Download Electricity Lines Business Regulation Draft Decisions

DNSP Outputs for Use in
Economic Benchmarking
AER Economic Benchmarking Workshop #1
13 March 2013
Denis Lawrence and John Kain
Economic benchmarking
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Compares the overall quantity of outputs produced to the
overall quantity of inputs used and costs incurred across
DNSPs and/or over time
Holistic, tops-down measure
Range of techniques used: total factor productivity (TFP),
multilateral TFP, econometric cost functions, data
envelopment analysis, stochastic frontier analysis
Use in building blocks regulation:
 Initial screening – accept revealed cost vs detailed analysis
 Is base year expenditure efficient?
 Efficiency improvement to be included in rates of change
 Benchmarking reports
www.economicinsights.com.au
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Data requirements
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Require data on the price and quantity (and hence value) of
all outputs and inputs and on the quantities of operating
environment variables (noting that output prices may be
shadow prices where the output is not explicitly charged for).
This then allows any of the key economic benchmarking
methods to be implemented.
Given its tops-down nature, it is important to concentrate on
a relatively small number of key outputs in economic
benchmarking
Desirable to have robust and consistent data
Data backcasting may be possible and facilitate early use
www.economicinsights.com.au
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Billed vs functional outputs (1)
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Billed outputs are those items an NSP actually charges
customers for
NSP charging practices have typically evolved on an ease of
implementation basis rather than on a network costreflective basis
High proportion of charges are on energy throughput
Dimensions that customers may value such as reliability,
continuity or speedy restoration after any interruption are not
explicitly charged for
Functional outputs are all those services NSPs provide to
customers which are valued by customers (of which billed
outputs are a subset)
www.economicinsights.com.au
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Billed vs functional outputs (2)
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Under building blocks the revenue requirement is set based
on the DNSP being expected to meet a range of
performance standards and other deliverables required to
meet the expenditure objectives
Prices then have to be consistent with broad regulatory
pricing principles
In the case of building blocks, it will be important to measure
output (and hence efficiency) in a way that is broadly
consistent with the output dimensions implicit in the setting
of NSP revenue requirements
Points to functional rather than billed outputs specification
but sensitivity analysis important
Need criteria to choose functional outputs to include
www.economicinsights.com.au
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Output selection criteria
1) the output aligns with the NEL and NER objectives which
are to:
a) meet or manage the expected demand for standard control
services
b) comply with all applicable regulatory obligations or requirements
associated with the provision of standard control services
c) maintain the quality, reliability and security of supply of standard
control services, and
d) maintain the reliability, safety and security of the distribution
system through the supply of standard control services.
2) the output reflects services provided to customers, and
3) the output is significant.
www.economicinsights.com.au
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The short list
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customer numbers (total or by broad class or by
location)
measured maximum demand and contracted maximum
demand for those customers charged on these bases
system capacity (taking account of both transformer and
line/cable capacity)
reliability (SAIDI and/or SAIFI), and
throughput (total or by broad customer class or by
location).
www.economicinsights.com.au
7
Billed outputs
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Energy delivered
 Bulk of charges but little impact on costs
 Proxy for load?
 Road analogy
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Customer numbers
 Proxy for fixed output components
 Need to disaggregate?
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Demand-based outputs
 Industrial customers usually charged on basis of actual peak demand
or reserved capacity
 Data available but not generally reported
 System proxies problematic
www.economicinsights.com.au
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Other functional outputs (1)
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System capacity
 Captures capacity to deliver (road analogy)
 Line capacity or line and transformer capacity?
 How can DSM and embedded generation be allowed for?
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Peak demand
 Important cost driver but customers see reliability at peak as relevant
output
 SA Power Networks advocates use of spatial rather than system
peak
 Volatility and incentive effects
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Reliability
 Important to customers
 Some practical issues to be resolved
 Should other aspects of service quality be included?
www.economicinsights.com.au
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Other functional outputs (2)
• System security
 Important cost driver and can provide an ‘insurance effect’ but is it
what customers see?
 Can a satisfactory objective summary measure be developed?
• Electricity safety and quality
 Of obvious importance but generally a prerequisite
 More important to include other outputs?
• Broader obligations
 Can include environmental, customer satisfaction and social
obligations
 Hard to measure
 Materiality?
www.economicinsights.com.au
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Output weights
• Need weights to aggregate outputs into an aggregate
output measure or to assess shadow weights estimated
by the model
• Revenue weights or cost-reflective weights
• Forming output weights on a cost–reflective basis is likely
to provide the most practical option going forward
• Cost function methods provide one way of doing this
• Information DNSPs use to demonstrate compliance with
regulatory pricing principles and for internal planning
purposes might provide another means of forming costreflective output weights
• Other methods may be required to allocate a value to
reliability outputs
www.economicinsights.com.au
11
The short list
•
•
•
•
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customer numbers (total or by broad class or by
location)
measured maximum demand and contracted maximum
demand for those customers charged on these bases
system capacity (taking account of both transformer and
line/cable capacity)
reliability (SAIDI and/or SAIFI), and
throughput (total or by broad customer class or by
location).
www.economicinsights.com.au
12