A review of AusNet Services - Draft Proposal Report to Energy Consumers Australia - Energy ...
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Report to Energy Consumers Australia
A review of AusNet Services
Spencer&Co
Draft Proposal Business advisory services
1Background - general
Changes to the framework • Customers are more informed at the beginning • The high level nature of the documents
of the regulatory process and have more time provided in this early phase of the regulatory
The Regulatory Framework has changed in recent
to contribute to proposals process has limitations. It is hard for customers
years to provide for formal customer
to understand how a business is performing
representation in regulatory processes via the • Simpler, more accessible (i.e. less technical)
over the longer term, or how it is performing
Customer Challenge Panel and greater support information is being provided to customers.
compared to peers.
for Customer advocates via Energy Consumers Documents now focus on customer issues and
Australia. are beginning to tie costs of service to tangible • Detailed data is typically not provided in Draft
benefits customers can expect to receive. Plans and is only available for past years via
The removal of rights to appeal the merit of
AER Regulatory Information Notices - a
regulatory decisions has led business to look to • Controversial issues such as Weighted Average
collection of more than 70 separate
customers and their advocates to provide Cost of Capital (WACC) are settled via a
spreadsheets of data that is largely
assurance to the Australian Energy Regulator separate decision and do not form part of the
impenetrable to customers and most
(AER) that regulatory proposals are in customer’s current process. This reduces the level of
advocates.
interests. complexity in the consultation material.
• Detailed data for the forthcoming period is not
Businesses are now engaging with customers • Businesses now provide summarised data in
available and will only be submitted with the
directly and taking on feedback with the goal that customer friendly formats to demonstrate
formal proposals.
with sufficient support and endorsement from trends and seek assurance from customers.
customers and advocates, proposals can be The role of these comments
The cost
accepted by the AER when formally submitted.
Given the limitations above, the comments within
• Providing customers with sufficient background
The benefits this report should be considered as those of a
information to enable meaningful participation
‘coach’ rather than those of a ‘critic’. There is
The process is front-loaded with large amounts of in discussions is time consuming and can be
insufficient data to make definitive statements but
public discussion occurring before the formal costly. It requires commitment to a long 12-18
in most cases, there is sufficient information to
start of the regulatory process. As a result: month process of engagement prior to formal
endorse an approach or highlight areas of
lodgement of a regulatory proposal.
concern or confusion.
Spencer&Co | May 2019 2Customer engagement in Victoria
The Victoria Distributors have made significant efforts to engage with customers using a variety of techniques from online and telephone surveys, to focus
groups, People’s Panels, deliberative forums, in-depth interviews and deep dive sessions with stakeholders. The time and effort and expertise involved in the
process is impressive. Most importantly, there is clear evidence that the views and preferences of customers have influenced distributors plans.
Jemena AusNet services Citipower Powercor United Energy
1600 online 1650 online 1609 online 1609 online
Customers surveyed 319 online
350+ telephone (including 400 SMEs) (including 404 SMEs) (including 405 SMEs)
Focus groups & 6 People’s Panel sessions
10 focus groups 4 forums 4 forums 3 forums
Deliberative forums 13 focus groups
Customers involved in
43 residential participants 76 participants 145 participants 174 participants 161 participants
focus groups
Time line Began Nov 2017 Began January 2018 Began March 2017
Network tours 3 tours - - - -
Management / Board
Executive and Board Executive Executive Executive
involvement
10 interviews 15 interviews 14 interviews
Stakeholder interviews Yes 70 interviews
5 mini discussion groups 9 mini discussion groups 7 mini discussion groups
Deep Dive sessions 1 all-day session 3 sessions 3 sessions
Spencer&Co | May 2019 3Draft Plan - what is its role?
Following formal changes to the framework, distributors Other questions that are also raised are: What does best practice look like?
now release a Draft Plan to provide an early picture of
• Do plans / proposals really change between the Draft • Open discussion allows customers and stakeholders
their proposal and its price outcomes. Draft Plans are
Plan and the initial proposal in practical terms? to direct the conversation. Some companies have set
typically pitched at customers who are not overly
topics to discuss and others provide loose guides for
familiar with energy regulation and the documents • Does the Draft Plan simply show customers who have discussion. Customer engagement that is narrowed
explain many of the central concepts. been engaged in the development of the plan that up front produces narrow feedback in response.
Detail (or lack thereof) their feedback has been incorporated in the plans? Engagement that is more expansive tends to have a
• For those that have not been involved, do we get broader influence and has the potential to change
There is a range of detail presented in Draft Plans. The operations and culture outside of the regulatory
comfort from the fact that others have?
documents to date have ranged from 30 page slide framework (i.e. in competitive areas of the business),
packs to 80-100 page reports. Some include charts with The Draft Plan is one part of the early consultation or prompt businesses to collaborate with other
no numbers and other businesses include tables of process taking place. ‘Deep Dives’ on specific subjects stakeholders to improve outcomes for customers that
numbers in appendices to support their story. are also held to provide interested parties with more are not within the regulated business’s purview).
detail about forecasts and investments. The Deep Dive
The level of detail provided (or not provided) indicates
sessions are very useful in explaining the underlying • The timescale over which engagement occurs
the type of information and feedback that businesses
data behind the story and they allow advocates to test determines how influential community/customer
expect or want to receive from readers.
assumptions. attitudes are likely to be on the business. Allowing
• A high level of detail assumes that those reading the sufficient time for feedback shows a strategic intent
So what is the right level of detail for the Draft Plan? To by the company and demonstrates how much it
document will have detailed and informed feedback.
the extent that distributors are seeking endorsement of wants customers to influence business strategy, and
• A low level of detail assumes readers will respond Draft Plans, they need to provide sufficient information how important it believes feedback will be.
with high level feedback that supports or questions for those reading to make specific comments and
the general direction the proposal will take. definitive statements about forecasts. Where • Representing the customer base is important. Some
distributors seek high level feedback about trends, businesses have gone out of their way to represent
For some businesses, the Draft Plan fulfils the role of the issues and directions, less detail is appropriate. their customer base in forums to ensure key
initial Proposal despite having no formal status under characteristics of age, linguistic background, home
the Rules. Unlike the initial Proposal, there is insufficient ownership, gender, disability, technology etc are
supporting detail or data to justify investment decisions represented. Others have failed to adequately
or explain investment criteria and methodology. With represent some groups within their franchise and
less information included, how do we respond? have therefore missed out on rich insights garnered
from diversity of opinion and experience.
