1. Better Regulation Expenditure Forecast Assessment Guideline 12 February 2013

2. Agenda 13:15Introductions 13:30Discussion of overall program and AER’s objectives 14:00Recap of issues paper and opportunity for stakeholder feedback 14:45Break 15:00Proposed forward work program 16:00Future meeting logistics 16:15Any other business 2

3. Overall program and AER objectives 3

4. Work program and AER Objectives Guidelines –general techniques and information requirements Annual reporting –monitoring of NSP efficiency –transparency of NSP performance vs expenditure –early identification of issues for network determinations Network determinations –refine and use techniques to set allowances 4

5. Work program Framework and Approach RINs/RIOs Benchmarking reports Regulatory determinations Expenditure assessment guideline Expenditure assessment approach RINs/RIOs 5

6. Working group meetings Frank and ‘off the record’ discussion – detailed minutes will not be taken, just key outcomes Material considered by working group will be published Not here to make decisions but consensus may be possible Pending availability and importance of topic, may be chaired by AER board member otherwise senior AER staff In addition to, and informed by, written submissions once received 6

7. AER Experience Current practice –Revealed cost methodology (incentive tools of economic regulation, taking historic costs as the base) –Bottom-up engineering review Limited use of benchmarking –Limitations –Response to incentives? –Technical appraisal and information asymmetry –Data integrity 7

8. AER’s objectives Improve our approach to expenditure assessments under revised NER Move from detailed, bottom up approach to overall reasonableness assessments Greater focus on benchmarking Open and transparent approach to regulation Recognition of data limitations and forecasting error Implementation costs have to be ‘worth it’ 8

9. This is the first step in a process Benchmarking is a big step Continual refinement as better data become available Gradual shift from current techniques Flexibility provided in framework and approach Guidelines subject to future revisions 9

10. Recap and discussion of issues paper 10

11. Recap of issues paper Purpose Objective – new benchmarking techniques Principles for how to select techniques Consultation approach (to be discussed next) Request feedback 11

12. Assessing efficiency as well as future circumstances (forecasting) Identification of assessment techniques –Those that have worked well –Others that are new or we wish to improve Potential for “first pass” model and more targeted assessments Relationship with incentive arrangements General considerations 12

13. Two detailed work streams Economic benchmarking –employs economic theory on the behaviour of firms to estimate relative efficiency and how this changes over time (TFP, DEA & SFA) Category analysis –approach to the assessment of expenditure categories 13

14. Economic benchmarking Holistic approach Focus on data requirements –Outputs: what are they? –Inputs: how should they be measured? –Environmental factors: what else should be taken into account? 14

15. Category analysis Categories matching factors that influence or explain costs – “driver” based approach Focus on benchmarking and trend analysis –eg cost per connection, per km of line Largely a continuation of existing reporting categories –New national definitions will require some change –Questions about level of detail required Recognition of differences between NSPs –Are these quantifiable and supported by evidence? –How/ when should they be accounted for? 15

16. Implementation issues Transition from existing reporting templates Annual reporting concurrently with determinations Different reporting years (calendar and financial years) Different cost allocation methods stakeholder engagement (guideline) NSP forecasting methodologies 16

17. Break Recommence at 3pm 17

18. Proposed forward work program 18

19. Forward work program Timing of workshops –How to deal with dependencies –Treatment of gas, distribution and transmission Workshop plan for economic benchmarking –Are the three phases appropriate? Are the individual workshop topics appropriate? Forward work program for category analysis –Are the four phases appropriate? Are the individual workshop topics appropriate? 19

20. Category analysis meetings datetopic 26 FebCategory selection 7 MarRepex, augmentation 19 MarConnections and customer driven 26 Maropex 11 Aproverheads 23 AprUse of actual data, base step trend, productivity change 7 MayCost allocation, accounting issues 16 MayRepex, augex and demand forecasting 28 MayRIN/RIO issues, first pass assessment, links with other guidelines, reconciliation of assessment methods 20

21. Economic benchmarking meetings datetopic 12 MarNetwork outputs Dx 14 MarNetwork Outputs Tx 19 MarNetwork inputs 30 AprOutput measurement & environmental factors Dx 2 MayOutput measurement & environmental factors Tx 7 MayNetwork input measurement 23 MayPrescription in the guidelines 28 MayRIN/RIO issues, first pass assessment, links with other guidelines, reconciliation of assessment methods 21

22. Other business 22