Wage and price forecasts for Western Power’s access arrangement

The Issue

The framework for economic regulation of certain electricity networks in Western Australia, including Western Power’s South West Integrated System, is the Electricity Networks Access Code (the Access Code).

The objective of the Access Code is to promote the economically efficient investment in, and operation and use of, networks and services of networks in Western Australia, to promote competition.

Under the Access Code, Western Power is required to submit access arrangements for its  electricity transmission and distribution networks. An access arrangement sets out the prices, terms and conditions that a network owner can charge its customers to use its infrastructure.

Synergies was engaged to assist Western Power in relation to the wage and CPI forecasts required for its proposed access arrangement for the 2017‑22 regulatory period.

Our CPI forecasts were to be used in the roll-forward of Western Power’s regulatory asset base value and WPI forecasts used in the inflation-adjusted escalation of labour costs for its operating and capital expenditure forecasts.

Methodology

Our forecasting methodology included a two stage process.

In the first stage a whole-of-economy model was used to develop economic forecasts for WA and Australia.

In the second stage, these economic forecasts were then used as inputs into an econometric model, which quantifies the relationship between the variables of interest (CPI and WPI in the EGWWS industry) and their key economic drivers. The following two regression equations were specified:

• CPI regressed against employment, the exchange rate and the oil price; and
• EGWWS sector WPI regressed against the terms of trade, CPI and employment in the EGWWS, mining and construction industries.

Our report noted that the WA and Australian economies were experiencing a significant structural adjustment following the end of the mining investment boom, while at the same time remaining exposed to ongoing instability in the global economy. Amongst other things, this had been reflected in very low interest rate and CPI outcomes. These factors created more uncertainty regarding the forecasts than would be the case in more ‘normal’ economic times

Key findings

Synergies’ key findings were:

• Somewhat weaker CPI and wage forecasts for WA compared to Australia over the 2017‑22 regulatory period, reflected in modest average real labour escalation of 0.7% per annum.
• Over the outlook period, national wages growth were expected to rebound from current depressed levels but remain below the historical average for the EGWWS labour sector.

Synergies’ expert report can be accessed here.