Commission confirms Grid Upgrade Project decision

6 August

Commission confirms North Island Grid Upgrade Project decision

The Commerce Commission has today released its final decision increasing the amount Transpower can recover for the North Island Grid Upgrade (NIGU) Project by $52.3 million.

The NIGU Project was part of a suite of initiatives aimed at improving security of electricity supply to Auckland and Northland. Transpower applied to the Commission to recover $70 million more than the amount of $824 million approved by the Electricity Commission in 2007.

Commission Deputy Chair Sue Begg said after considering all submissions on the draft decision released in April, the Commission has confirmed that Transpower can recover $52.3 million of the $70 million it applied for.

“The final decision released today confirms our draft finding that Transpower’s overspend was largely due to under-forecasting of the cost at the outset of the project. Accurately costing projects of this scale is challenging and the majority of the additional costs were unavoidable,” Ms Begg said.

“However, Transpower will need to absorb $17.7 million of the additional costs it has applied for. This relates to the cost of construction work being undertaken out of sequence that could have been avoided.”

This decision will be reflected in transmission revenues for the 2016/17 pricing year. The impact on pricing for individual consumers will depend on the outcome of the transmission pricing review currently being undertaken by the Electricity Authority.

The Commission’s final decision also approved the four output amendments proposed by Transpower.The review did not revisit the original Electricity Commission decision to approve the project.

A copy of the final report 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 involved the building of 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. The Commission considers a number of factors when assessing an application by Transpower to recover such amounts, including the extent to which any costs were avoidable.

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
May 2015 Submissions received on draft decision
August 2015 Final decision published

ends

© Scoop Media