Capex IM review Knowledge sharing workshop Review of the Transpower Capital Expenditure Input Methodology 24 May 2017

Transcription

1 Capex IM review Knwledge sharing wrkshp Review f the Transpwer Capital Expenditure Input Methdlgy 24 May 2017 Presented by Cmmerce Cmmissin staff

2 2 Intrductin

3 Purpse and utcmes Purpse Purpse f the wrkshp is t: explain hw the capex IM wrks share sme lessns learned t date intrduce the prpsed fcus areas fr the review Outcmes We hpe that the wrkshp will prvide an pprtunity fr stakehlders withut a clse understanding f the capex IM t better understand what it is, hw it wrks, and hw it might be relevant fr them. 3

4 Agenda 1. Intrductin Overview f the capex IM; the features f the capex IM; and lessns learned frm wrking with the capex IM t date Mrning tea The prpsed fcus areas fr the review Transpwer s experience with the capex IM Wrap up and pprtunity fr final questins and cmments

5 What is the capex IM? In shrt, the capex IM sets ut the rules, prcesses and requirements fr: the submissin, assessment and apprval f Transpwer s capital expenditure prpsals a number f capex-related incentives, which are applied thrugh the price-quality path (IPP) Transpwer t prvide an Integrated Transmissin Plan (ITP) 5

6 Why are we reviewing it? The Cmmerce Act requires us t review ur IMs n later than 7 years after setting them We must cmplete the review by February 2019 at the latest It may be desirable t cmplete the review (r aspects theref) well in advance f that date, s that any changes can be taken int accunt by Transpwer in preparing its price-quality path (IPP) prpsal fr the regulatry cntrl perid (RCP3). Transpwer is required t submit this prpsal in December 2018, but begins preparing it much earlier. 6

7 Why are we reviewing it? (2) At this stage, we are aiming fr a final decisin in Q We want the issues t drive the prcess s the prcess and timing fr the next phase f the review will be infrmed by yur submissins n the current cnsultatin paper 7

8 Apprach t the review Similar apprach and framewrk t the 2015/16 IM review We want t start by identifying mst imprtant things we shuld be fcusing n, and the specific prblems within thse areas that we shuld explre thrugh the review We want yur feedback n whether the fcus areas prpsed in ur paper are the right areas t fcus n, and what the specific prblems within them might be Once we ve identified specific prblems, we ll be able t mve n t explre hw they might best be slved 8

9 Framewrk fr the review We prpse t use the 2015/16 IM review framewrk Starting pint fr the review is the existing capex IM We prpse t nly change the IM where this is likely t: prmte the Part 4 purpse in s 52A mre effectively; prmte the IM purpse in s 52R mre effectively (withut detrimentally affecting the prmtin f the s 52A purpse); r significantly reduce cmpliance csts, ther regulatry csts r cmplexity (withut detrimentally affecting the prmtin f the s 52A purpse). 9

10 Next steps On 15 May 2017 we published ur first cnsultatin paper Our cnsultatin paper invites submissins n: what the fcus areas fr the review shuld be any specific prblems that shuld be cnsidered within thse fcus areas 10

11 Next steps (2) Timeframes: Submissins due 14 June 2017 Crss-submissins due 28 June 2017 Once we have cnsidered submissins and crsssubmissins, we expect t issue an update utlining the next steps fr the capex IM review Current view beynd that is draft decisin in Q4 2017, final decisin in Q

12 Agenda 1. Intrductin Overview f the capex IM; the features f the capex IM; and lessns learned frm wrking with the capex IM t date Mrning tea The prpsed fcus areas fr the review Transpwer s experience with the capex IM Wrap up and pprtunity fr final questins and cmments

13 13 Sme essential backgrund

14 Essential backgrund fr the fcus areas Overview f the capex IM hw we gt t nw Key features f the capex IM hw it was set and hw it has evlved Lessns we have learned frm wrking with the capex IM t date 14

