SA Power Networks cost pass through application for ... Decision - SA Power...AER Decision | SA Power Networks' vegetation clearance cost pass through 1 Final Decision SA Power Networks

AER Decision | SA Power Networks' vegetation clearance cost pass through 1

Final Decision

SA Power Networks cost pass through

application

for

Vegetation management costs arising from an

unexpected increase in vegetation growth

rates

July 2013


© Commonwealth of Australia 2013

This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be reproduced without permission

of the Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should

be addressed to the Director Publishing, Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT

2601.

Inquiries about this final decision should be addressed to:

Australian Energy Regulator GPO Box 520 Melbourne Vic 3001 Tel: (03) 9290 1444 Fax: (03) 9290 1457 Email: [email protected]

AER reference: 50720, D13/29251

Amendment record

Version Date Pages

1.0 30 July 2013 35


Contents

Contents ................................................................................................................................................. 3

Shortened forms ................................................................................................................................... 4

1 Summary ......................................................................................................................................... 5

2 Cost pass through application ..................................................................................................... 8

2.1 Cost pass through regulatory requirements ............................................................................. 8

2.2 SA Power Networks' pass through application ....................................................................... 10

3 Assessment approach................................................................................................................. 16

3.1 Pass through amount requirements ....................................................................................... 17

3.2 Submissions ........................................................................................................................... 18

4 Occurrence of a general nominated pass through event ........................................................ 19

4.1 AER decision .......................................................................................................................... 19

4.2 AER reasons ........................................................................................................................... 19

5 Positive change event ................................................................................................................. 26

6 Assessment of the costs likely to be incurred ......................................................................... 27

6.1 Vegetation clearance costs .................................................................................................... 27

7 Conclusion ................................................................................................................................... 32

A Compliance with section 6.6.1(c) of the NER ............................................................................ 33


Shortened forms

AER Australian Energy Regulator

BFRA Bush Fire Risk Area

CPI

DNSP

Consumer Price Index

Distribution Network Service Provider

EDPR Electricity Distribution Price Review

HBFRA High Bushfire Risk Area

HV High Voltage

NER National Electricity Rules

NEL National Electricity Law

NBFRA Non-Bushfire Risk Area


1 Summary

The Australian Energy Regulator (AER) regulates electricity distributors in the National

Electricity Market, including in South Australia. We do so under the National Electricity Law

(NEL) and the National Electricity Rules (NER). In May 2010, the AER made a distribution

determination for SA Power Networks (formerly ETSA Utilities), the South Australian

electricity distributor, for the regulatory control period 1 July 2010 to 30 June 2015. The AER’s

principal task was to set the revenue that ETSA Utilities can recover from the provision of

direct control services during the period.

The AER's distribution determination for SA Power Networks provided an amount of $108.6

million ($2009-10) for vegetation management costs as part of its total operating expenditure

allowance. This amount was distributed evenly over the five years, with a maximum

allowance of $22.8 million ($2009-10) in 2014-15 and a minimum allowance of $20.5 million in

2011-12 ($2009-10). Of all the operating expenditure categories, only emergency response

was provided a greater allowance for the period. SA Power Networks' vegetation

management allowance represents almost 11 per cent of its total operating expenditure

allowance for the 2010-15 distribution determination period.

The AER's distribution determination for SA Power Networks also included a pass through

mechanism for a 'general nominated pass through event'. This event allows SA Power

Networks to pass through incremental costs arising from uncontrollable and unexpected

events which could not have been prevented or mitigated by prudent risk management and

which materially changes the cost of providing distribution services. Clause 6.6.1(a1) of the

NER specifies that a pass through event includes any event specified in a distribution

determination as a pass through event for the determination. The pass through mechanism

recognises that an efficient revenue allowance cannot account for matters that are uncertain

and outside the control of the electricity distribution networks to manage through their revenue

allowance.

The vegetation clearance costs allowed for by the AER in its determination were forecast by

SA Power Networks based on the actual frequency and level of vegetation inspection and

clearance undertaken during 2008-09, which was used by SA Power Networks as the base

year to forecast its operating expenditure. Added to this expenditure was a step change

increase of 20 per cent, which the AER approved, to take into account the need to improve

the vegetation management program to meet SA Power Networks legislative requirements for

South Australia. SA Power Networks' vegetation management policy during 2008-09 was to

focus on a three yearly cycle for bushfire risk areas and only clear vegetation from around

high voltage and high risk low voltage powerlines in the Adelaide metropolitan area, pending

the resolution of proposed changes to the vegetation clearance regulations. No further

adjustment was made to account for the drought conditions experienced in the base year, and

the three prior years during the previous regulatory control period 2005-10. At the time that

the AER made SA Power Networks' current regulatory determination, South Australia had

experienced an extended period of below average rainfall and above average temperatures.

SA Power Networks submitted its pass through application to the AER on 11 April 2013. SA

Power Networks' application is for a material increase in vegetation management costs as a

result of an uncontrollable and unexpected increase in vegetation growth rates which followed

the breaking of the drought in mid-2010. SA Power Networks has proposed that the additional

vegetation management costs be considered as a general nominated pass through event as

specified by the AER in its 2010-15 distribution determination and in clause 6.6.1 of the NER.


SA Power Networks is seeking to recover an additional amount of $40.53 million ($2009-10)

in respect of the occurrence of a general nominated pass through event in the form of a step

change increase in vegetation growth rates. SA Power Networks stated that the above

average rainfall that was experienced in South Australia since mid-2010 caused a material

increase in vegetation growth rates and therefore vegetation management costs. SA Power

Networks' increase in vegetation growth rates commenced in about September 2011 but the

increase in growth rates only came to the attention of its vegetation management operational

staff in November 2011. SA Power Networks application also stated that the increase in

vegetation growth rates caused a significant increase in its vegetation inspection and

clearance that has and will be required in 2012 and 2013 in order to meet its legislative

obligations to manage vegetation in the vicinity of its assets within prescribed clearance

zones.

SA Power Networks has sought to mitigate the effect of the pass through event by utilising

prudent operational risk management, but the strict nature of the legislative vegetation and

clearance obligations prevents the deferral of most vegetation inspection and clearance

activities and also limits the extent to which vegetation can be cleared.

The AER has assessed SA Power Networks’ application in accordance with the requirements

of its determination and clause 6.6.1 of the NER. The AER considers that the application

satisfies the definition of a pass through event (pass through event requirements) under

clause 6.6.1 of the NER. In particular, the AER is satisfied that a general nominated pass

through event has occurred and that all the necessary requirements have been met. These

requirements include that the event described in SA Power Networks' cost pass through

application is uncontrollable and unexpected, and that the effect of the event could not have

been prevented or further mitigated by SA Power Networks.

The AER considers that a well-informed DNSP in the circumstances of SA Power Networks,

acting reasonably, would not have considered that the increase in vegetation growth rates

experienced in 2013 and forecast for 2014, at the time that it submitted its regulatory proposal

in April 2009, would have been more likely than not to occur in the regulatory control period.

Further, the AER considers that the change in costs of providing distribution services as a

result of the event are material.

For the reasons discussed in Section 6 of this decision, the AER has reduced SA Power

Networks' proposed pass through by $5.47 million ($2009-10) and hence approves a total

pass through amount of $35.06 million ($2009-2010).

The AER does not accept SA Power Networks’ assumption that high vegetation growth rates

will persist into the second half of 2013. The AER also made an adjustment to SA Power

Networks’ forecast rate for power lines requiring clearance for years of average vegetation

growth in bush fire risk areas. The AER used the midpoint of the range of the observed rate

for power lines requiring clearance in high and low growth years, rather than a point based on

the rate for power lines requiring clearance for high vegetation growth. The AER also

amended SA Power Networks' forecast inflation for 2012-13 and the manner in which SA

Power Networks applied the labour cost escalators approved as part of the current regulatory

determination. The AER has used this approved operating expenditure to calculate the

building block costs and determined the amount to pass through to Distribution Network

Users in each year of the remainder of the regulatory control period. This amounts to $39.79

million ($ nominal) which will be passed through to customers in 2014-15, which is the final


year of the current 2010-15 regulatory control period. The effect of this pass through is that

the average residential customer bill is likely to increase by around 1.5 per cent in 2014-15.


