Transcript Slide 1

Benchmarking and
efficiency mechanisms
Stephen Clark - A/GM Connections & Development
Transend Networks
Challenges of regulation
“Network performance, especially by the
transmission companies, is good.
However, we consider that the Regulator’s
concern to reduce costs to consumers
should now be tempered by a greater emphasis
on ensuring that electricity network owners have
the financial resources necessary to secure a
viable long-term electricity supply.”
House of Commons Trade and Industry Committee, March
2004, Resilience of the National Electricity Network,Third
Report of Session 2003–04, Vol 1
Shared objectives
• Deliver the right services at the right price
• Reward prudent investment – do not expose companies
to revaluation risk
• Provide incentives to improve performance – in relation
to cost and service
• Set “fair” allowances for opex and capex
• Share efficiency gains “fairly” between shareholders and
customers
• Minimise cost of regulation
Holistic approach required
• Objectives unlikely to be met if:
• Significant uncertainty regarding the regulator’s
approach or outcomes
• Weak incentive for better performance
• Opex and capex allowances are not set fairly
• Sharing of gains is not fair
• Processes are unworkable or impractical
• Regulation drives business decisions
Benchmarking & incentive
mechanisms
• Important aspects of regime
• Establish “fair” opex and capex allowance
• Establish “fair” sharing of cost efficiency and service
performance gains
• But
• Cannot be divorced from asset valuation and WACC
issues
• Danger if regulatory approach treats each “topic” as
separate
Role of benchmarking….so far
• Simplistic benchmarking as part of the evidence
for setting opex and capex allowances
• Opex benchmarking based on
• ITOMS
• Historic costs
• Simple ratio analysis
• Partial recognition that capex is more difficult to
benchmark, and incentive issues are more
complex to resolve
Effective benchmarking
• To be effective, need set of peers
• Distribution lends itself more easily to benchmarking
• International models offer limited benchmarks for
Australian transmission
• ACCC Discussion Paper (page 61) cautions:
"a substantial component of the differences in cost
observations between firms are due to legitimate or
‘uncontrollable’ differences in factors which affect the
level of costs incurred by the firms”
ACCC recognition
• ACCC identifies TNSP differences:
•
•
•
•
Nature, range, volume, quality of services
Price of inputs
Governmental regulations
Number, density, load factor and size-distribution of
customers [and generators]
• Environmental factors
• Age and quality of capital stock
Benchmarking non-peers
• Would require sophisticated analysis to normalise
• Proper consideration of explanatory factors
• Implies more intrusive regulation
=> Most effective Australian TNSP benchmark likely
to be against own performance
• same influences on efficient costs
(eg nature, range, volume, quality of service etc)
=> Well-designed incentive mechanisms: allow
benchmarking against own performance over
time
Incentive mechanisms…so far
• “Glide path” opex incentive mechanisms flagged
in the DRP
• Limited application of capex efficiency to date
(Powerlink)
• No clear system for application
• No distinction between cost and scope changes
• No clear models in recent revenue cap decisions
=> Companies cannot respond to incentives that only
reveal themselves after the event
Incentive mechanisms… the
future
• Should be:
• Clearly explained at the outset
• Well designed, well understood, consistent
over time
• able to recognise externally-imposed capex and
opex cost-drivers
• Equitable - fair sharing of gains
• Unobtrusive/light-handed
ESC’s incentive mechanism
• Scheme appears to have good incentive properties
provided cost allowances are set appropriately in
the first place
• Future opex allowances based on efficient costs being
“revealed”
• Capex profiling important (this may introduce
distortions?)
• Recognition of external unpredictable factors that may
affect cost performance
Note: Transend would not sign up to an ESC-type scheme based
on its present revenue cap allowances
Suggested way forward
• Benchmarking - useful if organisation
performance benchmarked against true peers
• In Australia, vastly different networks and
operational environment
=>most effective benchmarking for revenue-setting is
against organisation’s own performance
• Well-designed incentive mechanisms allow
companies to benchmark against selves over time
• ESC and ESCOSA models - starting point
for further analysis?
Principles for future incentive
regulation
• Scheme should be
• Well-designed, well-understood, consistent over
time
• Able to recognise externally imposed capex and
opex cost-drivers
• Equitable - fair sharing of gains
• Unobtrusive
• TNSP option to “sign up” to scheme
• Where allowances are set properly and incentive
mechanisms well-designed - win/win situation for
all:
• a viable long-term electricity supply