Spencer&Co | May 2019 4Engagement - AusNet Services
AusNet Services has shown its commitment to customer The channels have differed appropriately based on AusNet has also been particularly good at presenting costs
engagement by signing up to test the 'New Reg’ model customer preferences and experience. The Customer to customers and showing what revenue earned is used for
- a model that embeds customers in decision making Forum itself has undertaken substantial customer - i.e. how much of revenue is used to pay for past
engagement to ensure its views represent those of their investments versus future investments, and how much of
AusNet should be commended for its willingness to try the
constituents. every $100 is spent on various activities.
CUSTOMERnew regulatory
ENGAGEMENT PROCESSframework model that provides for certain
decisions to be negotiated between AusNet Services and a Who? A notable gap within AusNet’s program has been the AusNet have listed outcomes customers can expect to
Customer Forum made up of members of the community. engagement with customers with a cultural and receive, and to which customers can hold AusNet
This new model attempts to move engagement from the linguistically diverse (CALD) background. Furthermore, the Executives to account to deliver. These actions range from
e sessions ‘collaboration’
were conducted level in the International Association for Customer Forum brought views from rural businesses and improving accountability for customer outcomes within
mportant to us that this engagement process was industry leading and, when measured against the
Public Participation (IAP2) engagement framework to the
onal Association of Public Participation (IAP2), that we improved on previous engagement activities we
customers in regional towns into a stronger focus than AusNet, to fixing process issues, automating approvals and
dertaken. ‘empower’ level for parts of the decision. might have otherwise occurred. improving communications with customers. The explicit
accountability of the Executive shows the company’s level
3 IAP2 public participation spectrum AusNet Services has committed to a two year collaboration
IAP2 engagement framework of commitment to improving outcomes for its customers.
sing impact on decision and research program with the Consumer Policy Research
Centre to better understand needs of vulnerable and The impact of ‘New Reg’
disadvantaged customers which are under-represented in
The focus on the ‘New Reg’ model and how it would work
the customers that AusNet have engaged with to date.
Inform Consult Involve Collaborate Empower in practice may have distracted AusNet from strategically
What? AusNet has focused its attention on fixing key planning its engagement at the beginning of the process.
pation Goal
To provide the customer pain points. AusNet has mapped customer Luckily for AusNet, the Customer Forum’s own research,
public with To work directly
journeys to identify problems and has committed to engagement with customers and feedback has filled some
To partner with
How? The Customer Forum has played a public
unique in each role in
balanced with the public
the
and objective throughout the
To obtain public aspect of the To place final
information to
testing and challenging
assist them in
feedback on
analysis, alternatives
process to ensure
AusNet
that publicServices’
concerns proposal.
decision including
the development The
decision making
in the hands of the
tangible actions (including additional customer focused of the gaps.
understanding and aspirations
the problem,
and/or decisions.
Forum’s influence has beenunderstood narrowed
are consistently
and the
inidentification
scope ofby the
public.
resources) to address them. This process was thorough and
alternatives, and
preferred solution. The Customer Forum has clearly challenged AusNet’s plans
opportunities and/ considered.
agreement between the Customer Forum, AusNet and the
or solutions.
is already delivering real improvements to AusNet’s
and forced a reconsideration of issues from customers’
AER at the beginning of the process, on the basis of customers.
perspectives which has delivered a much improved
se to the manageability, the ability to influence the outcome, and the
So what? AusNet has been challenged by the Customer proposal.
direct link to customer preferences.
We will work with
As aWe result,
will look to
the Forum’s
We will keep you you to ensure that you for advice
Forum to frame its investments in terms of costs and
influence has been unfortunately
informed, listen to
limitedin formulating
your concerns and
in some areas.
and innovation
The degree to which AusNet has ‘rethought’ its approach
benefits to customers and has done a commendable job in
and acknowledge aspirations are
concerns and directly reflected solutions and
We will keep you
aspirations, and in the alternatives incorporate
We will implement
shows the value of the engagement process. However, it
informed.
AusNet has used a variety of engagement techniques
provide feedback developed and your advice and
what you decide.
demonstrating tangible benefits in its Draft Proposal,
on how public input provide feedback recommendations
also shows the journey of customer focus and cultural
influenced the on how public input
ranging from online and telephone surveys, interviews,
into the decisions
particularly in terms of benefits customers receive from
change that is yet to be completed within AusNet Services.
decision. influenced the to the maximum
decision. extent possible.
focus groups and ‘deep dive’ sessions with stakeholders. smart meters.
Spencer&Co | May 2019
he IAP2 guidelines, the process we ran sat in The People’s Panel was a deliberative process, a
aborate’ level of engagement on their spectrum
c participation. We worked with the People’s
develop a set of recommendations, which
method of engagement in which participants take
multiple points of view into account, and discuss
issues and options, before forming their own view.
