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Molesworth & Featherston (Weekend) – June 17 2006

Molesworth & Featherston - Weekend Update edition

Business and Political News
June 17th 2006

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Lights out, no one home

Some of the criticism directed at Transpower after last week’s power cut in Auckland has sounded suspiciously like the Think Big argument that energy infrastructure should be shored up regardless of the cost.

The cut resulted from a broken shackle, though that detail is of little more than engineering interest. The company has been criticised because there was no back-up line into Auckland, and some critics claimed the failure resulted from the generally poor condition and age of the substation.

Transpower says Auckland has relied heavily on Otahuhu for decades. A second substation might be built and development at the Otahuhu site is already planned. But neither of these options will ensure the power never again goes out for a few hours as it did on Monday.

The first economic consideration should be that the cost of back up - or ‘maintenance’ to a no-fail level -- is less than the cost of the outage. The cost of the outage is very high - it’s not only the direct cost of causing businesses to close, mobile phones to fail and the like, but also the loss of confidence that the infrastructure will always be there no matter what.

Despite the high cost of outages it’s likely there will never be a time when it makes sense for Transpower to back up every part of its network. The cost of preventing the odd outage is too high. Do businesses really want to pay higher power prices to ensure there is a back-up transmission line? The next question for Transpower is whether investment in backing up that particular line is the highest priority for capital investment.

Transpower cannot lawfully invest capital willy-nilly. It is strictly price controlled, accountable to one body for its investment decisions and to another for its pricing decisions. No one has yet worked out a practical way to make a business like Transpower’s truly competitive - at least not without creating more problems than exist now. A single failure is not necessarily evidence that a wrong judgement was made - though it’s the closest thing we have. It remains, however, more conspicuous but no more costly than a wrong decision resulting in over-investment.


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