Comment
Proposed Regulatory process for small grid investments
9. The revised GPS proposes a streamlined process for transmission investments under $20 million in value. Under this process Transpower need only demonstrate that they have effectively consulted with interested parties. The Commission will not be required to carry out a merits review of investment decisions under $20 million.
Assessing the problem
10. Evidence provided by Transpower indicated that it took between 3-9 months to prepare a grid upgrade proposal to the level of detail required by the Commission, and the Commission took between 2 to 6 months to approve it.
11. Transpower claims that this process is inefficient for small investments as it ties up expert resources within Transpower, the Commission and industry participants, and delays the commencement of important, but low cost, grid upgrades. Transpower claim that the Commission's requirements lead to complex and costly analysis for projects which are clearly self evident and do not warrant this level of evaluation. This in turn risks delay to related maintenance or replacement and refurbishment works (including larger maintenance projects).
12. An alternative view is that the problem lies largely with Transpower's internal processes. The Major Energy Users Group (MEUG) notes that the last four projects approved by the Commission under $20 million all took 55 days or less to approve, thereby implying that Commission is efficient. These timeframes are confirmed by the Commission.
13. The extent to which the existing rules gives rise to unnecessary costs or delays in progressing small investments is therefore unclear from the evidence to date. Nevertheless, I believe there is sufficient evidence of delay and costs, and insufficient evidence that the current level of regulatory scrutiny adds value, such that a change to the GPS for small projects is warranted.
Consultation Outcome
14. There is a statutory requirement to consult with the Commission before issuing any GPS. In addition, as a matter of good process the revised GPS was released publicly on 2 March 2009, and 32 submissions were received: 14 from interest groups (including a mix of business and domestic consumer groups); four from large business; nine from lines companies, and five from retailer/generators. Discussions and submissions have also been received from Transpower, the Commerce Commission, and the Ministry for the Environment.
15. Submitters were generally supportive of streamlining of the approval process and agree that this would benefit New Zealand and the industry. Submitters raised a number of issues regarding the GPS as drafted. The most significant of these are discussed in turn below.
Modifications to the draft wording
16. The most significant submissions received were on paragraphs 87 and 88 of the draft GPS concerning small transmission investment.
17. Paragraphs 87 and 88 of the GPS as released for consultation were drafted as follows:
Investment in minor transmission works
87 The Government's objective in relation to the investment in and maintenance of the transmission network is to put in place a more streamlined process for the approval by the Electricity Commission of grid upgrades by Transpower where the total cost of a project is less than $20M.
88 For all future small projects which cost less than $20M the Government seeks the following outcomes:
- Transpower should develop and submit upgrade plans to the Commission for approval.
- Grid upgrade plans should demonstrate the rationale for all expenditure (operational, maintenance and capital), taking into account good industry practice for power system operation.
- In developing grid upgrade plans Transpower should undertake the detailed planning role; it should consult with materially affected parties, and have regard to all submissions or objections received prior to submitting the grid upgrade plan to the Commission.
- Once the Commission has received a grid upgrade plan the Commission should approve the plan without undue delay provided it is satisfied that Transpower has complied with the requirements above.
- The Commission should not be required to assess and evaluate the merits of small investment plans of a value less than $20 million.
- If Transpower wants to amend an approved grid upgrade plan it should follow the same process unless the total project cost under the amended plan exceeds $20M. In that case, the standard process, as outlined in paragraphs 78 to 86, should apply.
18. The Commission supports the general objective expressed in paragraph 87 of the proposed GPS. It is, however, concerned that the specific requirements set out in paragraph 88 may present it difficulties during the rule change process. The Commission submits that the proposed change to the GPS is too prescriptive and does not give the Commission sufficient latitude to assess a broad range of options to achieve the objectives defined in paragraph 87 of the GPS.
19. The Commission has therefore submitted that the Government should consider setting the proposed amendments in the GPS at a higher level, directed at the objective to be pursued, rather than the means by which it should be pursued.
Use of GPS for policy directives
20. Concerns were raised by Consumer Coalition on Energy (CC93), MEUG, Federated Farmers, and Rio Tinto on the use of the GPS for such specific policy directives. These parties claimed that the proposed amendments were potentially in conflict with the rules (as raised above the Commission), and also expressed concern that "tinkering" with the GPS was "a very poor regulatory approach which exacerbates concerns around the quality of governance in the sector".
