenditure. If not, we apply an efficiency adjustment to ensure base opex reflects the opex criteria. We then apply a forecast rate of change to capture forecasting changes in prices, output and productivity. We then add or subtract any step changes to account for any other efficient expenditure not captured in base opex or the rate of change. As noted above, ActewAGL's opex forecasting method differs from our guideline forecasting approach in that it used a combination of zero-based and base year methods. Using category specific forecasting methods (such as ActewAGL's zero-based method) for some opex categories may produce better forecasts of expenditure for those categories but this may not produce a better forecast of total opex. Generally it is best to use the same forecasting method for all cost categories of opex because hybrid forecasting methods (that is, combing revealed cost and category specific methods) can produce biased opex forecasts inconsistent with the opex criteria. This view is consistent with a view expressed by Frontier Economics in a previous determination process, which stated: