2.1 ASSET MANAGEMENT PLANS

In terms of requirement 24 of the Electricity Information Disclosure Requirements, 2004 (“Requirements”) made under section 57T of the Commerce Act 1986 (the Act), all Electricity Distribution Businesses (“distribution businesses”) in New Zealand are required to publicly disclose an asset management plan (“AMP”) within three months of the beginning of each financial year.2 The information that is required to be disclosed is described in Schedule 2 to The Requirements and in Section 4 of the Electricity Information Disclosure Handbook (“Handbook”).3

The Commerce Commission (Commission) has requested PB Associates to :

• review current AMPs for compliance with the Requirements and the Handbook, identifying specific areas of weakness and remedial actions required to comply with the Requirements;

• recommend ‘best practice’4 in terms of the planning, scope, structure, content of distribution business AMPs and the consultation process for preparing those plans;

and

• propose specific revisions to the Commission’s prescriptions for information to be included in AMPs, to incorporate recommended ‘best practice’.

In fulfilling this assignment, we reviewed the publicly disclosed AMPs for 2004 of all 28 distribution businesses, as listed in Appendix A, against the specifications for AMP disclosure as presented in the Requirements. The specific findings for each distribution business have been provided in confidence to the Commission and for release to each respective distribution business.5

General findings and recommendations based on the AMP reviews are presented in this report. This report also contains recommendations for changes to the Requirements with regard to the preparation and content of distribution business AMPs. These recommendations are based on the quality of the plans reviewed, reviews of international asset management practice and discussions with various stakeholders, including the Commission, distribution businesses and third parties.

2.1.1 Intent of disclosed Asset Management Plans

Central to the review of the AMPs is an understanding of the intent and importance of disclosing AMPs as part of the current regulatory regime, both in terms of their contribution to facilitating the efficient operation of distribution businesses and from their regulatory purpose of information disclosure.

The overall purpose of the information disclosure regime, as set out in the Act, is :

2 The Requirements refer to Disclosing Entities. The term “distribution businesses” is used in this report for the same.

3 Issued by the New Zealand Commerce Commission on 31 March 2004.

4 ‘Best practice’ has been defined by the Commission as “a specific action or set of actions exhibiting quantitative and qualitative evidence of success together with the ability to be replicated and the potential to be adapted and transferred. It should not be considered to be current average or standard practice. It is likely not even the best of current practices but may contemplate a reasonable level of innovation, taking into account the current state of knowledge in the electricity industry internationally, developments in comparable methods in other areas and reasonable compliance costs in moving all distribution businesses to the proposed level of compliance.”

5 We understand that these reports have yet to be approved by the Commission, before their release.

“to promote the efficient operation of markets directly related to electricity distribution and transmission services by ensuring that large line owners and large electricity distributors make publicly available reliable and timely information about the operation and behaviour of those businesses, so that a wide range of people are informed about such factors as profits, costs, asset values, price (including terms and conditions of supply), quality, security, and reliability of supply of those businesses.”6

Hence the primary objective of information disclosure is to promote the efficient operation of electricity transmission and distribution markets by providing a dataset that enables an external and independent assessment of performance in terms of the three component objectives:

• allocative efficiency—concerning pricing and returns;

• productive efficiency—concerning operating inputs in relation to outputs; and

• dynamic efficiency—covering capital investment and innovation.

AMPs are particularly important with respect to both productive and dynamic efficiency, which relate to the planning and implementation of current operation and maintenance procedures and also to the efficiency of capital investment in the network.

2.1.2 Encouraging efficiency through transparency

Assessment of investment efficiency typically involves assessing outputs in relation to the assets employed, and assessing the rationale for investment in new capital augmentations.

AMPs can be used for an external assessment of the effectiveness and efficiency of operations and maintenance practices. When combined with an ex-post analysis of network investments, they can also be used as a means to assess investment efficiency.