5
en passed to our Board for consideration.Energy industry transformation
Megatrends Government policy The benefits of flexible grids
AusNet Services has considered the future energy The Victorian Government’s renewable energy targets of The programs put forward by distributors are designed
market and the transition required for networks to 25% by 2020 and 40% by 2025 is driving an increase in to gain better ‘behind-the-meter’ asset information.
accommodate the future needs of customers. The trends connections of large scale wind and solar generators to There is little discussion in the proposals about why this
identified by AusNet include growing solar use and the the network and provides incentives for households to information is not already available through smart meters
desire of some communities within its franchise area to install PV on their roofs. given that import and export data is recorded on
become entirely supplied by renewable energy. separate channels within the meter, and already available
The impact on the distribution network is being to the distributor. Furthermore, retailers have information
AusNet has focused its attention on addressing identified by increasing numbers of voltage complaints about customer assets which, could be shared with
immediate issues that customers face today. While this is from customers in areas of high solar penetration. While distributors in future.
key to good customer service, consideration of mega this impact is being seen in pockets of the network to
trends is also important as it shows that the business has date, distributors predict that voltage issues will become Businesses are starting to make greater use of metering
examined a range of different futures that it may face more widespread as solar penetration increases. data already available to identify issues on the network.
and acknowledges that the solutions required to address It is reasonable to expect that further data analysis will
future challenges will be different to those that have There is much talk of customers’ solar systems being identify other benefits to the networks that will lower
been available in the past. ‘constrained off’ to prevent export at times of peak costs in future.
network load. What we have not yet seen is analysis
Discussion of these issues demonstrates skill in about whether this constraint is likely to occur a lot of the The pursuit of greater information must be paid for by
communicating complex ideas to customers and time or at only short intervals. benefits to customers. It is not sufficient that customers
foresight in being able to link these concepts to business pay for more information to be collected and stored
needs today. We would expect the distributors to apply the same level without a benefits case being clearly articulated.
of analysis that is applied to risk when building and
replacing network assets to also be applied to this issue.
We would expect better underlying analysis of the
problem to occur before a wide-spread investment
programs is implemented to enable control of
Distributed Energy Resources (DER) takes place.
Spencer&Co | May 2019 6AusNet revenue
AusNet Services forecasts rising revenues over the AusNet Service RAB is forecast to rise by $226m in real AusNet has claimed $172.2m of incentive payments in
forthcoming period 2021-25. terms over the period ($739m in nominal terms). the 2021-25 period ($95m from Efficiency Benefit
However, the RAB is forecast to fall on a per customer Sharing Scheme (EBSS) and $85m from Capital Efficiency
The revenue path is predicted to rise by 2.6% compared basis. This is an important consideration for future Sharing Scheme (CESS)). This is a significant driver of
to the current period. This is despite a lower Weighted affordability and sustainability of costs. higher revenues in the 2021-25 period.
Average Cost of Capital (WACC) being applied to
07 REGULATORY PROCESSES
Regulatory Asset Base (RAB) in future which we would So, what else is driving revenues up? AusNet’s current determination shows that its forecast for
expect to drive reductions in revenues and prices. So depreciation is lower in 2021-25 ($548m) compared to
what is driving costs up? Operating costs are rising. Step changes contribute 2016-21 ($943m) period and the tax allowance is also
$20m over the period although only $4m per annum. forecast to reduce from $143m in 2016-21 to $98m in
AusNet’s forecast capex is lower in the 2021-25 period AusNet expects base year costs to rise by between 0.6% 2021-25.
than it is in the current period, despite a rise in
replacement capex. Customer connection capex is
7.1 Network Services
and 1.18% per annum which contributes $66m over the
period. A further $96m is included for Guaranteed AusNet has included detailed tables in appendices to its
significant, but this is offset by customer contributions Service Level (GSL) payments, debt raising costs and Draft Proposal showing the breakdown of the revenue
and lower forecast augmentation expenditure. Revenue
reallocation of costs from metering to thebuilding
distribution blocks building blocks for the forthcoming period. This is very
business. As we are a regulated business, we are required helpful.
to A presentation
Our Plan for the ofnext
current periodperiod
regulatory building blocks
is calculated
make an estimate of how much revenue we willwould need also using
be useful context to better understand whatIn
the AER’s post-tax revenue model (PTRM).
$M
AusNet has not applied the AER’s productivity factor of
in order to cover our costs, invest for the futureisand this model,
driving revenues in total
eachrevenue
periodisand
estimated
reasonsas why
the sum
750
0.5% to its forecast, but intends
provideto applies
a return the shareholders.
to our AER’s revenues are forecast to be higher in future than know
of a number of different types of costs we in theas
700 decision in its formal proposal in July. ‘building
current period.
blocks’.
650 Figure 7.1 The revenue building blocks
600
Regulated Revenue
550
500
450
400 Revenue = Rate of
Return
Regulatory
Asset Base
Value
Depreciation
Operating
expenditure
Taxes
Incentive
mechanism
outcomes
24
22
18
23
20
19
17
16
21
25
AR
20
20
20
20
20
20
20
20
20
20
YE
2016–17 – Actual 2021–25 – Forecast
2018–20 – Expected Efficiency income payments
Figure 6.2: Total distribution revenues 2016 to 2025 ($M, $2020)
Forecast costs (building blocks)
Spencer&Co | May 2019
$M
800 7
By adding the above building blocks together, we Our regulated asset base (RAB) consists of the assets
750 derive our proposed total requirement for annual we have historically invested in that are not fully
700 revenue during the next regulatory period. We receive depreciated and our investment in the network madeAusNet - total capex
Lack of project detail leads us to comment on trends The Customer Forum scrutinised the major augmentation The replacement expenditure forecast presented in the
and replacement projects. Unfortunately, the total value of Draft Proposal is not supported by failure data or condition
AusNet Services forecasts an 18% reduction in capex for these projects was very small in the context of the overall information. This information is perhaps too detailed for the
the 2021-25 period compared to the current period. This program. AusNet’s most significant expenditure lies in Draft Proposal, but we would expect AusNet to
represents a return to a more ‘normal’ state of expenditure replacement programs - replacement of poles and demonstrate how its proposed levels of replacement
following 10 years of inflated expenditure driven largely by conductors. Having realised this gap, AusNet hosted a compares with the AER’s Repex model and how it has
bush fire safety concerns. The bulk of bush fire safety deep dive session to invite detailed comment on the considered the needs of the network of the future. Given
programs in response to Black Saturday 2009 have now proposed programs. significant under-delivery of replacement in the current
been delivered and capex is forecast to return to more period, the narrative will also need to address deliverability
normal and lower levels. AusNet Capex of the repex program.