15 15 Overview f the capex IM

16 Histry f the capex IM We regulate Transpwer s electricity lines services under Part 4 f the Cmmerce Act Transpwer is subject t an individual price-quality path (IPP) where we set its maximum revenues, and it must make annual and peridic infrmatin disclsures Respnsibility fr apprval f Transpwer s grid upgrade plan prpsals was transferred frm the Electricity Cmmissin t us in Nvember 2010 and is nw incrprated in the rules n majr capex apprvals Transpwer capex input methdlgy review; Chapter 2: Regulatry cntext 16

17 Histry f the capex IM (2) We determined the Transpwer IMs (primary rules) in December 2010 (and these were reviewed in ): specificatin f price (ie, hw the maximum revenues are t be set) asset valuatin (including hw the RAB wrks and what values are recrded fr cmmissined prjects) cst f capital (ie, the WACC) cst allcatin, taxatin, IRIS pex incentive, and price-quality path recnsideratin 17 Transpwer capex input methdlgy review; Chapter 2: Regulatry cntext

18 Histry f the capex IM (3) The Act prvided fr a capex IM t cme later than the ther IMs and this set f rules fr capex was determined in January Transpwer capex input methdlgy review; Chapter 2: Regulatry cntext

19 Main influences n the riginal capex IM design The capex IM is based n the general premise that Transpwer is the principal grid planner and is respnsible fr prpsing and seeking ur apprval f capex that it cnsiders necessary Transpwer undertakes and manages capex prjects we have apprved Key bjectives f the capex IM are t prmte gd investment and efficient perfrmance 19

20 Main features f the capex IM design The capex IM sets up-frnt rules the cver tw main functins: ur ex-ante apprval f frecast expenditure (capex and related pex) that is prpsed by Transpwer ur ex-pst assessment f capex incentives, where the values are calculated and prpsed t us by Transpwer 20 Transpwer capex input methdlgy review; Page 17

21 21 Main features f the capex IM design (2) The capex IM rules d five things: set the prcess fr submitting, assessing and apprving base capex prpsals prir t each RCP set the prcess fr submitting, assessing and apprving majr capex prjects prpsed at any stage during an RCP set capex-related incentives which are applied thrugh the IPP set requirements fr grid utput measures which are applied thrugh the IPP set requirements fr Transpwer t prvide an integrated transmissin plan (ITP) Transpwer capex input methdlgy review; Page 17

22 Our regulatin f Transpwer has evlved Our RCP2 decisins paper set ut ur view f hw ur regulatin f Transpwer culd evlve ver time (ie, ver multiple 5-year RCPs) Amendments have been made t the capex IM since 2012 as part f that evlutin This review f the capex IM is a further pprtunity t test whether these key rules can deal with evlving circumstances Setting Transpwer s individual price-quality path fr final decisins and reasns [2014] NZCC 23 (29 August 2014); Attachment A 22

23 Our regulatin f Transpwer has evlved (2) 23 Transpwer capex input methdlgy review; Attachment B, Table B1, page 64

24 Our regulatin f Transpwer has evlved (3) In the interests f certainty fr Transpwer and stakehlders, changes made t IMs during an RCP generally nly have effect n the price-quality path frm the next RCP This means that the key rules in the capex IM need t anticipate what might happen during the next RCP (eg, the listed prjects mechanism fr apprval f identified frecast replacement r refurbishment base capex prjects) 24 Transpwer capex input methdlgy review; Attachment B, Table B1, page 64

25 Summary f decisins in the capex IM including listed prjects decisins 25 Transpwer capex input methdlgy review; Attachment B, Table B2, page 65

26 Current key decisins in the capex IM including listed prjects The capex IM applies t all capex intended t enter Transpwer s RAB Transpwer must cnsider transmissin alternatives in the develpment f majr capex prpsals The capex IM des nt apply t new investment cntracts (NICs) and SOSPA Capex is categrised as base capex r majr capex (listed capex is a subset f base capex) 26 Transpwer capex input methdlgy review; Attachment B, Table B2, page 65

27 Current key decisins in the capex IM including listed prjects (2) Majr capex must be cnsulted n, assessed and apprved n a prject-by-prject basis Base capex is prpsed, assessed and apprved n a pled expenditure basis befre the start f an RCP Additinal base capex fr listed prjects is prpsed, assessed and apprved n a prject basis during an RCP N substitutin between majr capex prjects r frm majr t base capex 27 Transpwer capex input methdlgy review; Attachment B, Table B2, page 65

