TRIBUNAL DECISION CAUSES MAJOR RETHINK OF OPEX BUDGETING
Company News, 17th March 2016

In a case that has ramifications across other regulated industries, the Australian Competition Tribunal has set aside the Australian Energy Regulator’s (AER) approach to determining an operating expenses or OPEX budget.

Gone is the ability to use simple benchmarking – and in its place is a broader range of modeling and benchmarking inputs. However, the most significant change is in the Tribunal’s impetus to also include a ‘bottom up’ review.

While much commentary has centred around the possible impact on consumer prices, little has been made of this last point. The “bottom up” approach advocated by the Tribunal requires the Regulator to consider how an OPEX should be developed cognizant of the asset base, the stakeholder requirements, together with its operating and physical context. As opposed to benchmarking, this view examines what is required to operate that particular network safely and reliably to meet customer needs.

This came after a number of the electricity network businesses successfully challenged the Regulator’s approach. Those operators use a Failure Mode, Effects and Criticality Analysis/Reliability Centred Maintenance (FMECA/RCM) or “bottom up process” as the basis of their OPEX budget.

Founder of Capability Partners Asset Management, Peter Kohler, has seen an increasing awareness of the need to undertake such “bottom up” analyses, both within and outside regulated industries, to provide a transparent approach to the determination of an OPEX budget.

“The Tribunal’s decision highlights that the FMECA/RCM process has now become a key tool in the management of physical assets,” Kohler said. “The fact that a number of operators were able to provide a defensible asset management plan went a long way to validating their claim, being that the regulator’s determination on OPEX would not provide sufficient revenue to meet safety and reliability obligations.”

Further, this FMECA/RCM tool also assists organisations meet the newly-launched ISO55000 requirement to “implement risk-based, information- and data-driven planning and decision-making processes” in relation to physical assets, Peter noted.

The release of the global ISO55000 standard has brought enormous focus to this area, with Kohler’s team of consultants being engaged to not only create asset management plans but also provide training to asset managers (both technical and financial) in organisations across Australasia. Here and abroad, companies are scrambling to get up to speed with the new best practice approach.

The outcome they are looking for is what Capability Partners call a “Defensible Budget”, i.e. one that enables an organisation to identify and demonstrate the effect of any change, whether that be a budgetary change, an asset performance change, or a change in acceptable risk. This obviously has applications for any organisation managing physical assets, irrespective of whether or not they operate in a regulated industry.

The high-profile nature of the Tribunal’s decision is set to ensure even more organisations increase their focus on developing defensible maintenance budgets, whether they are being defended internally, to shareholders, or to regulators.

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