Nuttall Consulting

Purpose overview of the form and use of the AERs repex tool Not Detailed reference material on the underlying spreadsheets Defence of the tools regulatory role and suitability Nuttall Consulting

Summary Background Repex model data requirements Overview of workbook – repex modelling tool Overview of replacement algorithm Discussion of issues raised Nuttall Consulting

Background – capex category Nuttall Consulting Non-demand-driven replacement of an asset with its modern-equivalent, where the timing of the need can be directly or implicitly linked to the age of the asset

Background - key aims Regulatory tool NOT planning/management tool Should account for main driver at aggregate level but not concerned with excessive detail Allow intra- and inter-company comparisons Targeting of matters for detailed review Development of benchmarks Nuttall Consulting

Form of model Nuttall Consulting Similar, in principle, to tools used by other regulators and NSPs Ofgem in the UK ESV, OTTER, ESCOSA – the PB model Numerous NEM DNSPs – the PB model and internal Inputs asset state asset ages and quantities planning parameters asset lives and replacement cost Outputs forecast replacement volumes forecast replacement capex forecast average ages

Form of model Nuttall Consulting Tool is spreadsheet based - uses VBA functions Does not rely upon proprietary – or black box – algorithms Uses standard probability theory – covered in numerous text books and papers Relatively simple to independently verify

Role – past application of tool Nuttall Consulting 1 - Base-case Prepare individual DNSP models based upon DNSP data 2 - Calibration Derive planning parameters from actual historical information of DNSP Prepare individual DNSP calibration models 3- Comparison Derive benchmarks parameters based upon set of DNSPs calibrated planning parameters Prepare individual DNSP benchmark models Repex tool assessment inform other elements of the review for example, targeting matters for more detailed review, set expenditure allowance

Nuttall Consulting

Format of network model Physical representation of network – volumes of assets Multiple asset categories used to improve accuracy allows for differences between networks reduce impact of aggregation For example, for poles we may have separate categories Different voltage levels carried by poles Different pole construction materials Different locations. Nuttall Consulting Historically 30 – 100 separate asset categories defined

Data – asset grouping Each asset category must be assigned to an asset group allows aggregation for analysis and reporting Nuttall Consulting AER previously defined 13 asset groups for distribution PolesDistribution transformersZone other Pole top structuresDistribution switchgearSCADA and protection ConductorsDistribution otherOther Underground cablesZone transformers ServicesZone switchgear

Data – asset category data For each asset category 1. Asset group ID 2. Asset replacement unit cost (mean unit cost) 3. Asset replacement life parameters a) Mean life b) Standard deviation (assumes a normal distribution) 4. Replacement method 5. Age profile – array of the volume of assets at ages (0 to 90 years old) Nuttall Consulting

Supporting data Previous RINs have included information requests to support DNSP data and aid in the AERs analysis For each asset category defined by the DNSP descriptions of the asset category historical asset replacement levels and expenditure explanations of the DNSPs determination of asset life parameters, including appropriate distributions explanations of the DNSPs determination of the unit costs, including variability and relationship to historical costs Nuttall Consulting

workbook structure Input sheets Model initialisation data sheet – Tables Asset category data input sheet – Asset data Output sheets Asset category summary sheet – Age profile summary Replacement forecast sheet – RRR hist-forc Chart sheets Age profile – age profile Replacement forecast – Forecast Ch1 and Forecast Ch2 Internal calculation sheets Nuttall Consulting

Overview of demo model Nuttall Consulting

See handbook for more detailed reference material Nuttall Consulting

Forecasting algorithm To account for variations in lives, a probabilistic asset replacement life is used Nuttall Consulting Probabilistic model X Asset state volume of assets survived to age - a Volume replaced Capex Planning parameters asset life replacement unit cost (probability distribution)

probabilistic algorithm Nuttall Consulting Use survivor / hazard curve principles to predict replacement quantities in a forecast year Given the unconditional probability distribution for the replacement life of the asset existing volume of assets at a certain age – i.e. the volume of assets that have survived to that age The unconditional probability distribution is then transformed into a conditional distribution appropriate for the assets, given they have survived to that age The condition probability distribution is then used to determine the proportion of these asset replaced in future years

VBA function Nuttall Consulting Array function =repcalc(age profile, method, life, SD, years, recursive, initial year) Inputs Age profile – array of age profile (replacement cost by installation date) Method – replacement method Life – mean replacement life SD – standard deviation of life Years – number of years for forecast Recursive – if TRUE, allow replaced assets to be replaced Initial year - if TRUE, 1 st year of forecast is year after last year of age profile Outputs Array of forecast replacement expenditure by year Array of forecast average age by year

VBA function – worked example Nuttall Consulting Pre-function calculations – to form age profile for VBA function Asset data sheet Use input volume age profile Multiply by replacement cost to form replacement cost age profile Age profile (Inst) sheet Transformer to replacement cost age profile by installation date Now assume an asset category defined in the model We are using the probabilistic replacement approach, where Mean replacement life = 50 years SD of replacement life = 10 years Replacement cost = $1,000 per unit replaced And we have array replacement cost age profile by installation date 1st year of forecast is 2014

VBA function – worked example Nuttall Consulting VBA function steps through each element of the age profile to prepare a forecast for assets installed at that date That is, assets that have survived to current date For example, assume we still have 100 assets that were installed in 1960 That is, 100 asset that have survived to be 53 year old Or a replacement value of $100,000 that has survived to be 53 year old

Probability distributions Nuttall Consulting

Aggregating Nuttall Consulting Forecast is summation of this calculation for each element of the age profile Algorithm also tracks and outputs the average age of the forecast age profile

Nuttall Consulting

Common issues raised Nuttall Consulting age is not a proxy for condition/risks as assumed by the model model does not allow for different operating environments use of normal probability distribution rather than Weilbull use of square root of mean as the standard deviation inferred historical lives often above industry benchmark lives use of estimated volumes and costs for inferring historical lives goodness of fit and fit for purpose of model forecasts

Nuttall Consulting