2 Cost pass through application

The AER considers that SA Power Networks' pass through application meets the criteria of a

general nominated pass through event as specified in the AER's distribution determination

and that its application conforms with the pass through requirements of the NER. We consider

that a pass through event has occurred. The reasons for this decision are:

an uncontrollable and unexpected event has occurred during the course of the regulatory

control period, the effect of which could not have been prevented or mitigated by prudent

operational risk management

the change in costs of providing distribution services as a result of the event is material

the event does not fall within the definition of any of the pass through events defined in r.

6.6.1 of the NER or any other pass through event specified in SA Power Networks'

distribution determination

a general nominated pass through event is a specified pass though event in SA Power

Networks' distribution determination.

Although the AER considers that a pass through event has occurred, the AER has reduced

SA Power Networks' proposed pass through by $5.47 million ($2009-10) because SA Power

Networks':

assumed that high vegetation growth rates will persist into the second half of 2013, which

is not evident based on available data

forecast equivalent find rate for years of average vegetation growth in bush fire risk areas

is considered too high, and

forecast inflation for 2012-13 required updating and the manner in which SA Power

Networks applied the labour cost escalators approved as part of the current regulatory

determination was incorrect.

The following sections discuss the regulatory requirements of the pass through in greater

detail. Section 3 discusses the detail of the AER’s reasoning for each element that must be

satisfied for a positive pass through event to be determined.

2.1 Cost pass through regulatory requirements

Clause 6.6.1(a1) of the NER allows a cost pass through for DNSPs:

6.6.1(a1) Any of the following is a pass through event:

(1) a regulatory change event;

(2) a service standard event;

(3) a tax change event;

(4) a retailer insolvency event, and

(5) any other event specified in a distribution determination as a pass

through event for the determination.


In its distribution determination for SA Power Networks, the AER has nominated the following

general pass through event for SA Power Networks:1

A general nominated pass through event occurs in the following circumstances:

1. An uncontrollable and unexpected event occurs during the next regulatory control period, the effect of

which could not have been prevented or mitigated by prudent operation risk management.

2. The change in costs of providing distribution services as a result of the event is material.

3. The event does not fall into any of the following definitions:

‘regulatory change event’ in the NER (read as if paragraph (a) of the definition

was not part of the definition)

‘service standard event’ in the NER

‘tax change event’ in the NER

‘terrorism event’ in the NER

‘smart meter event’ in this draft decision

‘CPRS event’ in this draft decision

‘feed–in tariff event’ in this draft decision

‘native title event’ in this draft decision

For the purposes of this definition,

‘material’ means the costs associated with the event would exceed 1 per cent of

the smoothed forecast revenue specified in the final decision in each of the years

of the regulatory control period that the costs are incurred.

If a pass through event materially increases the DNSP’s costs of providing direct control

services, then a positive change event occurs.2

If a positive change event occurs, the DNSP may seek AER approval to pass through to

Distribution Network Users a positive pass through amount.3

A DNSP’s cost pass through application must also conform to the timing and information

requirements outlined under clause 6.6.1(c) of the NER. If the AER determines4 a positive

change event has occurred, the AER must determine:

the approved pass through amount; and

the amount of the approved pass through amount which should be passed through to

Distribution Network Users in each regulatory year of the regulatory control period.

The NER requires the AER to make a determination within 40 business days from receipt of a

DNSP’s application and all necessary supporting information.5

1 AER, Final decision - SA distribution determination 2010-11 to 2014-15, May 2010, pp. 241-242.

2 Chapter 10 of the NER. A negative change event under clause 6.6.1(b) is not discussed in this AER decision as SA

Power Networks' application refers to a positive change event only. 3 Clause 6.6.1(a) of the NER.

4 Clause 6.6.1(d) of the NER and taking into account the matters set out in clause 6.6.1(j) - see Section 3.1 of this decision.

5 Clause 6.6.1(e).


2.2 SA Power Networks' pass through application

On 1 March 2013, SA Power Networks submitted its initial pass through application to the AER to

pass through additional expenditure to its distribution network users, under clause 6.6.1 of the NER.

The AER, however, identified issues related to the technical compliance of SA Power Networks'

written statement in relation to the terms of rule 6.6.1(c) of the NER. These issues were in relation to

SA Power Networks' definition of the positive change event, in particular the timing of the event in

relation to the pass through event. As a result, SA Power Networks withdrew its application and

submitted a revised version to the AER on 11 April 2013. SA Power Networks has applied the general

nominated pass through provisions specified in the AER's determination for its pass through

application rather than any of the prescribed events set out in the NER.

The expenditure relates to a material increase in vegetation management costs as a result of an

uncontrollable and unexpected increase in vegetation growth rates, which followed the unexpected

breaking of the 'Millennium drought' in mid-2010 and the above average rainfall that has been

experienced in South Australia since that time.

In particular, SA Power Networks submitted that:

The occurrence of an uncontrollable and unexpected increase in vegetation growth rates during the

2011/2012 and 2012/2013 regulatory years has entailed SA Power Networks incurring materially higher

costs in providing distribution services (and, in particular, direct control services) during the 2011/2012 and

2012/2013 regulatory years than it would have incurred but for the occurrence of this event.

SA Power Networks has been advised that this uncontrollable and unexpected increase in vegetation

growth rates is likely to continue during the 2013/2014 and 2014/2015 regulatory years and the associated

increase in the costs of providing direct control services solely caused by the ongoing occurrence of this

uncontrollable and unexpected increase in vegetation growth rates is also likely to continue to be

experienced by SA Power Networks during the 2013/2014 and 2014/2015 regulatory years.

The likely increase in the costs of providing distribution services (and, in particular, direct control services)

during the 2012/2013, 2013/2014 and 2014/2015 regulatory years has been caused solely by an

uncontrollable, unexpected and material increase in the frequency and extent of vegetation inspection and

clearance required to be undertaken by SA Power Networks in order to continue to meet its vegetation

clearance obligations under the Act and the Regulations (for example, the frequency of vegetation

inspection and clearance in bushfire risk areas (BFRAs) has moved from a 3 year cycle to an ongoing 1

year cycle and the number of spans required to be cleared each year in BFRAs has increased from 28,000

in 2008/2009 to an anticipated 76,000 in 2012/2013).

This uncontrollable and unexpected increase in vegetation growth rates has in turn been caused by a 'step

change' in climatic conditions during the 2010, 2011 and 2012 calendar years (i.e. the breaking of the

'Millennium drought' in mid-2010 and the occurrence of above-average rainfall since that time).

SA Power Networks submitted that the step change increase in vegetation growth rates probably

commenced in about September 2011 but that the increase in growth rates only came to the attention

of its vegetation management operational staff in November 2011. SA Power Networks stated that the

increase in vegetation growth rates has caused a significant increase in the frequency and extent of

its vegetation inspection and clearance that has and will be required in 2012 and 2013 in order to

meet its vegetation clearance obligations under the Electricity Act 1996 (SA) (Act) and Electricity

(Principles of Vegetation Clearance) Regulations 2010 (Regulations). Based on a review of

information obtained from an inspection of all spans located in bushfire risk areas and a

representative sample of powerlines located in non-bushfire risk areas (NBFRA), SA Power Networks

revised its 2013 vegetation inspection and clearance program in consultation with its vegetation

management contractor.

SA Power Networks submitted that the breaking of the drought in mid-2010 and the sustained above-

average rainfall experienced during autumn, winter and spring of 2011 and 2012, resulted in a


significant and material increase in vegetation growth rates. This has led in turn to a material increase

in the level of vegetation inspection and clearance that needs to be undertaken by SA Power

Networks during the balance of the current regulatory control period in order to continue to meet its

vegetation inspection and clearance obligations under the Act and Regulations. Further, SA Power

Networks submitted that the increased vegetation inspection and clearance that will be required for

the remainder of the 2010-15 regulatory control period was unexpected and was neither foreseen nor

anticipated at the time it submitted its 2010-15 regulatory proposal by itself, the AER or the AER's

consultant Parsons Brinkerhoff Australia during the distribution determination process.

