1. Gas default price-quality path reset 2017
Current views on forecasting expenditure
31 October 2016 #

2. Purpose
This presentation updates stakeholders on our current views on setting expenditure forecasts for the Gas DPP reset We are providing it to:
Set out changes we have made to aspects of our approach to setting expenditure forecasts (‘our approach’) in response to submissions on our 30 August 2016 policy paper
Foreshadow how we will implement this approach in our draft decision, which will involve supplier participation

3. Purpose This presentation is not a substitute for the draft decision:
We are not inviting submissions on this material at this stage
Stakeholders will have an opportunity to submit on the framework and the resulting expenditure forecasts following our draft decision in February 2017
We are still considering the details of our approach, and we may make changes before the draft decision
We will meet with suppliers to discuss next steps in implementing this approach for the draft decision

4. Outline
Overview of our initial proposed approach as set out in the policy paper
Summary of issues raised in submissions
Changes we are proposing to the assessment framework
Step-by-step explanation of the assessment framework

5. Proposed approach in policy paper
The next two slides set out the approach we proposed in the policy paper
We are providing this for comparison with the updated framework as set out in the rest of this presentation
The framework should provide incentives for suppliers to supply objective, unbiased asset management plan (AMP) expenditure forecasts

6. Proposed approach in policy paper

7. Proposed approach in policy paper
Key features of this approach included:
An expenditure objective, same as for customised price- quality paths (CPPs)
Business-as-usual (BAU) assessment
AMP scrutiny
Supplier scrutiny
Options for fall backs
Our revised approach retains all these aspects, but we have updated how they are implemented following submissions

8. Key issues in submissions
The perceived high cost of this approach
The level of discretion exercised by the Commission
Use of the CPP expenditure objective
Suppliers have not prepared AMPs for this purpose
Assessment should be done in aggregate, not by category
Base level of expenditure should be a multi-year average
Information for supplier scrutiny not available
BAU tolerances need to be specified
Fall back needs to be specified

9. Key changes to our approach
Step 1: Aggregate BAU variance checks
New step in the assessment process
Base level of expenditure changed from a single lowest year to a multi-year average
Fixed variance applied to all suppliers, intended to reflect historic volatility
Tolerance currently set at 5% for opex and 10% for capex

10. Key changes to our approach
Step 2: Category BAU variance checks
Base level of expenditure changed from a single lowest year to a multi-year average
Tolerance currently 5% for opex, 10% for capex
Categories of expenditure within variance accepted

11. Key changes to our approach
Step 3: Materiality check
Step was implicit in the supplier scrutiny step, now an explicit check in the process
We assess the materiality of any category expenditure above the BAU tolerance
If this expenditure is less than 3% of that year’s total opex or capex, we may not scrutinise it further

12. Key changes to our approach
Step 4: Quantitative AMP evidence
Name changed to reflect purpose of this step
Dashboard metrics used to look for justification of expenditure
Step 5: Qualitative AMP evidence
Desktop review of targeted aspects of AMPs to assess expenditure not explained by dashboard metrics

13. Key changes to our approach
Step 6: Supplier evidence
Name changed to better reflect the purpose of this step
Supplier engagement with this step remains voluntary, with the onus on the supplier to provide whatever supporting information was used to prepare the forecast
The kinds of supporting documentation cited in the policy paper (business cases or board papers) are only examples and are a sufficient but not necessary requirement for justification
Our intention is not to require the production of new documentation

14. Aggregate BAU variance check Supported expenditure
Assessment approach
Step 1
Aggregate BAU variance check
Supported expenditure
Supplier AMP forecast used for that year/category
Changes/notes
New step introduced
Multi-year average
5% tolerance for opex
10% tolerance for capex

15. Assessment approach Supported expenditure Step 1 Step 2
Aggregate BAU variance check
Step 2
ID category BAU variance check
Supported expenditure
Supplier AMP forecast used for that year/category
Changes/notes
Multi-year average
5% tolerance for opex
10% tolerance for capex