28 Current key decisins in the capex IM including listed prjects (3) Base capex substitutin is available at Transpwer s discretin between disclsure years in an RCP and between expenditure categries (ie, pled apprach, nt subject t individual prject apprval) An incentive regime applies t bth majr capex and base capex Althugh substitutin applies t base capex expenditure, there is n substitutin f pre-set values within the incentives regime 28 Transpwer capex input methdlgy review; Attachment B, Table B2, page 65

29 29 Key features f the capex IM

30 Overview f capex categries 30 Transpwer capex input methdlgy review; Attachment C, Figure C1, page 119

31 Hw we categrise capex fr apprval Base capex cvers all capex except individual large enhancement prjects that we cnsider shuld warrant individual scrutiny and public cnsultatin (ie, majr capex) The base capex prject threshld currently sets that cut-ff n enhancement prjects frecast t be in excess f $20M Asset replacement r refurbishment prjects are base capex prjects and have n upper threshld, but d have additinal cnsultatin requirements if frecast at ver $20M 31 Transpwer capex input methdlgy review; Attachment C, Figure C1, page 119

32 Hw we categrise capex fr apprval (2) Listed capex prjects are base capex prjects that are identified prir t the RCP as being reasnably required, but where the timing f cmmissining cannt be frecast with specificity Listed prjects can be apprved prir t the RCP fr inclusin n the list in the IPP, but the capex amunt is nt apprved at that time 32 Transpwer capex input methdlgy review; Attachment C, Figure C1, page 119

33 Capex apprval prcess base capex allwance Transpwer base capex prpsal requirements n cntent and timing Cmmissin cnsultatin requirements Cmmissin determines the base capex allwance befre the start f an RCP 33 Transpwer capex input methdlgy review; Attachment C, pages 133 t 136

34 Capex apprval prcess listed prjects Requirements fr Cmmissin t identify listed prjects prir t RCP Prjects are listed in the IPP determinatin (IPP) Transpwer applicatin requirements n cntent and timing fr additinal listed prject base capex allwance during the RCP Cmmissin may determine an amunt f additinal base capex allwance IPP may be repened fr revenue impact f frecast additinal base capex (Transpwer IMs) 34

35 Capex apprval prcess majr capex Cnsultatin requirements (Transpwer and Cmmissin) Prpsal and certificatin requirements Investment test Cmmissin apprval r rejectin f prpsal IPP may be repened fr revenue impact f frecast additinal majr capex (Transpwer IMs) Prject amendments prcess Annual reprting requirements 35 Transpwer capex input methdlgy review; Attachment C, pages 124 t 133

36 Hw majr capex wrks Cmmissin and Transpwer agree t a prgramme and cnsultatin timeframe When Transpwer develps the prpsal, it is required t cnsult twice and invite prpsals fr nn-transmissin slutins Tw cnsultatins are the lng list f ptins and shrt list f ptins Lng list f ptins cnsults n assumptins, need date and ptins Shrt list f ptins cnsults n the develp prpsal 36

37 Hw majr capex wrks (2) Transpwer develps technically feasible ptins and uses the investment test (ecnmic test) t determine preferred ptin The investment test cnsiders the electricity market csts (ver the lng term) and the benefits Csts and benefits are calculated using electricity demand and generatin scenaris (EDGES) We assess Transpwer s prpsal and cnsult n ur draft decisin befre making ur decisin We can nly accept r reject the prpsal 37

38 Hw the apprved capex links with the revenues in the IPP The frecast MAR (ie, maximum revenue) is calculated prir t the RCP taking int accunt the frecast cmmissined values f the apprved pl f base capex and the apprved majr capex prjects at that time Actual capex then enters the RAB generally n a GAAP accunting basis (see Transpwer asset valuatin IM), irrespective f whether it exceeds r is less than the apprved values 38