Condition based
REFCL program 160 Actual below conductor, cable and
finishes in 2023. Condition-driven allowance early pole replacement.
Expenditure to Strong connections 140 Condition station, pole in period due to Sharing of
meet higher and network 120 driven & conductor re-prioritisation communication costs
than expected Step up in safety Delivering on the replacement required replacement replacement resulting from REFCL with metering business
demand expenditure REFCL program in later years 100 140
$M
600
$M
80 120
60
500 100
40
400 80
20
0 60
300
2021 2022 2023 2024 2025 40
200 Replacement Connections Augmentation 20
100 Non-network Capitalised overheads 0
YEAR
2014
2024
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
2022
2023
2025
0 Actual/Forecast Major replacement projects Allowance
YEAR
2014
2024
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
2022
2023
2025
Actual/Forecast Major growth projects Solar integration Major replacement projects
AusNet’s overall capex forecast is down 18% but Figure 7.10: Replacement capex 2006 to 2025 ($M, $2020)
Innovation Allowance replacement expenditure is 21% higher than the current
Response to REFCL program
Figure 7.5: Total capital expenditure (including customer contributions) period. According to AusNet, this is due to the prioritisation 2006–2008 data
bushfire royal
commission
finishes in 2023
and other major
2006 to 2025 ($M, $2020) of safety programs over replacement in the last period and equals to 0.03
Million
recommendations
and our initiatives
REFCL
program
safety programs
completed
a re-categorisation of programs as replacement expenditure 200
$M
180
Network growth (including > Work to ensure the REFCL technology
Other drivers of a lower forecast program include lower in the 2021-25 period that would have been categorised as 160
major can continue to operate as the network
140 projects) P
grows or changes through new
augmentation requirements due to lower demand growth, safety programs in prior periods. While this explanation 120 growth expenditure is forecast to
Network connections, feeder extensions and
be100
$127 million ($2020) over 2021 to 2025.
and steady IT costs. makes sense to a degree, it does not explain the significant This80investment to expand the capacity
undergrounding. This is separate to
the REFCL program which is focused Whi
Proposed capital In practice, this might mean that the
Customer Forum could recommend deferring
under-spend in replacement and safety programs seen in of the
60 network is forecast to be 3% lower
compared
40 to 2016 to 2020 expenditure.
on the initial construction and operation ca
of the technology.
We support AusNet’s
expenditure negotiatedefforts toprojects
forecast
and hencea reduce
moreprices consistent
for all the current period. We are left to question the veracity of The20$127 million includes $12.8 million
with the
level Customer
of capex Forum a future
that reflects customers steady state.
in the short This is
term. However,
the replacement capex forecast, particularly as it contributes
($2020)
0 for the two projects at Clyde North
Network safety investment
2014
2024
and Doreen that have been negotiated and
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
2022
2023
2025
this would increase risks of interruptions un
important forhas
The Customer Forum energy affordability.
negotiated with us to customers in areas supplied by these close to 50% of the capital program (net of customers
agreed with the Customer Forum Safety
in Figure 7.11).
(as shownREFCL Safety capex (including the REFCL project)
Allowance reduc
projects subject to negotiation. In addition, is forecast to be $259 million ($2020) over
on specific aspects of our capital expenditure som
program that involve a trade-off between the Customer Forum might recommend contributions). The remaining network growth investment
2021 to 2025. As shown in Figure 7.12, this is
Figure 7.12: Safety capex 2006 to 2025 ($M, $2020)58% lower than expected expenditure in the
in lo
prices and the services that directly impact non-network options such as demand includes expenditure on the following
2016 to 2020 period. This does not reflect tha
customers. These are: management, embedded generation and programs (these have not been negotiated is ob
a reduction in our commitment to safety or
batteries to provide network support and with the Customer Forum): certa
in safety outcomes. It reflects the fact that
Spencer&Co | May 2019
> Major network growth projects:
8
manage risks in the short term. > Upgrading the network to integrate
Maintaining significant investments in required safety
projects to increase the amount of solar.legacy
This system
includes $20 million
Early ($2020) programs will be completed
In line with during the 2021
electricity that can be delivered by the and AMI modernisation ICT modernisation historicalsafety investment
to 2025 period. Network
to upgrade the network program
to allowandfor
Major growth projects
investment AMI for key systems. expenditure
network in areas where we have strong solar exports, where economic, and $4.3 has not been negotiated with the Customer Wha
70
$M
customer and demand growth million ($2020) for network sensors. Forum. woul
The Customer Forum has considered our two More detail on these investments is
60
> Major network replacement projects:
proposed major network growth projects in provided in Chapter 8
projects to replace large network 50
the 2021 to 2025 period. The projects are at > Expanding the capacity and voltageAusNet - Repex
Deep dive engagement sessions have helped address the Evidence of ‘community mindedness’ across AusNet’s Information about how AusNet has considered materials and
lack of detail for replacement programs customer base could help determine the optimal size and the costs of wood versus concrete construction would
timing of the portfolio, particularly where projects deliver demonstrate due diligence, as would information about the
AusNet provided significant detail about its replacement significant benefits of improved reliability to a small number prevalence and forecast levels of staking poles to extend
program during deep dive sessions. However, a lack of of customers and this can be delivered at relatively low cost asset life for lowest cost.
description of asset management processes and failure rates to all customers.
underpinning replacement programs leave gaps in the story There is evidence of collaboration and sharing of asset
that prompt questions about the size and timing of ‘Community mindedness’ is evident in customers’ clear failure and operation information between Victoria
programs. Examples supported by technical detail provide a preference to pay a very high price to reduce the risk of distributors which is pleasing to see. It is important that
level of comfort that appropriate data does exist and bushfires and in the views of customers investing in PV and expected future benefits of new technologies are reflected
assessments have taken place in support of the investment batteries. AusNet should review the insights drawn from its into the forecast (even if this is based on experience in other
decisions. engagement program to see if a similar case can be made to franchise areas).
support the timing of major projects.
