Advice to ActewAGL – Use of efficiency benchmarking in electricity distribution

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Client ActewAGL
Dates 2015
Service(s)Regulation & Competition

CEPA, led by David Newbery, CEPA Vice-Chairman, prepared an expert report for ActewAGL’s (an Australian electricity company) revised regulatory submission to AER, the Australian regulator.

The report provided a critiqued of the AER’s draft determination approach to benchmarking the Australian, National Electricity Market, electricity distribution companies operating expenditure. We compared the AER’s approach to those of the UK regulators, Ofgem and Ofwat, and provided views on the AER’s approach to using international data as well as their approach to ensuring comparability of data.

To support our critique of the AER’s approach, we conducted our own benchmarking analysis. This underlined issues with the data not just between Australia and other international jurisdictions, but also between the Australian networks. We developed a number of models which included alternative cost drivers to the AER’s model which, when combined, appeared to provide a more robust indication of the relative efficiency levels of the Australian DNSPs.

We also examined the AER’s approach to applying large operating expenditure allowance reductions (~30-40%) in a single year (i.e., a P0 approach). We compared this approach to international evidence which showed a greater use of reduced targets and glide-paths when dealing with significantly large efficiency savings targets.

Following on from the delivery of the expert report, we provided ActewAGL with ongoing support in assessing the AER’s final proposals and prepared arguments for its Australian Competition Tribunal appeal.