2.2.1 Basis of vegetation management allowance forecast for 2010-15

SA Power Networks based the vegetation management component of its forecast operating

expenditure in its 2010-15 regulatory proposal (submitted in July 2009) on the actual frequency and

level of vegetation inspection and clearance undertaken during 2008-09. SA Power Networks stated

that its expenditure on vegetation management in 2008-09 was unusually low as its focus was on a

three yearly cycle for bushfire risk areas (BFRA) and only clearing vegetation from around high

voltage and high risk low voltage powerlines in the Adelaide metropolitan area, pending the resolution

of proposed changes to the Regulations. SA Power Networks' regulatory proposal sought to increase

its vegetation management allowance for the 2010-15 regulatory period based on its estimate of the

likely increase in the level of vegetation inspection and clearance that would be required to achieve

full compliance with its regulatory obligations in NBFRAs. SA Power Networks submitted that the

number of BFRA spans cleared each year during the 2005-10 regulatory period remained generally

static and that on this basis the expectation was that clearance volumes for BFRAs would continue at

the same general rate during the 2010-15 regulatory period. On this basis, it was considered that an

increase of 20 per cent in the historical based expenditure (which was seen as unusually low) would

be sufficient to fully meet its compliance obligations.

SA Power Networks also submitted, as part of its July 2009 proposal, that its vegetation inspection

and clearance processes for the 2005-10 regulatory period, including a pre-summer check for all

spans located within BFRAs prior to the commencement of the declared fire danger season (DFDS),

were in place during 2010-11.

2.2.2 Impact of increased vegetation growth

SA Power Networks submitted that although the 'Millennium drought' broke in the winter of 2010, this

change in climatic conditions did not impact on the frequency and extent of vegetation inspection and

clearance required to be undertaken during 2010-11. SA Power Networks stated that above average

rainfall continued during autumn, winter and spring of 2011 and that the scoping process in October

2011 and pre-summer checks identified an unusually high level of intrusions of vegetation into the

clearance zone for BFRA spans. SA Power Networks stated that these intrusions were addressed

during the summer of 2011-12.

SA Power Networks submitted that they continued to monitor the required level of vegetation

clearance during January and February 2012, including steps to identify the potential cause of the

increase, and decided in March 2012 to move to:

an annual inspection and clearance cycle in BFRAs, and

focus available resources on ensuring that it met its vegetation inspection and clearance

obligations in relation to, firstly, BFRAs and secondly, high voltage and high risk low voltage

powerlines in NBFRAs.


SA Power Networks acknowledged that it had not yet conclusively identified the reason for the

increase in vegetation inspection and clearance activity. SA Power Networks submitted that above

average rain fall continued during autumn, winter and spring of 2012.

SA Power Networks submitted that based on information from inspections from the previous 12

months and its vegetation management contractor's inspection of 430,000 spans in BFRAs and a

representative sample of powerlines located in NBRAs, in October 2012 it was able to determine the

level of vegetation inspection and clearance likely to be required for 2013 and beyond.

2.2.3 SA Power Networks response to increased vegetation management costs

SA Power Networks submit that it has sought to mitigate the effect of the pass through event by

utilising prudent operational risk management. This is a consideration under 6.6.1(j) of the NER which

we need to have regard. SA Power Networks submitted that it considers that the strict nature of the

legislative vegetation and clearance obligations prevents the deferral of most vegetation inspection

and clearance activities and also limits the extent to which vegetation can be cleared.

SA Power Networks stated that the current per unit costs for its vegetation management contractor

are below the unit costs which were used to determine its vegetation management allowance for the

2010-15 distribution determination. SA Power Networks submitted that these (lower) costs were used

to determine its pass through cost amounts for 2012-13, 2013-14 and 2014-15. SA Power Networks

also acknowledge that changes to the Electricity (Principles of Vegetation Clearance) Regulations

2010 in February 2010 and the associated adoption by SA Power Networks of a 'risk based approach'

to the clearance of vegetation around low risk powerlines in prescribed areas has not increased its

vegetation management costs.

2.2.4 Pass through amount

SA Power Networks is seeking a pass through amount of $40.53 million ($2009-10) which includes an

amount of $1.61 million as provided for under clause 6.6.1(j)(4) of the NER to account for the time

cost of money based on SA Power Networks' allowed rate of return of 9.76 per cent. SA Power

Networks proposes to recover this amount in equal amounts of $20.26 million ($2009-10) through its

distribution tariffs for the 2013-14 and 2014-15 regulatory years. SA Power Networks expects this

amount to increase residential customers' bills by about 0.9 per cent.

The AER provided an allowance of $108.6 million ($2009-10) for SA Power Networks' vegetation

inspection and clearance program for the 2010-15 distribution determination period. Of all the

operating expenditure categories, only emergency response was provided a greater allowance for the

current regulatory control period. SA Power Networks' vegetation management allowance represents

almost 11 per cent of its total operating expenditure allowance for the 2010-15 distribution

determination period.

2.2.5 Date of positive change event

In accordance with clause 6.6.1(c)(2), SA Power Networks submitted that the pass through event and

consequently the positive change event probably commenced to occur in or about September 2011

and has continued since that time. SA Power Networks also submitted that its consultant advised that

these increased vegetation growth rates are likely to continue until at least the summer of 2013-14,

assuming that rainfall conditions return to average during 2013. SA Power Networks stated that it was

not until early November 2012 that it was able to recognise the ongoing nature of the event and was

in a position to fully quantify and extrapolate the level of vegetation inspection and clearance required

to meet its regulatory obligations.


2.2.6 General nominated pass through event

SA Power Networks' pass through application addressed various elements of the AER's general

nominated pass through event criteria. The AER has nominated the following general pass through

event for SA Power Networks:6

A general nominated pass through event occurs in the following circumstances:

1. An uncontrollable and unexpected event occurs during the next regulatory control

period, the effect of which could not have been prevented or mitigated by prudent operation

risk management.

2. The change in costs of providing distribution services as a result of the event is

material.

3. The event does not fall into any of the following definitions:

‘regulatory change event’ in the NER (read as if paragraph (a) of the definition

was not part of the definition)

‘service standard event’ in the NER

‘tax change event’ in the NER

‘terrorism event’ in the NER

‘smart meter event’ in this draft decision

‘CPRS event’ in this draft decision

‘feed–in tariff event’ in this draft decision

‘native title event’ in this draft decision

For the purposes of this definition,

‘material’ means the costs associated with the event would exceed 1 per cent of

the smoothed forecast revenue specified in the final decision in each of the years

of the regulatory control period that the costs are incurred.

Uncontrollable and unexpected event

SA Power Networks submitted that as the terms "uncontrollable" and "unexpected" are not defined in

the National Electricity Law, they should be given their ordinary meanings having regard to:

the context in which they are used;

the purpose of clause 6.6.1 of the NER; and

the national electricity objective and the revenue and pricing principles contained in the National

Electricity Law.

SA Power Networks interpreted the term uncontrollable as an event that is beyond the control of the

Electricity Distribution Network Service Provider (DNSP) and submitted that climatic conditions and

vegetation growth rates are clearly beyond its control. SA Power Networks also submitted that it has

no control over the inspection and clearance obligations imposed on it by the legislative requirements

of the Act and Regulations. SA Power Networks also stated that it did not anticipate there would be

6 AER, Final decision - SA distribution determination 2010-11 to 2014-15, May 2010, pp. 241-242.


any significant difference in the climatic conditions during the 2010-15 regulatory period compared to

those in 2005-2010 and, in particular, the 2008-09 reference year.

Evidence

SA Power Networks engaged consultants GHD to report on the weather patterns between 2002-03 to

2011-12.7 SA Power Networks submitted that GHD concluded that the wetter period after 2009

replenished soil moisture levels and generated a ‘pulse’ of native vegetation regrowth across the

landscape. GHD's report also stated that the wave of regeneration across all vegetation strata that

occurred over this two year period would have impacted on SA Power Networks' vegetation clearance

program, generating significantly increased costs of compliance for meeting its vegetation

management obligations.

SA Power Networks submitted that on the basis that there is likely to be a progressive return to

average climatic conditions and average vegetation growth rates during 2013-14, it has anticipated a

reduction in the vegetation inspection and clearance volumes required to meet its legislative

obligations. For 2014-15, SA Power Networks has forecast a likely return to average weather

conditions noting that this still requires a higher level of vegetation inspection and clearance than the

level of vegetation inspection and clearance that was used to determine its vegetation management

allowance for the 2010-15 regulatory period.

Mitigation

SA Power Networks submitted that although it must adhere to the strict nature of its legislative

vegetation and clearance obligations, it has sought to reduce costs by:

ceasing pre-summer patrols after shifting to an annual clearance cycle;

obtaining independent advice on the unit costs of undertaking both vegetation inspection and

clearance work; and

deferring components of the NBFRA vegetation inspection and clearance to later regulatory years

where that is permitted under the Act and Regulations.

SA Power Networks stated that it is investigating opportunities to have the Regulations amended to

alter the clearance zones (CZ) and buffer zones (BZ) and provide the ability to remove vegetation

(such as saplings under CZs so that future costs are avoided). SA Power Networks further stated that

any such amendments are unlikely to eventuate within the remainder of this regulatory control period.

Materiality

The AER's determination for SA Power Networks requires that the change in costs for a general

nominated pass through event be material. For SA Power Networks, this means that the costs

associated with its proposed general nominated pass through event must exceed one per cent of its

smoothed forecast revenue specified in the AER's final decision in each of the years of the regulatory

control period that the costs are incurred. Table 2.1 shows SA Power Networks' smoothed revenue

requirement, materiality threshold and proposed pass through amount for 2012-13, 2013-14 and

2014-15.

7 GHD, Report for SA Power Networks - Recent Seasonal Climate Variability and Vegetation Growth Effects, January,

2013.


Table 2.1 SA Power Networks' smoothed revenue requirement, materiality threshold and

proposed pass through amount ($m nominal)

($m nominal) 2013 2014 2015

Smoothed revenue requirement 761.9 825.7 851.5

Materiality threshold (1%) 7.6 8.3 8.5

Pass through amount 14.9 16.2 12.1

Source: SA Power Networks Pass Through Application, 10 April 2013, p. 21.

2.2.7 Clause 6.6.1(c) requirements of the NER

SA Power Networks' application addressed each of the NER requirements under clause 6.6.1(c) for a

positive pass through amount in respect of a positive change event occurring, including:

details of the positive change event (6.6.1(c)(1))

date on which the positive change event occurred (6.6.1(c)(2))

eligible pass through amount (6.6.1(c)(3))

eligible pass through amount claimed (6.6.1(c)(4))

amount to be passed through each regulatory year (6.6.1(c)(5)), and

evidence (6.6.1(c)(6)).

Discussion of the details of these requirements has largely been covered in this section of the AER's

decision. The AER's assessment of SA Power Networks' pass through application in respect of

compliance with section 6.6.1(c) of the NER is contained in Appendix A.

2.2.8 Relevant factors to be considered by the AER

SA Power Networks submitted that its application has addressed the matters listed in clause

6.6.1(j)(1)-(8) of the NER that the AER must take into account for a cost pass through event

application. As discussed above, SA Power Networks stated that it has done and continues to do

everything that it can to minimise the magnitude of the eligible pass through amount. SA Power

Networks submitted that the positive pass through amounts include a saving of about $1.02 million

($2009-10) to reflect the decrease for the unit rates since the 2008 reference year charged by its

vegetation management services contractor.


3 Assessment approach

The AER undertook a systematic process in conducting this review. First, the AER reviewed whether

the application received addressed the requirements of the NER for a general nominated pass

through event. Appendix A discusses this analysis.

The AER next undertook its own analysis. This involved a number of steps which included:

Comparing the proposal to earlier AER approved material submitted by SA Power Networks to

support its 2010 EDPR revised proposal

Testing if the proposal fell within a defined pass through category (i.e. a general nominated pass

through event)

Testing if the cost increases satisfied a test of materiality and whether the event affected direct

control services

Determining whether the AER should take into account any additional factors under r. 6.6.1(j) of

the NER in determining the positive pass through amount

Considering whether SA Power Networks had sought to minimise the magnitude of the cost pass

through amounts sought as required by clause 6.6.1(j)(3) of the NER

Consulting the Office of the Technical Regulator on the program to assess the regulatory

obligations and mandated activity volumes under the Electricity Act 1996 (SA) and Electricity

(Principles of Vegetation Clearance) Regulations 2010

Assessing the reasonableness of the cost estimates

Considering whether alternative work practices were feasible, and

Ultimately coming to a view on whether to accept or reject the proposal and, where relevant, to

substitute an alternative estimate.

The AER considers that this process is consistent with the requirements of the NER. The decision is

predicated on the material submitted by SA Power Networks, but subject to the AER’s own analysis.

The AER had regard to all the factors set out in clause 6.6.1(j) of the NER. These requirements are

set out in section 3.1. Of particular relevance:

factor 6.6.1(j)(2) which requires consideration of the increase in costs that the DNSP has incurred

and is likely to incur as a result of the event. The AER interprets this to mean that, in addition to

costs already incurred, the threshold test for including forecast costs in the pass through amount

is that such costs must have been, or be likely to be, incurred and must be caused by the event.

factor 6.6.1(j)(3) concerns the risk of the pass through event and whether the service provider has

taken steps to minimise the cost of the event. The AER interprets this to mean service providers

must seek to minimise costs where possible.

Where the material SA Power Networks submitted was unclear or incomplete, the AER put questions

to SA Power Networks and had regard to its responses. In some instances this involved asking further

follow-up questions and considering SA Power Networks' further replies.

Important components of the AER’s analysis were:


reviewing current and historical weather patterns and climatic conditions

assessing the basis for SA Power Networks' forecast find rates and clearance volumes

comparing the proposed vegetation scoping and cutting unit rates with the approved rates implied

in the current regulatory determination and costs incurred by other DNSPs

considering whether SA Power Networks has failed to take any action that could reasonably be

taken to reduce the magnitude of the eligible pass through amount in respect of the positive

change event; and

examining whether SA Power Networks will only recover its actual or likely incremental costs, and

confirming that the incremental costs occur solely as a consequence of a pass through event.

Clause 6.6.1(i) of the NER provides that, in assessing pass through applications, the AER may

consult the DNSP (applicant) and other relevant stakeholders.

In the course of assessing SA Power Networks’ pass through application, the AER consulted with and

requested SA Power Networks to provide further information to clarify aspects of its application.8

The AER considers that this analysis is consistent with the National Electricity Objective as it is in the

long term interests of customers for SA Power Networks to meet its regulatory requirements at an

efficient cost.

The AER may take into account the Revenue and Pricing Principles of the NEL when making pass

through decisions.9 The AER has done so here. In particular, the AER considers that a regulated

network service provider should be provided with:

a reasonable opportunity to recover at least the efficient costs;10

and

effective incentives to promote economic efficiency.11

The AER has sought to balance these principles, where necessary.

3.1 Pass through amount requirements

Where the AER has determined that a positive change event has occurred in accordance with clause

6.6.1(d) of the NER, the AER must determine:

(1) the approved pass through amount; and

(2) the amount of that approved pass through amount that should be passed through to

Distribution Network Users in each regulatory year during the regulatory control period,

taking into account the matters referred to in paragraph (j).

Accordingly, in determining the approved pass through amount in accordance with section 6.6.1(d) of

the NER, the AER has considered the matters referred to in section 6.6.1(j). In assessing a particular

element of SA Power Networks' proposed costs, the AER has had regard to the matters in paragraph

(j) that it considers relevant to that element. However, in each case the AER has considered SA

8 AER, SAPN Vegetation clearance cost pass through - AER questions, 24 April 2013;

AER, SAPN Vegetation clearance cost pass through - AER information request no. 2, 22 May 2013. 9 NEL, s.16(2)(b).