Major projects have been presented as a portfolio of AusNet has generally presented its programs and shown
investments. This approach tries to mimic the portfolio that a AusNet’s pole replacement program would benefit from a forecasts in the context of at least three periods (last period,
business would see, but the data presented did not show description of technical drivers including failure rates and current period and forecast period). We commend this
the reliability and cost impacts of the individual projects trends that support the program. Presenting the program in approach and hope it continues in the July Proposal.
which makes it impossible for stakeholders to determine an terms of historic spend would also be useful.
optimum package of investment. AusNet’s conductor replacement program should be
AusNet’s explanation should include the fact some asset presented in context of the AER’s Repex model. Care should
In the end, the cost difference between the portfolio options replacement is achieved through asset relocation, customer be taken to ensure the Repex model takes account of
presented by AusNet is very small and the cost to individual connection and other augmentation work and that effort has Powerline Replacement Fund (PRF) expenditure in the past
customers likely to be outweighed by credit card surcharges been made to avoid double-counting program to ensure that modelled outcomes reflect underlying drivers
incurred when paying their bill! Despite the small cost, the requirements. This is particularly important in relation to of failure rather than external factors that have brought
benefits to individual customers were unclear in the analysis. proactive bushfire work which has reduced traditional drivers forward expenditure in codified areas (i.e. PRF compliance
of pole failure to such an extent that the largest driver of program). Furthermore, cost estimates for Single Wire Earth
AusNet’s engagement process together with the insights failure is now third party damage. This information will be Return (SWER) replacement in codified areas provided in the
from the Customer Forum did highlight that the economic useful in calibration of the Repex model. To that end, we deep dive sessions appear very high and require further
and social impact of outages is very significant to some encourage early engagement with AER on the Repex model scrutiny.
communities and businesses, particularly in regional towns. to understand drivers of difference between forecasts and
The analysis provided by presented tradeoffs did not show a modelled outcomes. Finally, AusNet mention that a larger portion of smart meter
comparison of similar units (i.e. $cost/$benefit (Value of communication equipment replacement is included in its
Customer Reliability (VCR) rather than $/min). Further, replacement program. A better explanation of what this
Ausnet did not show the probability of customers having actually includes would be useful to justify this program and
outages - be it 2% or 90% chance. support the overall increase in replacement expenditure.
Spencer&Co | May 2019 9AusNet - augmentation & reliability
Safety remains a priority Other distributors have undertaken analysis to show the We note that AusNet intends to seek an adjustment to
net present value of options and have estimated the the STPIS targets to reflect the higher likelihood of failure
AusNet has re-categorised capex from ‘safety’ to future cost of piecemeal work on the network to alleviate should major projects negotiated with the Customer
‘replacement’ in the 2021-25. We are comfortable that constraints, a complete ‘build out’ approach to eliminate Forum be delayed compared to AusNet’s original timing.
this change does not reflect a change in the priority of future constraints, or the roll-out of smart devices to We would encourage a rethink of this strategy as it
safety for AusNet Services, merely a change in allow more flexible grid management. AusNet has not appears somewhat gratuitous in light of STPIS rewards in
categorisation. been as transparent in its considerations or analysis. The recent years.
Growth capex is forecast to remain steady but is AER is likely to heavily scrutinise investment in flexible /
smart grid programs. It is in AusNet’s interest as well as 4.0
Interruptions per customer
under-supported with analysis in the proposal
those of customers for AusNet to better explain and 3.5
AusNet’s forecast for growth capex is that it will remain justify the proposed expenditure in growth related 3.0
steady. Two major growth projects at Doreen and North programs. 2.5
Clyde will be negotiated with the Customer Forum and
2.0
contribute to $12.8m (10%) of AusNet’s augmentation Customers have paid for improved reliability
1.5
program. The remaining $114m of the program is made We note the improvements in reliability in AusNet’s 1.0
up of feeder programs to address localised constraints, network that have occurred in the past two decades. 0.5
increased capacity and voltage management of the Low Improved asset management is a major contributor to
0.0
Voltage (LV) network, a $20m program to support solar
YEAR
improved reliability outcomes across the NEM.
2000
2008
2002
2003
2007
2004
2001
2010
2006
2009
2005
1999
2013
2016
2015
2017
2012
2014
2011
export into AusNet’s network and a further $4.5m for
network sensors. In AusNet’s case, reliability has also improved as a result
of the proactive nature of the mandated bush fire Figure 3.3: Total number of unplanned interruptions per customer
There is no information provided to justify the $89.7m response following Black Saturday. AusNet acknowledge AusNet STPIS rewards
program of feeder augmentation or the program to that approximately $1billion of capex has been brought 60
increase capacity and management of the LV network. Number of unplanned interruptions per...
