Top-down models of operating and capital expenditure

What do we mean by ‘top-down’? 2 Uses economic and engineering assumptions to estimate the level of expenditure required, given information on the drivers and network characteristics

How can we estimate future opex? 3 Year 1 Year 2 Opex ($m) Δ operating efficiency Δ input prices Δ network scale

Comparison of forecasts 4

5

How can we explain these differences? 6 Was 2012 an atypical year for some distributors? Do we have a different assumption about efficiency improvements? Commission estimate based on 0% annual productivity improvement Are distributors expecting input prices to grow at a different rate? Do the measures of scale used not capture expected future changes in network scale?

Was 2012 atypical? 7

NZIER forecasts of the Labour Cost Index and Producer Price Index (weighted 60:40)C 8 Commission estimate uses NZIER forecasts of the Labour Cost Index and Producer Price Index (weighted 60:40) Are distributors expecting input prices to grow at a different rate?

Do the measures of scale used not capture expected future changes in network scale? 9 The Commission model uses the following measures of network scale: historic growth in network length (network opex) regional population growth forecast provided by Statistics New Zealand (network and non-network opex) How does this compare to distributor forecasts of future changes in scale? total energy delivered to ICPs maximum coincident system demand

NZIER forecasts of the Labour Cost Index and Producer Price Index (weighted 60:40)C Do the measures of scale used not capture expected future changes in network scale? 10

Do more disaggregated or alternative models need to be developed? 11 Network opex: Routine and corrective maintenance and inspections Service interruptions and emergencies Vegetation management Asset replacement and renewal Non-network opex: Business support System operations and network support

How can we estimate future capex? (I) 12 Year 1 Year 2 Capex ($m) Δ capital efficiency Δ input prices Δ network performance ‘Adjustment method’

What is the appropriate level of (dis)aggregation? 13 Consumer connection Asset replacement & renewal System growth Non-network assets Asset relocations Quality of supply Legislative and regulatory Other reliability, safety and environment Subtransmission Zone substations Distribution & LV lines Distribution & LV cables Distribution substations & transformers Distribution switchgear Consumer type

How can we estimate future capex? (II) 14 Alternative approaches may be more suitable for some categories of expenditure ‘Absolute calculation’ approach focuses less on historical expenditure proportion of total expenditure or asset base unit cost x volume of activity

15 Asset health-driven expenditure on distribution and LV lines (%) How can the information disclosed help us better understand forecast expenditure on asset replacement and renewal?

Capacity-driven capital expenditure on sub- transmission and zone substations Is this explained by changes in peak demand and zone substation capacity?

Summary 17 Information disclosure provides additional information on the drivers of expenditure How can we amend the existing top-down model for opex to better understand distributors’ forecasts of expenditure? How can we develop top-down models for capex?