10 NEL, s.7A(2).

11 NEL, s.7A(3).


Power Networks' pass through application, taking into account all additional information received from

SA Power Networks. The matters which the AER must consider as set out in clause 6.6.1(j) are:12

(1) the matters and proposals set out in any statement given to the AER by the provider under

paragraph (c) or (f); and

(2) in the case of a positive change event, the increase in costs in the provision of standard

control services that the provider has incurred and is likely to incur until the end of the

regulatory control period as a result of the positive change event; and

(3) in the case of a positive change event, the efficiency of the provider's decisions and actions

in relation to the risk of the positive change event, including whether the provider has failed

to take any action that could reasonably be taken to reduce the magnitude of the eligible

pass through amount in respect of that positive change event and whether the provider has

taken or omitted to take any action where such action or omission has increased the

magnitude of the amount in respect of that positive change event; and

(4) the time cost of money based on the weighted average cost of capital for the provider for the

relevant regulatory control period; and

(5) the need to ensure that the provider only recovers any actual or likely increment in costs

under this paragraph (j) to the extent that such increment is solely as a consequence of a

pass through event; and

(6) in the case of a tax change event, any change in the way another tax is calculated, or the

removal or imposition of another tax, which, in the AER's opinion, is complementary to the

tax change event concerned; and

(7) whether the costs of the pass through event have already been factored into the calculation

of the provider's annual revenue requirement; and

(8) any other factors the AER considers relevant.

3.2 Submissions

The AER received one submission in response to SA Power Networks’ pass through application.

This was a letter from the South Australian Minister for Mineral Resources and Energy, the Hon. Tom

Koutsantonis MP, dated 20 March 2013.13

The Minister expressed two key concerns:

the breaking of the 'Millennium Drought' and the above average rainfall experienced since that

time could not be classified as unexpected events as South Australia's climatic conditions include

an unpredictable and varied rainfall pattern

the incentive based regulatory framework provides businesses with strong incentives to manage

costs and realise efficiency gains, and more than adequately rewards electricity distributors for

managing their costs. As such, customers should not be forced to pay additional costs for

vegetation clearance.

The AER considered this submission in evaluating whether the proposed pass through event was

uncontrollable and unexpected in accordance with the general nominated pass through event

definition.14

12 Clause 6.6.1(j) of the NER

13 SA Minister for Mineral Resources and Energy, submission in response to the AER, 20 March 2013.

14 See section 4.2.


4 Occurrence of a general nominated pass through

event

The AER considers that a general nominated pass through event has occurred.

4.1 AER decision

The AER is satisfied that a general nominated pass through event has occurred. All the necessary

circumstances have been met. These circumstances are:

an uncontrollable and unexpected event has occurred during the course of the regulatory control

period, the effect of which could not have been prevented or mitigated by prudent operational risk

management

the change in costs of providing distribution services as a result of the event is material

the event does not fall within the definition of any of the pass through events defined in r. 6.6.1 of

the NER or any other pass through event specified in SA Power Networks' distribution

determination.

The AER’s considerations are discussed in the following section.

4.2 AER reasons

4.2.1 Uncontrollable and unexpected event

The AER considers the event described in SA Power Networks' cost pass through application is

uncontrollable and unexpected, and that the effect of the event could not have been prevented or

further mitigated by SA Power Networks.

SA Power Networks described the event as an uncontrollable and unexpected increase in vegetation

growth rates, causing a material increase in the level of vegetation inspection and clearance required

to comply with its regulatory obligations. The increased vegetation growth rates are reflected in

increased 'find rates' – the percentage of spans15

inspected which require cutting. The increased

vegetation growth rates were in turn caused by the breaking of the drought with a sustained period of

significantly above average rainfall.

Uncontrollable

The rate at which vegetation grows within SA Power Networks' distribution area is not controllable by

SA Power Networks. While there are many variables affecting the growth rates of individual trees, in

general terms, vegetation growth rates are typically driven by moisture availability and temperature.

These climatic factors are beyond the control of SA Power Networks.

Unexpected

In the context of the general nominated pass through event that applies in SA Power Network's

distribution determination, the AER considers an event to be 'unexpected' if, despite the occurrence of

the event being a possibility, there was no reason to consider that the event was more likely than not

15 A span means the part of the power line that lies between two poles or other supports for that line.


to occur during the regulatory control period. This test is an objective one. That is, the question is not

whether SA Power Networks expected the event. Rather, the AER must consider whether a well-

informed distribution network service provider in the circumstances of SA Power Networks, acting

reasonably, would have considered the increase in vegetation growth rates experienced by SA Power

Networks to be more likely than not to occur in the regulatory control period.

Vegetation growth rates

SA Power Networks has experienced a significant increase in vegetation growth rates since

approximately September 2011. In order to continue to meet its regulatory obligations for vegetation

clearance, SA Power Networks had to increase the frequency of its inspections and clearance cycle in

BFRAs, and focus available resources on high voltage and high risk low voltage powerlines in

NBFRAs.

The AER reviewed the extent of the change in vegetation growth rates from 2010-11 to 2011-12,

measured by the observed find rate of spans requiring cutting. The find rate in BFRAs increased by

173 per cent in 2011-12. While we would expect to see some fluctuation in find rates from year to

year as a result of variable climatic conditions and vegetation growth rates, the extent of the change

observed from 2010-11 to 2011-12 is significant.

The AER therefore sought additional information from SA Power Networks concerning find rates

observed in the 2005-2010 regulatory control period, to provide an insight into the extent of variability

typically observed from year to year. SA Power Networks advised that this historical data was not

readily available and in any case may not be comparable due to changes in how vegetation clearance

activities are undertaken.16

In the absence of historical find rate data, the AER reviewed the observed

variability in historical vegetation management expenditure. The level of expenditure is driven by other

factors in addition to find rates, such as variations in labour costs. Nonetheless, the AER considers

the typical variability of expenditure from year to year provides some indication of the variability in

vegetation clearance volumes that might reasonably be expected to occur.

In the period for which data is available, from 1999-00 to 2011, the average variability in vegetation

management expenditure from year to year was approximately 21 per cent. For the 2011-12 year, this

figure was 63 per cent or approximately three times the historical average. This, combined with the

observed increase in find rates in BFRAs of 173 per cent, suggests that the change in vegetation

clearance volumes and costs experienced in 2011-12, and persisting in 2012-13, was unusual. Such

a significant increase in vegetation clearance volumes and costs would not reasonably have been

considered to be more likely than not to occur in the regulatory control period.

Climatic conditions

SA Power Networks, and its consultant GHD, submitted that the significant increase in vegetation

growth rates and clearance costs experienced since 2011-12 was caused by the breaking of the

drought in South Australia in 2010 and the above average rainfall experienced since that time. The

AER has therefore reviewed the nature of the climatic conditions experienced at that time in South

Australia to assess whether such conditions could have been reasonably expected to occur within the

regulatory control period.

At the time that the AER made SA Power Networks' current regulatory determination, South Australia

had experienced an extended period of below average rainfall and above average temperatures.

16 SA Power Networks, Response to AER information request, 3 May 2013.


These conditions affected the vegetation growth rates and clearance volumes experienced by SA

Power Networks in the previous regulatory control period. The vegetation management forecast for

the 2010-2015 regulatory control period was based on the level of vegetation inspection and

clearance undertaken by SA Power Networks in the first three years of the 2005-2010 regulatory

control period. Table 4.1 shows the extent to which rainfall and temperature varied from the long term

average in South Australia during the current and previous regulatory control periods.

Table 4.1 Rainfall and temperature variability in South Australia 2005 to 2012

2005 2006 2007 2008 2009 2010 2011 2012

Rainfall

(% of long term

average) 87 64 95 75 88 161 157 77

Temperature

(oC above or below

long term average) +1.0 +0.8 +1.1 +0.5 +1.3 -0.1 +0.5 +0.5

Source: Bureau of Meteorology, Australian climate variability time series data, viewed at www.bom.gov.au.

The level of rainfall experienced in South Australia in 2010 and 2011 clearly varies from the conditions

experienced in the 2005-2010 regulatory control period. The breaking of the drought, or indeed the

occurrence of any particular level of rainfall, cannot of itself be considered a pass through event.

Nevertheless, given that the level of rainfall in 2010 and 2011 was a key driver of the increase in

vegetation growth rates and clearance costs experienced by SA Power Networks, the AER has

examined whether the level of rainfall could reasonably be considered to be unexpected.