Interruptions per customerMillions
forward through the mandated Powerline Replacement 50
This is a significant gap in AusNet’s proposal. Program (PRL) and the Rapid Earth Fault Current Limiter
6
40 6
Interruptions per customer
530
In relation to solar, AusNet discuss the options available (REFCL) program. 5
420 4
to address solar exports in Chapter 8 of its proposal. The Service Target Performance Incentive Scheme 310 3
AusNet refers to analysis undertaken but has not (STPIS) scheme has been in place for AusNet for several 2 0
2
explained how costs and benefits for the chosen periods. AusNet has received rewards totalling $189m 1-10
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1
program have been calculated or the cost / benefit from STPIS since 2010. 0-20
0
2000
YEAR
2008
2002
2003
2007
2004
2001
2010
2006
2009
2005
1999
2000
2013
2016
2015
2017
2008
2012
2002
2014
2003
2011
2007
2004
2001
2010
2006
2009
2005
1999
2013
2016
2015
2012
2014
2011
analysis of the various options considered. Source: AER Benchmarking RIN data, Tab 3.1 Revenue
Figure 3.4: …urban customer Figure 3.5: …customer on short rural feed
Spencer&Co | May 2019 Note: Major storm events are excluded from this data. Short rural feeder lines areAusNet - non-system capex
Information & Communication Technology (ICT) capex AusNet provided little information about the composition of Innovation
the ICT program in its proposal other than a brief description of
AusNet forecast $168m ($2020) of expenditure on ICT in the AusNet has made considerable effort in its proposal to argue
activities included ranging from improved communication
2021-25 period (an average of $38m per annum). However, the the need for an innovation allowance of $11.5m in addition to
systems, integration of solar information into asset systems, and
document states thatResponse a further $50m is allocated REFCL
to the the Demand Management Incentive Allowance (DMIA) ($3m).
to program improved system security. Additional information provided in a
distribution
that provide
business
2006–2008 data
equals to 0.03
from
commission
expenditure
bushfire royal
benefitsrecommendations
to the distribution REFCL
on metering systems
finishes in 2023
and other major
businesssafety
over the five
programs
?
Deep Dive session focused on $9m of opex step changes being The innovation allowance is be negotiated with the Customer
Million and our initiatives program completed sought for IT as a result of transferral of data and systems to the Forum under the New Reg framework. To date the Customer
year
200 period. (Note: This $50m is not included in ICT capex
$M
180
cloud and heightened CAPITAL IT security. A further Deep Dive session Forum has supported $7.5m for innovation based on feedback
charts for the distribution business (see 7.13 below) or in EXPENDITURE
160 on ICT provided more detail on the proposed Customer that customers do not want to pay for research into electric
metering
140 capex. This lack of transparency should be rectified in PROPOSAL FOR
Information Management System (CIM), and upgrade of the vehicle related issues that is perceived to benefit only a small
the finalised regulatory proposal).
120 2021 TO 2025
100 Outage Management System (OMS). number of customers. AusNet must make a case for how this
80
AusNet states that ICT capex will be lower on average than in Which aspects of our research will benefit all customers.
60 In the second
capitalDeep Dive session, AusNet was able to provide
expenditure
the40previous 10 years, but this comparison includes a period of proposals for do you
cogent arguments the need for both CIM and OMS, but the Several of the projects included in AusNet’s innovation program
very
20 high ICT spend (higher than the AER allowance at that support, taking
0 presentation of benefits was focused on business benefits
into account the appear to be projects required for the proper management of
time).
2014
2024
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
2022
2023
2025
rather than customer that
understanding benefits, despite research findings that the future network, and as such, are part of a forward looking
These issues hide the fact that ICT spending in 2021-25 is
Safety REFCL Allowance reduced expenditure
there was customer support in for this type of investment. distributor’s ‘core business’. AusNet should consider its
some areas will result
forecast to be $10m higher on average than in the current in also
lowerhasreliability and categorisation of projects to ensure they are truly innovation
Figure 7.12: Safety capex 2006 to 2025 ($M, $2020) AusNet a challenge to explain to customers what
period. that AusNet Services projects, rather than part of core business improvements,
benefits they received
is obliged to spend on in the current period as a result of
particularly given that competitive businesses innovate as part
significant
certainexpenditure,
things becauseand why further investment is required.
of its statutory of normal business. It would be worth explaining how AusNet
Maintaining
legacy system Early In line with A detailed breakdownobligations? of projects showing drivers of invests its own money to innovate and be rewarded under the
and AMI modernisation ICT modernisation historical
investment program and AMI for key systems. expenditure expenditure, as well as costs and benefits to the network and to incentive schemes, and explain why the projects put forward as
What changes, if any,
70 its customers is like
required
to see?before stakeholders could support innovation projects do not fit these schemes.
$M
would you
60 almost $50m of expenditure per annum.
50 It is important that AusNet explain the links and differences
40
There is significant opportunity for AusNet to hone the between the ICT program and the innovation program.
30
messages about ICT investment (both current and future) in its Furthermore, AusNet should be clear on why projects have
20
proposal and provide information that makes these investments been chosen and how they contribute to the wider body of
10
tangible to those who are ultimately paying for them. knowledge within the NEM. Customers are keen that networks
0
share information and are not paid to recreate trials that have
There is no discussion of other non-system related capex for
already been proven elsewhere. Finally, findings from trials
2014
2024
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
2022
2023
2025
items such as fleet and buildings. We assume that this
Actual/Forecast Allowance funded by innovation allowances need to be shared within the
expenditure is categorised within some of the other programs
Figure 7.13: Information technology capex 2006 to 2025 ($M, $2020) industry so that all customers can benefit.
(i.e. replacement) but this is unclear.
Spencer&Co | May 2019
Information and communications
technology investment
> improved integration and management
of solar and other distributed energy
resources in our network. This will support
expenditure of $42 million ($2020) over
the previous 10 years from 2011 to 2020.