16. Assessment approach Supported expenditure Step 1 Step 2 Step 3
Aggregate BAU variance check
Step 2
ID category BAU variance check
Step 3
Materiality check
Supported expenditure
Supplier AMP forecast used for that year/category
Changes/notes
Moved from part of supplier scrutiny
Threshold 3% of total opex/capex
Expenditure below materiality threshold accepted

17. Assessment approach Supported expenditure Step 1 Step 2 Step 3 Step 4
Aggregate BAU variance check
Step 2
ID category BAU variance check
Step 3
Materiality check
Step 4
Quantitative AMP evidence
Supported expenditure
Supplier AMP forecast used for that year/category
Changes/Notes
Relies on the metrics in the dashboard to justify out-of-BAU expenditure
Separated from ‘qualitative’ step for clarity

18. Assessment approach Supported expenditure Step 1 Step 2 Step 3 Step 4
Aggregate BAU variance check
Step 2
ID category BAU variance check
Step 3
Materiality check
Step 4
Quantitative AMP evidence
Step 5
Qualitative AMP evidence
Supported expenditure
Supplier AMP forecast used for that year/category
Changes/notes
Relies on a review of AMP for justification of non-BAU expenditure

19. Assessment approach Supported expenditure Step 1 Step 2 Step 3 Step 4
Aggregate BAU variance check
Step 2
ID category BAU variance check
Step 3
Materiality check
Step 4
Quantitative AMP evidence
Step 5
Qualitative AMP evidence
Step 6
Supplier evidence
Supported expenditure
Supplier AMP forecast used for that year/category
Changes/notes
Supplier participation remains optional
Unsupported expenditure moves to fall back at a category level

20. Assessment approach Supported expenditure Step 1 Step 2 Step 3 Step 4
Aggregate BAU variance check
Step 2
ID category BAU variance check
Step 3
Materiality check
Step 4
Quantitative AMP evidence
Step 5
Qualitative AMP evidence
Step 6
Supplier evidence
Fall back
Unsupported expenditure
Supported expenditure
Supplier AMP forecast used for that year/category

21. Fall backs
We are providing more detail on fall backs where expenditure is outside BAU variance and not supported by the AMP or supplier evidence:
We term this expenditure ‘unsupported expenditure’
For categories that are unsupported, the forecasts will revert to the upper bound of the BAU variance (currently using the 5% tolerance for opex and 10% for capex)
We term the combination of these fall backs with other categories that were supported the ‘adjusted AMP forecast’

22. Fall backs There is an additional check applied for opex:
The present value (PV) of the entire adjusted AMP forecast is compared to the PV of our opex step and trend modelling (incorporating a positive partial productivity parameter)
Where the adjusted AMP forecast is MORE than the step and trend forecast, we use the adjusted AMP forecast
Where the adjusted AMP forecast is LESS than the step and trend forecast, we use the step and trend forecast
This additional check is not performed where the supplier’s AMP forecast is below the step and trend forecast

23. Fall backs Final expenditure forecasts Capex Capex Capex Capex Opex
Supported capex
Capex
ID category for that year is ‘unsupported’
Capex
Forecast reverts to BAU+10% variance upper bound
Capex
Unsupported expenditure
Capex
Adjusted AMP forecast
Final expenditure forecasts
Opex
ID category for that year is ‘unsupported’
Opex
Forecast reverts to BAU+5% variance upper bound
Opex
Unsupported expenditure
Opex
Adjusted AMP forecast
Opex
PV of adjusted AMP forecast compared to PV of step and trend. Larger used.
Supported opex

24. Implications of this approach
The implications of our overall approach are:
The maximum expenditure allowance (in any case) will be the supplier’s own opex and capex forecasts:
The minimum capex allowance will be the lesser of
the supplier’s own forecasts or
an average of total capex, +10%
The minimum opex allowance will be the lesser of:
our step and trend forecast