As noted by the South Australian Minister for Energy, South Australia's climatic conditions include an

unpredictable and varied rainfall pattern, with periods of drought conditions.17

Some variability in

climatic conditions across regulatory control periods is likely to occur, and therefore cannot be

considered to be unexpected. History suggests that all droughts break at some stage. However,

although some variability in climatic conditions is to be expected, it does not necessarily follow that a

specific variation in conditions can be expected within a regulatory control period. The AER must

therefore consider the nature of the specific circumstances experienced by SA Power Networks to

determine whether such circumstances meet the definition of 'unexpected'.

Figure 1 shows the annual rainfall anomaly for South Australia since 1900. This depicts the extent to

which rainfall in each year departed from the long term average. As can be seen in the figure, 2010

and 2011 were both significantly wetter than average. Both years are in the top five wettest years on

record in South Australia.

17 SA Minister for Mineral Resources and Energy, Submission to the AER, 20 March 2013.

http://www.bom.gov.au/


Figure 1 Annual rainfall anomaly for South Australia (1900-2012)

Source: Bureau of Meteorology, Australian climate variability time series graphs, viewed at www.bom.gov.au.

At the time that SA Power Networks submitted its regulatory proposal to the AER in 2009, rainfall of

the level subsequently experienced in 2010 had occurred only twice since 1900. A two year period of

rainfall such as that experienced in 2010-2011 had occurred only once before, in 1973-1974. The

AER is therefore satisfied that there was no historical information available in 2009 that would have

led a reasonable person to consider that a rainfall event such as that experienced in 2010-2011 was

more likely than not to occur within the current regulatory control period.

The AER has also considered the availability of forecast information on likely climatic conditions. The

Bureau of Meteorology produces seasonal outlooks for rainfall and temperature covering periods

approximately three months ahead. These seasonal outlooks indicate the probability of exceeding

median rainfall and temperature in the forecast period. The Bureau of Meteorology also publishes

reports on the El Niño-Southern Oscillation (ENSO) and Indian Ocean Dipole, which can provide

information on the chances of above or below median rainfall over a three to six month outlook period.

At different times of the year, the reports reflect varying levels of confidence in the forecast presented.

Overall, the AER considers the forecasting information typically available is not useful in anticipating

climatic conditions across a five year regulatory control period due to the short forecasting horizon

and, in any event, cannot predict the nature of specific weather events.

Having considered the quantum of the change in vegetation growth rates observed by SA Power

Networks, and the nature of the rainfall event experienced in South Australia in 2010-2012, the AER

is satisfied that the increase in vegetation growth rates and clearance costs was unexpected. A well-



informed DNSP in the circumstances of SA Power Networks, acting reasonably, would not have

considered the increase in vegetation growth rates experienced by SA Power Networks to be more

likely than not to occur in the regulatory control period.

4.2.2 Effect of the event could not be prevented or mitigated

The AER considers that the effect of the event described by SA Power Networks could not have been

prevented or mitigated beyond the extent to which SA Power Networks has already done so. The

AER interprets the 'effect of the event' as meaning the effect of the event on the costs of providing

distribution services.

The AER considers that the costs of SA Power Networks' vegetation clearance activities are driven by

the following key factors:

the regulatory obligations for vegetation clearance around powerlines imposed by the Electricity

Act 1996 (SA) and Electricity (Principles of Vegetation Clearance) Regulations 2010, including:

mandatory minimum and maximum clearance requirements

maximum inspection intervals

actual vegetation growth rates, and

unit costs for inspection and clearance activities, including with regard to internal and contractor

costs.

In considering whether the effect of the event could have been prevented or mitigated, the AER has

examined in particular those factors which are controllable by SA Power Networks.

Regulatory obligations

SA Power Networks is required to comply with regulatory obligations regarding vegetation

management. These requirements aim to maintain safe clearances between vegetation and

powerlines, in both BFRAs and NBFRAs. Compliance with these obligations is audited by the Office

of the Technical Regulator. SA Power Networks must inspect all powerlines at least once every three

years. The extent to which vegetation clearance work can be deferred is therefore limited. Also, the

extent to which trees in the vicinity of powerlines can be trimmed is limited by the Regulations. This

means SA Power Networks cannot increase the extent to which it trims trees in order to account for

higher growth rates or to extend the trimming cycle.

The AER also acknowledges that SA Power Networks' response to changes to the Regulations in

February 2010 by adopting a 'risk based approach' to the clearance of vegetation around low risk

power lines in prescribed areas has not increased its vegetation management costs and has been

taken into account in estimating the efficient pass through cost amounts.

Vegetation growth rates

As noted in section 4.2.1, the rate at which vegetation grows within SA Power Networks' distribution

area is not controllable by SA Power Networks. Over an extended period of time, there are actions

that a DNSP may pursue to reduce the overall growth and find rates affecting its network. These

include tree replacement programs and information programs for councils and customers, to replace

unsuitable trees with lower and slower growing species and encourage appropriate plantings in future.

SA Power Networks already pursues some aspects of these programs, for example the publication of


an approved tree list for planting in the vicinity of powerlines. The costs and benefits of such

programs, for any DNSP, should be considered in the context of the regulatory determination process.

However, in the short term, SA Power Networks cannot control the growth rate of the existing

vegetation stock in response to a change in climatic conditions.

Unit costs

SA Power Networks uses contractors to undertake all scoping and cutting work for its vegetation

clearance program. SA Power Networks' staff then undertake audits of contractor performance to

ensure compliance with its regulatory obligations. The basis of engagement is a $/hour rate for

scoping work and then a fixed price per span (BFRAs) or per tree (NBFRAs) for cutting work.

The unit rates charged by SA Power Networks' vegetation management services contractor are less

than those included in SA Power Networks' regulatory proposal for the current regulatory control

period. As such, SA Power Networks' vegetation management services contractor rates have not

contributed to the increase in vegetation management costs but rather contributed to the mitigation of

these costs.

Actual operating expenditure

The AER reviewed SA Power Networks' actual operating expenditure for 2011-12 to determine what

scope SA Power Networks had to shift resources between operating expenditure categories in order

to provide some capacity to meet unexpected costs. Although SA Power Networks incurred additional

vegetation management costs of $16.7 million ($ nominal) above its allowance, which SA Power

Networks are not seeking to pass through to customers, SA Power Networks' total operating

expenditure was only $6.2 million ($ nominal) greater than its allowance. This suggests that SA Power

Networks was able to at least partially absorb part of the vegetation management overspend in 2011-

12 through reductions in other operating expenditure categories. The cost pass through regime,

however, does not require a DNSP to exhaust its operating or capital expenditure allowances in order

to apply for a pass through. Operating expenditure data for SA Power Networks was not available for

2012-13.

4.2.3 Material change in costs

The AER considers that the magnitude of the increase in SA Power Networks' costs to provide

distribution services is material.

The definition of the general nominated pass through event includes the definition of 'material' for the

purposes of this event. For the purposes of the general nominated pass through event, 'material'

means:18

the costs associated with the event would exceed 1 per cent of the smoothed forecast revenue specified in

the final decision in each of the years of the regulatory control period that the costs are incurred.

The AER interprets this to mean that the incremental costs incurred in each regulatory year will be

considered to be material if they exceed 1 per cent of the smoothed forecast revenue for that year.

The incremental costs associated with the event forecast by SA Power Networks, the forecast costs

approved by the AER, and SA Power Networks' smoothed forecast revenue for each regulatory year

are shown in table 4.2.

18 AER, Final decision - SA distribution determination 2010-11 to 2014-15, May 2010, p. 242.


Table 4.2 Materiality of pass through costs

($m nominal) 2012-13 2013-14 2014-15

Smoothed revenue requirement 761.9 825.7 851.5

Materiality threshold (1%) 7.6 8.3 8.5

Proposed pass through amount 14.9 16.2 12.1

Approved incremental opex 14.9 11.4 9.4

As shown in table 4.2, the actual and forecast costs incurred as a result of the pass through event

exceed the materiality threshold in each year for which costs are incurred.

The AER agrees that the increased vegetation growth rates experienced by SA Power Networks have

materially increased SA Power Networks' costs of providing direct control services. This conclusion is

on the basis of the AER’s analysis of the financial metrics presented by SA Power Networks.


5 Positive change event

The NER defines a positive change event as19

:

For a Distribution Network Service Provider, a pass through event that materially increases the costs of

providing direct control services.