11
The proposed information and improved reliability while maximising The efficient planning and operation of our
communications technology (ICT) investment customers’ solar exports to the grid. network is also increasingly reliant on the
is focused on gradually modernising our smart technologies in place on our network
> increased information and ICT systems (such as meters and switches) that provide
business tools during normal life cycleAusNet - forecast credibility
Total capex forecast by AusNet shows significant AusNet acknowledged during Deep Dive discussions AusNet Services closing RAB ($m Nominal)
underspend during the current period. This prompts that the reprioritisation of REFCL expenditure was a 6000
serious concerns about the accuracy of AusNet’s forecast contributing factor to the underspend. It is not clear why
5000
for 2021-25 particularly in the context of AusNet’s the reprioritisation of capex negatively impacted
forecast ~$100m reward under the Capital Efficiency AusNet’s ability to deliver its planned program. Were 4000
Sharing Scheme (CESS) - a scheme that rewards there delays in internal planning approvals for non-
businesses for efficiently underspending their capital REFCL projects? Were there delivery issues? Did AusNet 3000
allowance. over-forecast its repex and safety requirement?
2000
As context for the forecast for the 2021-25 period Ultimately, customers should know whether the CESS is
1000
forecast, it would be beneficial to understand just how rewarding efficient behaviour, happenstance, a lack of
much of the a 20% (or $267m) reduction in capex accurate forecasts or an inability to drive project 0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
forecast in the current period is due to external factors approvals through the internal bureaucracy.
outside AusNet’s control (changing demand or fewer
customer connections) and how much can be attributed Examination of AusNet’s current period capital program
to AusNet’s innovative risk management and/or efficient will help to establish the credibility of AusNet’s 2021-25
delivery mechanisms. capital forecast.
AusNet’s RAB is forecast to grow over the period by
more than $700m in nominal terms. A growing RAB drive
REFCL program
finishes in 2023. sup revenues which ultimately must be paid for by
Expenditure to Strong connections
meet higher
than expected Step up in safety Delivering on the
and network
replacement required
customers.
demand expenditure REFCL program in later years
600
$M
AusNet should take care to consider what the long term
500
profile of its RAB is and how it is taking steps to ensure
400
that RAB growth remains steady, particularly on a per
300
customer basis, and helps to ensure ongoing
200
affordability of its network services.
100
0
YEAR
2014
2024
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
2022
2023
2025
Actual/Forecast Major growth projects Solar integration Major replacement projects
Innovation Allowance
Figure 7.5: Total capital expenditure (including customer contributions)
2006 to 2025 ($M, $2020)
Spencer&Co | May 2019 12
Proposed capital In practice, this might mean that the
Customer Forum could recommend deferring
expenditure negotiated projects and hence reduce prices for all
with the Customer Forum customers in the short term. However,AusNet opex
AusNet has discussed the build-up of its opex forecast with Step changes - are they justified? IT security step change ($1.0m) - All distributors are facing
the Customer Forum but its approval lies with AER heightened IT security requirements. Again, not all are
AusNet are seeking step changes worth $4m per annum seeking step changes to recover costs. Some distributors
Base year - is it efficient? ($20m additional opex over the period) to reflect one-off intend to pay for these costs by seeking further operational
changes to operating costs. savings. Given the small cost of $1m requested, we would
AusNet’s base year opex of $209m reflects the impact of
AusNet’s transformation program over the last two years REFCL step change ($8.6m) - Little information has been consider that internal savings could be found to cover this
which has reduced underlying opex during the current provided about the REFCL change. This is a gap that should cost.
period. AusNet proposes to use 2018 operating costs as be addressed in AusNet’s proposal, particularly as it is the 5-minute meter data step change ($2.6m) - AEMC
the base year for the opex forecast. We would recommend largest step change in costs being sought. accepted that the move to 5-minute settlement would
that a base year of 2019 is more appropriate as it will be the generate some costs for networks. However, AEMO has not
latest full year of data available to the AER when making its IT cloud step change ($8.0m) - Most distributors are
migrating parts of their IT systems to the cloud. However, yet finalised its implementation plans, and has recently
final determination, and is likely to reflect even more lodged a rule change to amend the rule to minimise
savings from AusNet’s transformation program. not all are seeking step changes to recover the uplift in
operating costs. Some distributors have found that savings implementation costs to the market.
AusNet performs relatively well in the AER’s opex in software leasing and annual upgrade costs are sufficient A number of submissions made to the AEMC alluded to
benchmarking analysis. The recent transformation program to offset the increase in cloud costs. increases in data transmission and storage costs. Other
has improved the performance and based on analysis using submissions argued that such costs were inflated. We
2017 data, AusNet sits in the top 5 distributors in the NEM. AusNet explained in deep dive sessions that the IT cloud
step change is made up of several IT systems ranging from recommend that AusNet review this step change and
This reflects a relatively comfortable position for AusNet. ensure that it reflects the most recent rules and
However, transformation programs occurring in other outage management, customer management, work force
collaboration, HR etc. These systems are designed to implementation plans from AEMO.
distributors may change the relative performance in future
years. improve the quality of information, improve information Trend - is it reasonable?
sharing and drive business efficiencies (i.e. reduced number
Presentation of the base year costs does not show the of cancelled outages due to proper resourcing being in AusNet intends to use the AER’s methodology to establish
allocation of costs from smart meters that AusNet intends to place to do the work). We would expect that in many the trend of forecast cost escalation. We anticipate that the
allocate to the distribution system. These costs are not instances, these systems will save AusNet money which AER will update its forecasts closer to the time of the
shown in the metering business forecasts either. This gap should be used to offset the costs. determination and that this update will reflect changes in
should be remedied in the proposal. We encourage AusNet economic factors such as recent softening in inflation
to look to the Customer Forum’s explanation of this issue as We encourage AusNet to review this step change in light of expectations and labour costs.
it was clearer than that included in the Draft Proposal. future savings from improved business efficiencies, as well
as software lease and upgrade savings that may not have
been taken into account.
Spencer&Co | May 2019 13Incentives
An incentive regime with added incentives. ✴ The F-factor applies in Victoria and incentivises Is the additional revenue received by businesses
businesses to reduce the number of fire starts commensurate with benefits received by customers?