Minor wording changes in paragraph 87 and 88
21. Submissions identified wording changes that would improve the intent and flow of paragraphs 87 and 88. The majority of these were minor additions that added qualification to wording such as the insertion of the words "expected" before total costs and "upgrade" before project.
Coordination with Commerce Commission
22. The Commerce Commission noted that if the Electricity Commission reduces the level of scrutiny for those between $1.5m1 and $20m, it may need to consider whether it needs to increase its scrutiny in this area. The Commerce Commission advised that it cannot pre-determine its views and may need to consult on the treatment of Transpower's capital expenditure for this range of projects.
Increase threshold
23. Several parties asked for the threshold to be increased to $50 or $100 million. Others asked on what basis $20m had been chosen. I consider that $20m is an appropriate level at this time, as it balances the risk of lesser project scrutiny against the need to expedite transmission investment.
Recommended response for improving the regulatory process for small transmission projects:
24. The issues raised by submitters suggest three different options for consideration. These are:
- Option 1: Continue with the GPS as drafted for consultation (with minor improved wording);
- Option 2: Describe the outcomes sought in a less prescriptive manner (as suggested by the Commission); or
- Option 3: Keep with the status quo.
25. I will discuss each of these options in turn.
Option 1: Retain current drafting of paragraphs 88 and 89
26. The GPS as consulted on clearly sets out what the Government's expectations are for the Commission when considering smaller grid upgrade plans and should be straight forward to implement.
27. The Ministry of Economic Development's legal advice is that there is a risk that paragraph 88, as drafted could be legally challenged on the basis that it goes beyond the scope of section 172ZK of the Act. This is because paragraph 88 arguably (at least in part) consists of processes rather than outcomes.
28. The Ministry has also considered the Commission's concern that paragraph 88 is too prescriptive and would present difficulties during the process of amending rules under section 172F. The Ministry's legal advice is that, while paragraph 88 is expressed in quite specific terms, it should still be possible for the Commission to fulfil its duties in relation to rule making., Matters of detail will still need to be spelled out in the rules in order to give effect to paragraph 88 and there is scope for the Commission to consider a range of different options in relation to each such rule. The Ministry considers that the proposal is, therefore, workable.
29. There is a risk that the Commerce Commission may not be satisfied with this level of scrutiny and may in compensation seek to increase its own level of scrutiny in addition to the Electricity Commission's process, thereby defeating the objective of a more streamlined process. I do not believe this is a significant risk because, any additional process put in place by the Commerce Commission (for small grid upgrades) is likely to be more streamlined than the process currently required by the Electricity Commission.
30. Overall this option achieves the objective of a streamlined process for small grid investments.
Option 2: Focus on the outcomes sought in paragraph 88
31. A less prescriptive requirement would be to amend the GPS as follows:
Investment in minor transmission works
87 The Government's objective in relation to investment in the transmission network is to put in place a more streamlined process for approval by the Electricity Commission of grid upgrade proposals by Transpower where the expected total cost of the upgrade is less than $20 million.
88 The Government expects the Commission to develop and report to the Minister of Energy and Resources by 31 July 2009, on the processes that will achieve the objectives and outcomes expressed in paragraphs 87.
32. This wording drafted by my officials is consistent with that suggested by the Commission in its submission. It allows the Commission to consider other options for streamlining the investment decision process.
33. However, I believe there is a risk with this option that any resulting changes to the rules or the Electricity Commission's processes would not sufficiently reduce the time taken to have small grid upgrade plans developed and approved, nor would it absolutely preclude merits reviews being undertaken on small projects in future by the Commission.
Option 3: Status Quo
34. An option would be to hold off making changes to the GPS in this area until the Ministerial Review on the electricity market is completed. However, I believe that streamlining small investments is a matter that can and should be addressed quickly.
35. The potential hold ups being experienced, the potential savings identified by Transpower, and limited progress in improving these issues to date, highlights the need for me to send a very strong signal about the need for progress in this area.
Conclusion:
36. Each of the options above has its merits, and its own risks. On balance I believe that Option 1 is the best way to proceed, as it achieves the desired outcomes and should be straightforward to implement.
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