The AER has concluded that SA Power Networks' pass through application meets the criteria of a

general nominated pass through event (and therefore, of a pass through event). As part of that

consideration, the AER also considered materiality.20

It found that the pass through event did

materially increase the costs to the service provider of providing direct control services during the

regulatory control period. Therefore, the AER considers that a positive change event has occurred.

Clause 6.6.1(d) of the NER provides that if the AER determines that a positive change event has

occurred, the AER must determine:

the approved pass through amount; and

the amount to pass through to Distribution Network Users each year during the regulatory control

period.21

The remainder of this decision deals with the AER’s determinations on these matters.

19 Chapter 10 of the NER.

20 See section 4.2.3.

21 Clause 6.6.1(a) of the NER.


6 Assessment of the costs likely to be incurred

The AER has determined that the approved pass through amount to be passed through to network

users is $35.1 million ($2009-10). This is approximately $5.5 million or about 13.5 per cent less than

that proposed by SA Power Networks.

Table 6.1 sets out the approved incremental opex costs and pass through amount.

Table 6.1 Approved incremental opex costs and pass through amount ($2009-10)

2012-13 2013-14 2014-15

Incremental vegetation clearance opex 13.8 10.3 8.2

Approved pass through amount - - 35.1

6.1 Vegetation clearance costs

SA Power Networks' application detailed what it considered to be the likely incremental vegetation

clearance costs arising from the pass through event. The AER has identified a number of issues with

SA Power Networks' proposed forecasts, and has amended the forecasting methodology accordingly.

These issues are discussed in turn below.

6.1.1 Inflation and labour cost escalation

The AER has amended SA Power Networks' forecast inflation for 2012-13.

SA Power Networks' forecast inflation of 2.52 per cent for 2012-13 is consistent with the forecast rate

of inflation set out in its current regulatory determination. For the purposes of SA Power Networks'

regulatory determination, the rate of inflation for 2012-13 is measured by the change in the eight

capital cities weighted average consumer price index (CPI) from March 2012 to March 2013.

The Australian Bureau of Statistics published the quarterly CPI data for March 2013 on 24 April 2013,

after SA Power Networks submitted its pass through application. The AER has therefore updated the

model proposed by SA Power Networks to forecast its vegetation clearance costs to reflect the actual

CPI figure. The actual rate of inflation for 2012-13 is 2.50 per cent.

The AER has also amended the manner in which SA Power Networks applied the labour cost

escalators approved as part of the current regulatory determination. The model submitted by SA

Power Networks incorrectly applied the approved escalators in different years to those approved. The

AER has corrected this minor error in modelling the approved pass through amount.

The model submitted by SA Power Networks also incorrectly applied the joint impact of the CPI and

labour cost escalator forecasts. The AER has corrected this minor error in modelling the approved

pass through amount.

6.1.2 High vegetation growth rates in 2013-14

The AER does not accept SA Power Networks' assumption that high vegetation growth rates will

persist into the second half of 2013. The AER considers it likely that vegetation find rates in this

period will reflect an average rate of growth, and that forecast vegetation clearance costs for this


period should be reduced accordingly. In coming to this conclusion, the AER has had particular

regard to r. 6.6.1(j)(2) of the NER, which requires the AER to take into account costs the DNSP 'is

likely to incur'.

The relationship between rainfall conditions and vegetation growth rates is discussed in SA Power

Networks' pass through application, particularly in the report prepared by GHD entitled Recent

Seasonal Climate Variability and Vegetation Growth Effects. SA Power Networks has forecast that

above average vegetation growth rates will persist until at least the end of 2013, assuming that

'rainfall conditions return to average in 2013' and noting that 'GHD has advised that a change in

rainfall conditions will take approximately 12 months to manifest itself in a change in vegetation

growth rates'. 22

In response to questions from the AER, SA Power Networks subsequently stated it

had actually assumed an 18 month lag between a change in rainfall conditions and a material impact

on growth rates.23

The AER considers SA Power Networks' assumption that high vegetation growth rates will persist

throughout 2013 is not reasonable, and fails to have regard to actual rainfall conditions experienced in

South Australia since April 2012. The incremental costs forecast by SA Power Networks for the period

from 1 July to 31 December 2013, to the extent they reflect assumed above average growth rates, are

not likely to be incurred and therefore should not be passed through to customers. The AER's reasons

for this conclusion are set out below.

SA Power Networks' pass through application states on a number of occasions that above average

rainfall continued to occur in South Australia throughout 2012.24

This is not the case. The AER's

analysis of rainfall conditions in South Australia in 2012 and 2013, based on information from the

Bureau of Meteorology, shows that:

the 2011-2012 La Niña event concluded in March 2012, and ENSO indicators have remained

generally neutral since that time

2012 was the driest year since 2006, with temperatures 0.5 degrees warmer than average

spring 2012 was the third driest spring on record, and the driest since 1967, with temperatures

1.8 degrees above the long term average

the 2012-13 summer was the driest summer since 1985-86, with temperatures averaging

1.5 degrees above the long term average, and

rainfall for the 12 month period from April 2012 to March 2013 was the third lowest on record in

South Australia.

Figures 2 and 3 below show the level of rainfall received in South Australia for the most recent

12 month and 18 month periods. As can be seen, for the significant majority of the geographical area

covering SA Power Networks' distribution network, rainfall in the 12 month period to 30 April 2013 has

been either below or very much below average. In the 18 month period to 30 April 2013, rainfall in SA

Power Networks' distribution area has been mostly average or below average, with small areas of

very much below average and above average rainfall.

22 SA Power Networks, Vegetation clearance pass through application, 11 April 2013, p. 23.


24 SA Power Networks, Vegetation clearance pass through application, 11 April 2013, pp. 3, 4, 11 and 13.


Figures 2 & 3 South Australian rainfall deciles: 1 June 2012 - 31 May 2013 and

1 December 2011 - 31 May 2013

Source: Bureau of Meteorology, viewed at www.bom.gov.au on 6 June 2013.

It is clear that South Australia, and particularly the southern half of South Australia in which SA Power

Networks' distribution network is mostly located, has generally experienced either average, below

average or very much below average rainfall for the last 12 to 18 months. At the same time, maximum

temperatures in South Australia have been 0.5 - 1.5 degrees above average.25

Future rates of vegetation growth and required clearance work are difficult to predict. However, while

above average rates of vegetation growth are possible in the second half of 2013, the AER does not

consider this to be likely given recent climatic conditions. The AER considers it is more likely that the

average or below average rainfall and above average temperatures experienced for the last

12-18 months will reduce vegetation growth and find rates in the second half of 2013. In accordance

with r. 6.6.1(j)(2) of the NER, the AER must only approve the pass through of costs which are likely to

occur.

The AER has amended SA Power Networks' forecast vegetation clearance model to reflect an

assumption of average vegetation growth and find rates for the whole of 2013-14. This forecast,

however, is still higher than that reflected in the AER's 2010-15 distribution determination for this

category of costs.

6.1.3 Average find rates

The AER considers SA Power Networks' forecast equivalent find rate for years of average vegetation

growth in BFRAs is excessive. The AER considers the midpoint of the range of observed find rates in

high and low growth years is appropriate to forecast the likely find rate in a period of average growth.

The number of spans requiring clearance in average growth years is forecast by SA Power Networks

at 11.9%, compared to a rate in high growth years of 14.6% and 5.5% in low growth years. That is,

the find rate in an average year is expected to be above the midpoint of the low and high growth

years. The find rate for an average growth year has been determined solely by reference to the high

growth find rate. The AER considers that, while this rate is possible, in forecasting 'likely' costs a more

25 Bureau of Meteorology, Maximum temperature anomaly 1 June 2012 to 31 May 2013, viewed at www.bom.gov.au on 6

June 2013.




conservative find rate should be utilised which references both the observed high and low growth

period find rates. The AER considers the midpoint of the range of observed find rates in high and low

growth years is appropriate to forecast the likely find rate in a period of average growth. Moreover, SA

Power Networks has used the midpoint for the average NBFRA find rate, but not for BFRAs.

