Commission approves amendment to costs Transpower can recover for Otahuhu Substation project
The Commerce Commission has approved an amendment to the Major Capital Expenditure Allowance (MCA) for the Otahuhu Substation Diversity Project. The maximum amount of expenditure that Transpower can now recover from consumers has increased from $99.0 million to $106.1 million (all in 2009 dollars).
The Otahuhu Substation Diversity project was a major project that was initiated to urgently manage the risks identified following an equipment failure at the Otahuhu substation in 2006. This failure caused a widespread loss of supply of electricity to Auckland and Northland.
Transpower applied to the Commission for an increase in the MCA because the actual project costs exceeded the original amount approved by the former Electricity Commission.
In assessing the application, the Commission found that while Transpower’s cost forecasting could have been better, the actual costs incurred in delivering the project were efficient. As a result of the urgency associated with the impact of the black-out, Transpower decided to progress the project before developing a full assessment of the costs involved. Transpower has indicated that its cost estimation process has been improved since submitting its original proposal.
“Our decision to approve the amendment does not expose consumers to inefficient costs and maintains Transpower’s incentives to invest in the national grid,” said Sue Begg, Deputy Chair of the Commerce Commission. “We consider this is in the long-term benefit of consumers and, promotes the purpose of Part 4 of the Commerce Act.”
The final decision can be found on the Commission’s website at www.comcom.govt.nz/otahuhu-substation-diversity-project-mca-amendment-application/
Background
On 12 June 2006, an equipment failure at the Otahuhu substation resulted in a widespread loss of supply of electricity to Auckland and Northland. Following this incident, Transpower initiated the Otahuhu Substation Diversity Project to improve the reliability of supply into Auckland and Northland.
The project was approved by the former Electricity Commission, under the Electricity Governance Rules, in August 2007 with a maximum allowed cost of $99.0 million (in 2009 dollars). The functions of approving and amending Transpower’s capital expenditure have since been transferred to the Commerce Commission.
In September 2012, Transpower submitted an application to the Commission to increase the MCA for the Otahuhu Substation Diversity Project to $106.1 million (2009 dollars). Transpower was seeking to recover all the costs it incurred in delivering the project.
This amendment decision is the first to be made under the Capital Expenditure Input Methodology (Capex IM) applying to Transpower and demonstrates the process the Commission uses to evaluate each application and the relevant circumstances of the application.
The Commission expects to receive an application from Transpower at the end of June this year to amend the MCA for the North Island Grid Upgrade Project.
Capex IM
The Capex IM sets the rules applying to Transpower’s capital investments.
The Capex IM allows Transpower to recover the costs it incurs in delivering major capex projects from consumers, up to an approved level, ie, the MCA. However, the MCA is not equivalent to the price in a fixed price contract. The Capex IM recognises that circumstances may change during projects that justify an amendment to the MCA.
In deciding whether to approve an amendment to the MCA, the Commission has to assess whether the costs incurred in a project were efficient. It must also assess what would best promote Part 4 of the Commerce Act and what incentives the decision might create for Transpower.
Other criteria that inform, but do not direct, the Commission’s decision include:
• whether the reasons relating to additional costs were reasonably foreseeable and within the Transpower’s control
• what actions Transpower took to mitigate the costs outside of its control
• the possible effects of the amendment on the project’s benefits.
Any decision on an application to amend the MCA for a major capex project must be consistent with the rules of the Capex IM. You can read more about the Capex IM on the Commission’s website at http://www.comcom.govt.nz/transpower-input-methodologies/
There are various incentives on Transpower to have accurate forecasting and cost control including those provided by upfront scrutiny by participants and the Commission during the Capex IM approval process. Transpower is also required to regularly and consistently report on its projects, which will enable stakeholders to assess Transpower’s performance.