Draft decision on Transpower’s NIGU application
Commission releases draft decision on Transpower’s NIGU application
The Commerce Commission has today released
a draft decision on Transpower’s application seeking to
recover its overspend on the North Island Grid Upgrade
Project (NIGU).
The NIGU project was part of a suite of initiatives aimed at improving security of electricity supply to Auckland and Northland. The Commission is reviewing the project as Transpower spent more than originally approved.
Transpower has applied to the Commission to recover $70 million more than the original $824 million approved by the Electricity Commission in 2007. The Commission’s draft decision is that Transpower should be allowed to recover $52.3 million of that overspend.
Commerce Commission Deputy Chair Sue Begg said the review found that the $70 million overspend was largely due to under-forecasting at the beginning of the project.
“NIGU was the largest and most complex transmission line project that Transpower had undertaken for many years. Accurately forecasting the costs of major infrastructure projects is challenging, so spending in excess of a forecast is not necessarily inefficient,” Ms Begg said.
“The focus of this review was to identify costs that Transpower could have foreseen and avoided. We found that $17.7 million of the $70 million overspend was avoidable and this all relates to construction costs for the 400 kV line. Specifically, this was a result of construction work being undertaken out of sequence.
“Our assessment is in line with Transpowers’ own estimates of the costs that arose from later than ideal planning, which it proposed to not recover. Our draft decision will allow Transpower to recover an additional $52.3 million from consumers, which amounts to roughly 89 cents per year for the average consumer.”
Preventing Transpower from recovering the avoidable costs from consumers will encourage it to deliver investments more efficiently, while still providing incentives for new investments that are appropriate in the future.
The Commission’s draft decision also approved the four output amendments proposed by Transpower.
The review did not revisit the original Electricity Commission decision to approve the project.
The Commission is seeking feedback on its draft decision and Transpower’s proposal by 5pm on 21 May 2015.
A copy of the draft decision can be found here.
Background
Transpower New Zealand Limited is the
owner and operator of the national grid. As system operator
it also manages the real time coordination of the
electricity market. Transpower is a State Owned Enterprise.
As a monopoly supplier, the revenue it earns and the quality
standards it must meet are regulated under Part 4 of the
Commerce Act.
What is the North Island Grid Upgrade Project?
The NIGU Project built a new 400 kV capable transmission line from Whakamaru in the central North Island to Pakuranga in South Auckland, a distance of 196 km. It was built to increase transmission capacity and improve the security of electricity supply to Auckland and Northland.
The project was approved in July 2007 by the Electricity Commission under the Electricity Governance Rules (EGRs), with a maximum allowance of $824 million. Transpower completed the NIGU Project in October 2012.
The main components of the project were:
186 km of
400 kV overhead lines strung on 426 towers from Whakamaru
North substation to Brownhill substation;
10 km of dual
220 kV underground cables from Brownhill substation to
Pakuranga substation;
a new substation at Brownhill, and
the extension of the existing Otahuhu, Pakuranga, and
Whakamaru substations; and
the acquisition of properties
or property rights for 318 properties to construct the
transmission line, lay the cable and enable the substation
projects.
What is the Capex IM?
The rules relating to Transpower’s major capital expenditure (capex) projects are set out in the Transpower Capital Expenditure Input Methodology (Capex IM) Determination.
Major capex projects are defined as those that have an expected cost greater than $20 million, and are for new assets or upgrades that enhance or develop the transmission grid. They do not include ‘like for like’ asset replacements.
The Capex IM requires Transpower to obtain the Commission’s approval for major capex projects in order to recover the full cost of its investments in the national grid from consumers. Projects are approved with a maximum allowance set for the cost of the works carried out, and a list of outputs that the project must deliver.
For major capex projects, Transpower must also obtain the Commission’s approval of any expenditure above the originally approved amount before it can recover such expenditure from consumers. Transpower must also obtain the Commission’s approval for any changes to approved outputs.
The process to date
September
2013 Transpower submitted its amendment
application
October 2013 The Commission published a paper
setting out the process it would follow in assessing the
application
November 2013 The Commission published a
second paper setting out its proposed approach to assessing
the application and the areas of the NIGU Project it
proposed to investigate
January 2014 Submissions received
in response to the Commission’s proposed
approach
August 2014 Expert reports published on the NIGU
Project
September 2014 Submissions received on expert
reports
April 2015 Draft decision published
ends