In response to questions from the AER, SA Power Networks stated that as the low growth rate period

was associated with many years of drought, and the high growth rate period with a few years of well

above average rainfall, find rates during periods of average growth rates would be closer to the find

rate for high growth rates than low growth rates.26

The AER considered SA Power Networks' response but was not persuaded that the find rates during

periods of average growth should be closer towards the observed high growth rate find rates than to

the low growth rate find rates. The AER considers that SA Power Networks has not demonstrated that

the impact on growth of many years of drought is significantly different to the impact on growth from a

few years of above average rainfall. On this basis, the AER does not accept SA Power Networks'

forecast equivalent find rate for years of average vegetation growth in BFRAs.

6.1.4 Use of 'optimised' find rates in 2012

SA Power Networks has used their 'optimised' find rate of 17.1% in BFRAs in 2012-13 rather than the

actual 2012 cyclic find rate of 16.2%. SA Power Networks justified the increase in the actual 2012

cyclic find rate for 2012-13 on the basis that the actual 2012 cyclic find rate is likely to have been

under-reported because of the inspection method used in 2012.27

SA Power Networks stated that the

inspection method in 2012 used a lower proportion of ground inspections than an optimal inspection

method and that it was required to employ a higher proportion of aerial inspections in 2012 than

optimal because of resource constraints.

Based on data supplied by SA Power Networks, the AER was able to confirm that in 2012 the

average find rate for aerial inspections was less than the average find rate for ground inspections in

BFRAs. SA Power Networks also stated that the overall (cyclic and pre-DFDS) find rate forecast of

14.6% is lower than the overall find rate of 14.9% for 2011-12 on the basis of a reduction in the pre-

DFDS find rates from 12.5% in 2011-12 to 1.3% in 2012-13.

The AER considers that the find rate forecast for 2012-13 in BFRAs is reasonable.

6.1.5 Application of the incremental overhead rate to the total forecast expenditure

The incremental overhead rate of 1.5% has been applied to the total forecast vegetation clearance

expenditure. In response to questions from the AER, SA Power Networks stated that the incremental

overheads were for additional personnel and administrative costs due to significantly increased

volumes in respect of vegetation management activity.28

In particular, SA Power Networks stated that

it appointed a new Vegetation Manager, Programme Manager/Analyst, Vegetation Support Officer

and additional staff to process and verify the invoices prior to payment.29

The total value of these

incremental overheads forecast by SA Power Networks is approximately $1.5 million ($2009-10).

26 SA Power Networks, Response to AER information request, 3 June 2013.





The AER considers that given the additional volume of vegetation management activity as a

consequence of an increase in vegetation growth rates, the employment of additional resources is

reasonable. The level and cost of these additional resources is also considered reasonable.


7 Conclusion

The amount the AER has determined for SA Power Networks' vegetation management costs arising

from the general nominated pass through event is $35.1 million ($2009-10). This represents a

reduction of approximately $5.5 million ($2009-10) or about 13.5 per cent less than that proposed by

SA Power Networks. Table 7.1 summarises the AER's decision.

Table 7.1 AER decision - SA Power Networks vegetation clearance pass through

application

Millions $2009-10

SA Power Networks' pass through proposal $40.53

Adjustment for SA Power Networks' assumption that high vegetation growth rates will persist into the

second half of 2013 ($1.85)

Adjustment for SA Power Networks' forecast equivalent find rate for years of average vegetation

growth in bush fire risk areas ($4.84)

Adjustment for amendments to SA Power Networks' forecast inflation for 2012-13 and the manner in

which SA Power Networks applied the labour cost escalators $0.02

Time value of money adjustment (2013-14 pass through amount recovery delayed one year to 2014-

15) $1.20

AER decision $35.06


A Compliance with section 6.6.1(c) of the NER

The AER has evaluated SA Power Networks' pass through application and finds that it conforms with

the requirements of section 6.6.1(c) of the NER. Section 6.6.1(c) of the NER specifies the timing and

nature of a DNSP’s pass through application. The AER’s considerations are set out below.

A.1.1 Requirements of section 6.6.1(c) of the NER

To seek the approval of the AER to pass through a positive pass through amount, a DNSP must

submit to the AER, within 90 business days of the relevant positive change event occurring, a written

statement which specifies:

1. the details of the positive change event; and

2. the date on which the positive change event occurred; and

3. the eligible pass through amount in respect of that positive change event; and

4. the positive pass through amount the provider proposes in relation to the positive change event;

and

5. the amount of the positive pass through amount that the provider proposes should be passed

through to Distribution Network Users in each regulatory year during the regulatory control period;

and

6. evidence:

i. of the actual and likely increase in costs referred to in subparagraph (3); and

ii. that such costs occur solely as a consequence of the positive change event; and

7. Such other information as may be required under any relevant regulatory information instrument.

A.1.2 Written application made within 90 business days

A Distribution Network Service Provider must submit to the AER, within 90 business days of the

relevant positive change event occurring, a written statement which specifies the details of the pass

through application.

SA Power Networks submitted its pass through application on 11 April 2013. The application satisfies

the requirement of a being a written statement. The relevant positive change event, the significant and

sustained increase in vegetation growth rates commencing in 2011, is continuous and ongoing. As

such, the application has been made within 90 business days of the event occurring.

The AER considers this requirement has been met.

A.1.3 Details of the positive change event

The pass through application must specify the details of the positive change event. SA Power

Networks nominated the material increase in vegetation management costs as a result of an

uncontrollable and unexpected increase in vegetation growth rates which followed above average

rainfall that has been experienced in South Australia since that time as the relevant positive change

event.



A.1.4 Date of the positive change event

The pass through application must specify the date on which the positive change event occurred.

SA Power Networks’ pass through application states that the positive change event commenced in

about September 2011, and that the increased vegetation growth rates have been ongoing and

continuous since that time. The AER considers that whether or not an event occurs over an extended

period of time is a question of fact. The positive change event is therefore ongoing.


A.1.5 Eligible pass through amount

The pass through application must specify the eligible pass through amount in respect of that positive

change event.

SA Power Networks has identified the eligible pass through amount in respect of the positive change

event as $38,913,540 ($2009-10).


A.1.6 Positive pass through amount

The pass through application must specify the positive pass through amount the provider proposes in

relation to the positive change event.

SA Power Networks has proposed the positive pass through amount to be a total of $40,518,130

($2009-10).

The AER considers that this requirement has been met.

A.1.7 Positive pass through amount in each year of the regulatory control period

The pass through application must specify the amount of the positive pass through amount that the

provider proposes should be passed through to Distribution Network Users in each regulatory year

during the regulatory control period.

Table A.1 Positive pass through amount ($m 2009-10)

2012-13 2013-14 2014-15 Total

Positive pass through amount - 20.3 20.3 40.5

Source: SA Power Networks, Veg_Clearance_costs_pa_pass_thru_final_3_May_2013_final_insp_correction.xlsx, 3 May 2013.

The AER considers that this requirement has been met.

A.1.8 Evidence of actual and likely increase in costs

The pass through application must specify evidence of the actual and likely increase in costs and that

such costs occur solely as a consequence of the positive change event.


Section 3.4 of SA Power Networks’ pass through application details what SA Power Networks

considers to be the actual and likely increases in vegetation clearance costs. This is supported by

both a description of the costs and how they are derived. Section 3.7 further discusses the derivation

of the costs and sets out why SA Power Networks considers the costs have occurred solely as a

consequence of the positive change event. Additionally, attachment 5 (confidential) of SA Power

Networks' application provides details of the volume and cost calculation of the forecast increase in

vegetation management costs that it is likely to occur.

The AER considers this requirement has been met, insofar as SA Power Networks has specified its

forecast costs. However, the AER has amended this forecast to ensure only likely costs caused by

the event are passed through to customers, as discussed in section 6 of this decision.

A.1.9 Such other information as may be required under any relevant regulatory

information instrument

The AER did not require any additional information under any relevant regulatory information

instrument.


A.1.10 Conclusion regarding the compliance of SA Power Networks’ pass through

application with section 6.6.1(a) of the NER

The AER considers that SA Power Networks’ pass through application is compliant with the

administrative requirements of section 6.6.1(c) of the NER.

Documents

SA Power Networks cost pass through application for ... Decision - SA Power...AER Decision | SA Power Networks' vegetation clearance cost pass through 1 Final Decision SA Power Networks