39 Hw the apprved capex links with the revenues in the IPP (2) Wash-up calculatins are carried ut under the IPP and applied t later years revenue t adjust fr the actual vs frecast timing f CPI, FX and timing f cmmissining The net effect f the revenue adjustments is that the NPV f revenues ver time ends up being based n the actual capex, adjusted fr incentive amunts Incentives fr verspends, underspends and ther incentive adjustments are handled thrugh IPP revenue adjustments (ie, nt by adjusting the RAB) 39

40 Overview f Transpwer incentives regime (capex IM and ther) 40 Transpwer capex input methdlgy review; Attachment A, pages 37 t 61

41 Capex IM incentive mechanisms Base capex incentives in the capex IM: 1. Annual expenditure adjustment 2. Annual plicies and prcesses adjustment 3. Annual grid utput adjustment Majr capex incentives in the capex IM: 4. Prject verspend adjustment 5. Prject utput adjustment 6. Prject sunk csts adjustment 7. Peridic efficiency adjustment 41

42 Hw incentive adjustments are applied t revenues Incentive amunts calculated under the capex IM mechanisms are applied t the EV accunt thrugh EV accunt entries (see the IPP) The price path is updated each year t take accunt f the revenue effect the wash-ups in frecast v actual csts and fr incentive amunts in the EV accunt (see price path repener prvisins in the Transpwer IMs) 42

43 1. Base capex expenditure adjustment Expenditure incentive adjustment n pled base capex Penalty if Transpwer verspends relative t the apprved ttal allwance Reward if Transpwer underspends relative t the apprved ttal allwance Apprved allwance fr a year is adjusted if listed prject capex is apprved Base capex incentive rate f 33% applies Calculated annually Transpwer capex input methdlgy review; Attachment A, pages 45 and 46 43

44 2. Base capex annual plicies and prcesses adjustment Asymmetric penalty n Transpwer fr nt fllwing plicies and prcesses Base capex incentive rate f 33% applies Calculated annually Transpwer capex input methdlgy review; Attachment A, page 51 44

45 3. Annual grid utput adjustment Symmetric incentive n Transpwer t deliver agreed level f 4 types f grid utputs: Grid perfrmance Asset perfrmance Asset health Asset capability Each grid utput measure has a target level, an incentive rate, and a cap and cllar Calculated annually Transpwer capex input methdlgy review; Attachment A, page 49 45

46 4. Majr capex verspend adjustment Asymmetric penalty if Transpwer verspends n a majr capex prject (ie, exceeds the apprved majr capex allwance) Transpwer bears 100% f csts in excess f the ttal apprved csts fr the prject Transpwer may apply fr an amendment t an apprved investment, which may increase the apprved capex allwance Calculated at the cmpletin f the prject Transpwer capex input methdlgy review; Attachment A, pages 37, 38 and 42 46

47 5. Majr capex prject utput adjustment Asymmetric penalty if Transpwer des nt deliver the agreed prject utputs Majr capex incentive rate f 33% applies Calculated at the cmpletin f the prject Transpwer capex input methdlgy; Attachment A, page 41 47

48 6. Majr capex sunk csts adjustment Allws Transpwer t avid being expsed t csts where a majr capex prject is abandned fr a gd reasn Prvides Transpwer with an incentive t discntinue a prject when: it is n lnger in cnsumers interests; r the prject takes lnger than expected (ie, apprval expiry date has passed) Des nt apply t base capex, because thse prjects are treated n a pled basis and Transpwer is expected t manage its sunk csts within the base capex allwance Transpwer capex input methdlgy; Attachment A, pages 43 and 50 48

49 7. Majr capex efficiency adjustment Asymmetric reward t Transpwer fr efficiency gains ver an RCP Majr capex incentive rate f 33% applies Applied at the cnclusin f the RCP 49

50 Capex IM implementatin decisins 50 Transpwer capex input methdlgy review; Attachment B, Table B3, page 105

51 State f develpment f perfrmance measures Grid perfrmance measure f reliability in terms f: number f interruptins average duratin f interruptins duratin f lnger interruptins Asset perfrmance measure f availability f assets HVDC and key HVAC circuits Asset Health utput measures an attempt t quantify the direct impact f capex and pex applied in simplified frm, under develpment Asset capability related with impact f E&D prjects nt applied in RCP2 51

