Draft decision approving Transpower’s $154m major capex proposal

The Commerce Commission has published its draft decision paper approving a major capital expenditure proposal from Transpower New Zealand Limited (Transpower).

If finalised, the decision would allow Transpower to invest and increase its revenue to recover a maximum of $154 million on grid assets and equipment to manage voltage stability in the Waikato and Upper North Island region.

Transpower submitted its proposal to the Commission in December last year. The proposal is for the first stage of a two-stage project Transpower wants to undertake.

Commission Deputy Chair Sue Begg says the need to invest in managing voltage stability is due primarily to actual and announced decommissioning of major generation plants in the region, as well as forecast electricity demand growth in the area.

“The closure of generation plants in the Waikato region is expected to cause voltage management issues in the Auckland and Waikato regions, particularly as the population grows and peak electricity demand increases,” says Ms Begg.

“In preparing its proposal, Transpower received broad stakeholder agreement on the need to invest in the proposed assets and equipment to meet that need.”

Ms Begg acknowledges that the impact of COVID-19 added uncertainty to forecast electricity demand and the timeframe for removing generation from normal service, as well as to the likely costs of Transpower delivering the first stage.

However, Ms Begg considered that Transpower’s proposal and the Commission’s draft decision appropriately accommodated that uncertainty.

“We conducted a thorough evaluation of the proposal to ensure that it is appropriate and delivers significant net benefits to the electricity market. We have also set up an incentive scheme that shares the risk between Transpower and consumers to manage delivery uncertainty and to ensure that this is money well spent.

“We have concluded that Transpower’s proposed investment is needed to maintain a secure and reliable electricity supply.”

Ms Begg added that the Commission agrees with Transpower that without this investment, there would be an unacceptable risk to customers as well as the power system if particular faults occurred in the region.

“This is about making sure the lights stay on and safeguarding the future of supply to the region.”

The Commission is consulting on its draft decision and will consider submissions before making its final decision.

If the Commission ultimately decides to approve the proposal, the likely increase in transmission revenue from Transpower delivering the first stage of the project will be approximately 1%.

Submissions on the Commission’s draft decision are due by 9 July 2020. Cross-submissions on submissions the Commission receives will be due on 17 July 2020. The Commission expects to make its final decision by 3 September 2020.

Background

  • Transpower owns and operates the national grid – the high-voltage transmission network connecting generation plant with towns and cities across New Zealand.
  • The Commission seeks to promote the long-term benefit of consumers of regulated services by regulating such services under Part 4 of the Commerce Act. The regulated services under Part 4 include electricity transmission services provided by Transpower.
  • The Commission regulates the electricity transmission line services that Transpower supplies to consumers through an individual price-quality path (IPP) under Part 4 of the Commerce Act. When setting the IPP, we approve Transpower’s base capital expenditure allowance for each of the 5 years the regulatory period covers – the current period runs from 2015 to 2020.
  • Transpower may at any time submit a major capital expenditure proposal to the Commission seeking to invest in and recover major capital expenditure. 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.
  • The Commission may approve or decline a major capital expenditure proposal from Transpower. If the Commission approves a proposal, Transpower may, after commissioning the relevant assets and equipment, include the relevant costs in its regulatory asset base and then recover those costs as transmission charges allocated according to the transmission pricing methodology (TPM).
  • The Electricity Authority has recently finalised and issued guidelines to Transpower to develop a new TPM. The new TPM that Transpower develops will introduce benefits-based charges, where an investment is paid for by the customers who benefit from it. The new TPM will apply to Transpower’s future recovery of the costs of this project and will largely be recovered through customers in the Waikato Upper North Island region.

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