The simple building block model has been amended caused by network assets.
over time to close gaps that, left unchecked, could The EBSS and CESS schemes provide 30% of ongoing
lead to perverse business behaviour. A decade, 5 schemes and more than $2 billion later, benefits to businesses and 70% to customers over the
have customer outcomes improved? long term. If $2B of benefit has been earned by
✴ The EBSS ensures businesses have consistent
businesses, this suggests $4.8B worth of benefit has (or
incentives to reduce operating costs throughout The number of schemes in place demonstrates the
will) flow to customers. This is increased further to over
the regulatory period. Without this mechanism, complexity of the current regulatory framework. The
$5.0B+ based on the Queensland decision to return
businesses have an incentive to inflate operating EBSS was first introduced in 2006 and over the last 9
most of the benefit to customers by not recovering
costs on which the future period opex will be set. years, other schemes have been in introduced. For
scheme entitlements through prices in the forthcoming
Victoria, the EBSS will be applied to a fourth regulatory
✴ The CESS ensures businesses have consistent period.
period in 2021-25.
incentives to reduce both operating and capital Customer feedback received by all businesses during
costs. Without the CESS, businesses would receive By the end of 2020, the incentive schemes in total will their pre-proposal engagement activities is that many
a financial benefit from reducing opex in favour of have generated business entitlements for more than customers are struggling with energy affordability.
capex with no incentive or sanction for spending $2B of additional revenue for distributors in the NEM. Others consider current services to be expensive. Most
capex above the allowance. Over $500m+ of revenue has been awarded to date. do not want to pay less for poorer reliability, but do
This revenue is over and above the regulated return on not want to pay any more for improvements to
✴ The STPIS ensures businesses do not reduce opex
assets awarded by the AER via the WACC. services.
and capex at the expense of reliability and
customer service outcomes. Businesses are In NSW, the AER has awarded $400m+ in incentive
Within this context of significant extra revenues being
penalised for reductions in service and rewarded for payments in its recent draft determination.
earned by businesses, a lack of appetite from
improvements above pre-set reliability and service
The Queensland businesses have calculated customers to pay more, and heightened expectations
targets.
entitlements of $570m+ of benefits from the schemes of better customer service, should yet another scheme
✴ The DMIS was originally designed to ensure that based on costs savings over the last regulatory period. be introduced? Do businesses require an incentive
business did not face a dis-incentive to invest in However, Energy Queensland has said it does not mechanism to operate to improve customer service
demand management under a price cap. intend to recover the revenue from customers in the outcomes? Are the recent changes to the framework
forthcoming period. that encourage greater focus on customers and
✴ The DMIA is designed to provide businesses with a stakeholder feedback sufficient to improve customer
positive incentive to pursue demand management The Victorian distributors intend to claim outcomes? Or do businesses respond better / quicker
solutions over traditional network solutions in approximately $605m of incentive benefits from the (or only respond) to explicit financial rewards?
response to network capacity constraints. current period through prices in the forthcoming
period (2021-25).
Spencer&Co | May 2019 14Customer incentive scheme
What gap is the CSIS filling? What is being proposed? The devil is in the detail.
Two of the five Victorian distributors have put forward a AusNet Services suggests that the scheme be based on Issues to consider is designing an incentive scheme:
Customer Service Incentive Scheme to be applied in improvements to the following parameters:
❖ Sufficiency and consistency of data across
2021-25 period. The schemes put forward differ in their
❖ $1m to planned outages ( 28.5%) Distributors is likely to be problematic. Are there
design, but are based on the following design principles:
consistent definitions of what constitutes a complaint?
❖ The STPIS focus on telephone answering is
❖ $1m to unplanned outages (28.5%) What element of the connection process will be
antiquated as customers predominantly use other ❖ $1m to connections (28.5%) measured? Data cleansing may also be required.
digital channels to access information.
❖ $0.5m to complaints (14.5%) ❖ Target poorest performance. Issues of process
❖ A new Customer Service Incentive Scheme (CSIS) improvement are easier to fix for all customers than
should be designed to improve customer service (not The targets will be based on most recent Customer issues such as complaints which are specific to an
reliability) outcomes. Satisfaction surveys. The surveys have been in place individual customer and inherently subjective. Targets
since early 2018. should be set to improve poorest performance rather
❖ The revenue allocated to telephone answering within
than set to encourage marginal improvements for the
STPIS should be applied to the new scheme. Jemena suggests that the scheme be based on
bulk of customers.
improvements to a range of different parameters the
❖ Benefits and penalties should be applied existing 0.05% revenue being applied as follows: ❖ Potential to pay twice when customers don’t want
symmetrically within a cap and collar mechanism.
to pay extra at all. A step change in improved
❖ Complaints (33%) - Reliability of supply, Admin/
Targets should be set on historic data sources (source customer service outcomes is expected in the next
❖
customer service, connection or augmentation
differs between distributors). period based on committed projects within Draft
❖ Customer satisfaction - Customer connections (33%), Plans and ongoing pressure from customers for better
The businesses that propose a Customer Service Call Centre performance (33%) service. Is this the right time to be applying incentives
Incentive Scheme claim that it will help internalise for improvement? Customers could end up paying for
customer focus in the business and drive improvement Citipower, Powercor and United Energy have not the cost of IT systems and pay again when outcomes
programs, particularly as many could be self-funding. outlined plans for a Customer Service Incentive Scheme improve above target levels. To avoid this, targets
in their draft plans. need to be forward looking and reflect a new baseline
Neither business is proposing a paper trial which was
It would be in customer’s interest if a single scheme was of improved customer service.
used when STPIS was first implemented.
negotiated between businesses and put forward jointly. ❖ A paper trial could be used to iron out data issues
This would avoid a ‘battle of the schemes’ and for both Jemena and AusNet Services, and
demonstrate collaboration in the interests of customers. introduced more widely following a successful trial.
Spencer&Co | May 2019 15You can also read
