TNSP Outputs for Use in
Economic Benchmarking
AER Economic Benchmarking Workshop #2
14 March 2013
Denis Lawrence and John Kain
Economic benchmarking
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Compares the overall quantity of outputs produced to the
overall quantity of inputs used and costs incurred across
TNSPs and/or over time
Holistic, tops-down measure
Range of techniques used: total factor productivity (TFP),
multilateral TFP, econometric cost functions, data
envelopment analysis, stochastic frontier analysis
Use in building blocks regulation:
 Initial screening – accept revealed cost vs detailed analysis
 Is base year expenditure efficient?
 Efficiency improvement to be included in rates of change
 Benchmarking reports
www.economicinsights.com.au
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Data requirements
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Require data on the price and quantity (and hence value) of
all outputs and inputs and on the quantities of operating
environment variables (noting that output prices may be
shadow prices where the output is not explicitly charged for)
This then allows any of the key economic benchmarking
methods to be implemented
Given its tops-down nature, it is important to concentrate on
a relatively small number of key outputs in economic
benchmarking
Desirable to have robust and consistent data
Data backcasting may be possible and facilitate early use
www.economicinsights.com.au
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Billed vs functional outputs (1)
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Billed outputs are those items an NSP actually charges
customers for
NSP charging practices have sometimes evolved on an
ease of implementation basis rather than on a fully network
cost-reflective basis
High proportion of charges often on energy throughput
Dimensions that customers may value such as reliability,
continuity or speedy restoration after any interruption are not
explicitly charged for
Functional outputs are all those services NSPs provide to
customers which are valued by customers (of which billed
outputs are a subset)
‘Secondary deliverables’ affecting current and future system
security may also be relevant for TNSPs
www.economicinsights.com.au
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Billed vs functional outputs (2)
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Under building blocks the revenue requirement is set based
on the TNSP being expected to meet a range of
performance standards and other deliverables required to
meet the expenditure objectives
Charges typically only imposed on a subset of performance
dimensions considered in setting the revenue requirement
In the case of building blocks, it will be important to measure
output (and hence efficiency) in a way that is broadly
consistent with the output dimensions implicit in the setting
of NSP revenue requirements
Points to functional rather than billed outputs specification
but sensitivity analysis important
Need criteria to choose functional outputs to include
www.economicinsights.com.au
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Output selection criteria
1) the output aligns with the NEL and NER objectives which
are to:
a) meet or manage the expected demand for prescribed transmission
services
b) comply with all applicable regulatory obligations or requirements
associated with the provision of prescribed transmission services
c) maintain the quality, reliability and security of supply of prescribed
transmission services, and
d) maintain the reliability, safety and security of the transmission
system through the supply of prescribed transmission services
2) the output reflects services provided to customers, and
3) the output is significant
www.economicinsights.com.au
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The short list
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throughput (total or by broad user type or by location)
number of entry and exit points
measured maximum demand for those users charged
on this basis
system capacity (taking account of both transformer and
line/cable capacity)
market dispatch intervals with market impact of outages
greater than $10/MWh
loss of supply event frequency
average outage duration, and
circuit availability
www.economicinsights.com.au
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Billed outputs
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Energy throughput
Little impact on costs
Proxy for load?
Road analogy
Entry and exit point numbers
Proxy for fixed connection output components
Output or secondary deliverable?
Demand-based outputs
Based on contracted or measured maximum demand
Data should be readily available
Scores well against selection criteria
www.economicinsights.com.au
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Other functional outputs (1)
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System capacity
Captures capacity to deliver (road analogy)
Line capacity or line and transformer capacity?
Robust data readily available
Peak demand
Important cost driver but customers see reliability at peak
as relevant output
Volatility and incentive effects
Circuit availability and reliability
Reliability important to customers
STPIS includes three broad types of indicators: service,
market impact and network capability
www.economicinsights.com.au
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Other functional outputs (2)
• Circuit availability and reliability (cont’d):
 STPIS service category includes 4 components:
average circuit outage rate, loss of supply event
frequency, average outage duration and proper
operation of equipment
 Market impacts and some service indicators score well
against selection criteria
• Broader obligations
 Can include environmental, customer satisfaction and
social obligations
 Hard to measure
 Materiality?
 Ofgem secondary deliverables to manage future risk
www.economicinsights.com.au
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Output weights
• Need weights to aggregate outputs into an aggregate
output measure or to assess shadow weights estimated
by the model
• Revenue weights or cost-reflective weights
• Forming output weights on a cost–reflective basis is likely
to provide the most practical option going forward
• Cost function methods provide one way of doing this
• Information TNSPs use to demonstrate compliance with
regulatory pricing principles and for internal planning
purposes might provide another means of forming costreflective output weights
• Other methods may be required to allocate a value to
reliability outputs
www.economicinsights.com.au
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The short list
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•
•
•
•
•
•
•
throughput (total or by broad user type or by location)
number of entry and exit points
measured maximum demand for those users charged
on this basis
system capacity (taking account of both transformer and
line/cable capacity)
market dispatch intervals with market impact of outages
greater than $10/MWh
loss of supply event frequency
average outage duration, and
circuit availability
www.economicinsights.com.au
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