We have opted to use Modern Equivalent Asset Value (MEAV) for this purpose as this measure recognises substation assets as well as linear assets. The inspection, maintenance and replacement of plant assets at all voltages constitutes a significant proportion of network spend and deserves to be incorporated in a cost driver. MEAV also reflects the fact that higher voltage assets generally cost more to manage than lower voltage assets. Because a DNO’s current asset base is already sized to reflect the location of its existing customers, using MEAV in a model has the added advantage of avoiding the need to develop and include a density measure as a cost driver that reflects the incremental costs of working in very sparse and very dense areas. It must be recognised that the use of MEAV in totex models will still have shortcomings. For example it does not take into account variations in capex profile, it does not reflect the level of outputs delivered by companies, fails to differentiate between efficient delivery of work and non-delivery and does not take account of fixed costs that can be shared by ownership groups. For these reasons we review the results of totex modelling ‘in the round’. The results guide our assessment as to whether our plan is efficient, but we do not specifically seek to achieve the predicted costs suggested by the totex model.
3.5
Other cost drivers that we dismissed
The use of customers or peak load as cost drivers would suggest that if a DNO’s customer numbers or peak load fall it would immediately reduce the size of its asset base to reduce apparent redundancy from the network. The reality of what would constitute an efficient response in these circumstances is somewhat different. DNOs inherited networks with particular characteristics at privatisation. Their current cost bases are largely driven by the need to serve the customers connected to their network, the legal obligations associated with owning assets, with the current health and loading of those assets. The peak load of the total network is not a good measure of the drivers of DNOs’ spend in the short or medium term. DNOs’ reinforcement expenditure is largely driven by local changes in peak demand. For example, over recent years we have been required to make substantial expenditure in the Manchester area to address localised peak load increases, despite the fact that our overall peak load has dropped. It is not generally efficient to ‘downsize’ a lightly loaded section of the network that was specified to accommodate higher loadings in the past. The cost of installing new smaller assets, combined with the cost of rendering existing assets redundant would generally be greater than maintaining the current assets in service. For these reasons we do not use customer numbers or peak load as cost drivers. Network length is an inferior cost driver because it takes no account of the considerable number of expensive to maintain and replace substation assets and assumes that all network voltages have the same unit costs of maintenance and replacement. We accept that comparable output measures do not currently exist and therefore ruled out undertaking output delivery efficiency analysis on the basis of data availability rather than principle. As a consequence, none of the drivers used reflect outputs delivered and therefore DNO under-delivery may inappropriately influence results from this model – regardless of the cost driver chosen. Electricity North West Limited
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1 July 2013