Media Releases

Commission releases draft decision on Transpower’s NIGU application

23 April 2015

The Commerce Commission has today released a draft decision on Transpower’s application seeking to recover its overspend on the North Island Grid Upgrade Project (NIGU).

The NIGU project was part of a suite of initiatives aimed at improving security of electricity supply to Auckland and Northland. The Commission is reviewing the project as Transpower spent more than originally approved.

Transpower has applied to the Commission to recover $70 million more than the original $824 million approved by the Electricity Commission in 2007. The Commission’s draft decision is that Transpower should be allowed to recover $52.3 million of that overspend.

Commerce Commission Deputy Chair Sue Begg said the review found that the $70 million overspend was largely due to under-forecasting at the beginning of the project.

“NIGU was the largest and most complex transmission line project that Transpower had undertaken for many years. Accurately forecasting the costs of major infrastructure projects is challenging, so spending in excess of a forecast is not necessarily inefficient,” Ms Begg said.

“The focus of this review was to identify costs that Transpower could have foreseen and avoided. We found that $17.7 million of the $70 million overspend was avoidable and this all relates to construction costs for the 400 kV line. Specifically, this was a result of construction work being undertaken out of sequence.

“Our assessment is in line with Transpowers’ own estimates of the costs that arose from later than ideal planning, which it proposed to not recover. Our draft decision will allow Transpower to recover an additional $52.3 million from consumers, which amounts to roughly 89 cents per year for the average consumer.”

Preventing Transpower from recovering the avoidable costs from consumers will encourage it to deliver investments more efficiently, while still providing incentives for new investments that are appropriate in the future.

The Commission’s draft decision also approved the four output amendments proposed by Transpower.

The review did not revisit the original Electricity Commission decision to approve the project.

The Commission is seeking feedback on its draft decision and Transpower’s proposal by 5pm on 21 May 2015.

A copy of the draft decision can be found on the project page.

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 built 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. 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