In addition, AMPs can provide transparency on lines business policies for extracting efficiencies through innovation and in particular by adopting new technology and implementing non-network solutions to meeting consumer demands (e.g., load management and distributed generation).

Public disclosure of AMPs simulates the efficiency drivers of a competitive environment by allowing both internal and external stakeholders to compare the performance of a business against its peers.

2.1.3 Encouraging efficiency through best practice asset management

The preparation of structured AMPs assists management to ensure the efficient provision of electricity distribution services, irrespective of whether or not distribution businesses are required to publicly disclose the information.

Best-practice asset management implies a holistic, company-wide view of assets that is aligned with overall company goals and vision. It encompasses the philosophies, processes, and tools to maximize asset value through optimization of asset performance over the total asset lifecycle and is particularly important for asset-rich businesses, such as electricity distribution businesses. The long life of electricity distribution business assets, compared with the lives of assets typically used by other businesses makes good asset management even more critical, particularly in today’s increasingly volatile business environment.

6 This goals (for subparts 1 and 3) was taken from the Purpose Statements in both subsections 57E and 57T of the Act

Responsible and efficient management of distribution businesses would therefore dictate great emphasis on effective asset management practices. The AMP serves to capture this and acts as an important tool with which to consolidate and present the asset management processes within the business in an integrated and consistent manner. If well-prepared, the AMP should not only become a focus and driver for internal asset-related activities, but also an effective means in communicating responsible stewardship to external stakeholders.

2.2 CONSUMER ENGAGEMENT

In the operation of a distribution business there is a trade-off to be made between cost and quality of supply. Assuming an efficient operator, there are only a limited number of strategies available to improve the quality of supply. One approach is to construct a network that is more resistant to faults triggered by external causes. A distribution business can also increase maintenance levels to reduce the risk of equipment failing in service and to reduce response times when a fault does occur. Unfortunately such approaches also have cost implications. Hence an efficient distribution business will not attempt to provide a near perfect electricity supply irrespective of cost but will strive to strike a balance between the quality of supply provided and the price that consumers are willing to pay.

This price/quality trade-off is explicitly recognised in the target control regime for distribution businesses (Part 4A, subpart 1, of the Act). In terms of this regime, the Commission must assess distribution businesses against thresholds set by the Commission, identify for further investigation any businesses that breached those thresholds, and, if warranted, declare control over those businesses.7 As part of the quality thresholds thus established, distribution businesses are required to meaningfully engage with consumers to determine their demand for service quality, having regard to the available price-quality trade-offs. They also have to demonstrate that consumers’

views are taken into account when making asset management decisions.

To assist it in meeting its obligations under the Act, the Commission has requested us to:

• recommend best practice with respect to meaningful engagement by distribution businesses with consumers as outlined in clause 6(1)(e) of the Electricity Lines Thresholds Notice 2003, namely to :

(i) properly advise consumers about price-quality trade-offs available to them in relation to the goods and services provided by the distribution business;

(ii) consult with its consumers about the quality of goods and services that they require, with reference to the prices of those goods and services;

(iii) properly consider the views expressed by consumers during and after that consultation; and

(iv) adequately take these views into account when making its asset management decisions.

• propose ways in which consumer engagement can be integrated into the asset management decision-making processes of distribution businesses.

This part of the assignment was managed by Saunders Unsworth Ltd, working in conjunction with PB Associates. A survey of international practice with regard to consumer engagement and consultation by private and public sector electricity distribution businesses was conducted, and the information disclosed by distribution businesses on consumer engagement in their 2004 threshold compliance statements was examined. In addition interviews were held with various interested parties, including

7 This is the so-called “threshold regime”.

a number of distribution businesses. Based on the results of this work, recommendations for best practice consumer engagement and incorporating this into the AMPs have been developed and are presented in this report.

In document ELECTRICITY DISTRIBUTION BUSINESS ASSET MANAGEMENT PLANS AND CONSUMER ENGAGEMENT : BEST PRACTICE RECOMMENDATIONS (Page 10-14)