52 Experience f majr capex prpsals T date, we have nt rejected any, due t the effrt already put in by Transpwer in develping prpsals But we have asked Transpwer t amend the prpsal r d further wrk S far, Transpwer has withdrawn ne prpsal (land purchase near Otahuhu) 52

53 Useful reference dcuments Transpwer capex input methdlgy review Prpsed fcus areas fr the capex IM review (15 May 2017) Transpwer Capital Expenditure Input Methdlgy Determinatin [2012] NZCC 2 (cnslidated as at 5 February 2015) Transpwer Capital Expenditure Input Methdlgy Reasns Paper (31 January 2012) Transpwer Input Methdlgies Determinatin 2010 [2012] NZCC 17 (cnslidated as at 28 February 2017) Transpwer Input Methdlgies Reasns Paper (December 2010) Input Methdlgies (Electricity Distributin and Gas Pipeline Services) Reasns Paper (December 2010) 53

54 Useful reference dcuments (2) Transpwer Individual Price-Quality Path Determinatin 2015 [2014] NZCC 35 (cnslidated as at 31 Octber 2016) Cmpanin paper t final determinatin f Transpwer s individual pricequality path fr (28 Nvember 2014) Setting Transpwer s individual price-quality path fr final decisins and reasns [2014] NZCC 23 (29 August 2014) Draft decisin n Transpwer s Central Park Wiltn B listed prject (13 April 2017) Decisin n Transpwer s Bunnythrpe-Haywards Lines A and B majr capex prpsal [2014] NZCC 11 (9 May 2014) Amending Transpwer s allwance and utputs fr the Nrth Island Grid Upgrade Prject (NIGU Prject) [2015] NZCC 21 (6 August 2015) 54

55 Lessns learned frm wrking with the capex IM t date 55

56 Lessns learned Apprving majr prjects in an uncertain envirnment is challenging Ex-pst reviews can be cmplex and nt effective Stakehlders want certainty n csts f majr capex prjects and are resistant t increasing the apprved allwances 56

57 Apprving majr prjects in an uncertain envirnment is challenging Rules were set in a predictable envirnment, but we were applying them in an uncertain envirnment, s we adapted t the extent pssible Is it better t apprve ne large prject r break it int smaller bits? Applied a staged apprach t Upper Suth Island reliability prject stage tw: Transpwer applied fr an amendment t stage 1 majr capex prpsal fr prperty & resurce cnsents rather than submitting a separate ne Did nt need t apprve an $80 M majr capex prpsal with a highly uncertain need date Nw the stage 2 need date is delayed frm 2018 t late 2020 Nt always pssible under the current rules 57

58 Ex-pst reviews can be cmplex and nt very effective Bth fr Transpwer and the Cmmissin A lt f time and effrt was invlved amending the Otahuhu Diversity and the NIGU prjects Main reasn fr allwing amendment is because majr capex prjects are apprved early phase f their lifecycle Significant scpe and cst S we apprve an allwance and Transpwer recvers actuals up t the allwance r seeks and amendment t the allwance 58

59 Stakehlders want certainty n csts f majr capex prjects and are resistant t increasing the apprved allwances Stakehlders want majr capex allwance t be a prject budget that Transpwer shuld wrk twards Highlighted in submissins t ur draft decisin n the NIGU prject A budget and early apprval are nt cmplementary Shuld we cnsider alternative appraches Such as staged apprval with prcess fr subsequent stages simplified 59

60 60 Mrning tea

61 61 Prpsed fcus areas

62 Prpsed fcus areas fr capex IM review Fcus area 1: Given the changing landscape in the energy sectr, are there adjustments that culd be made t the capex IM t better ensure the right transmissin investments are being made, including nntransmissin slutins? Fcus area 2: Des the capex IM supprt a prprtinate apprach t scrutiny? Fcus area 3: Once expenditure has been apprved, des the capex IM apprpriately deal with changing circumstances during a regulatry perid? Fcus area 4: Are the incentive mechanisms in the capex IM effective? Fcus area 5: Are aspects f the capex IM t cmplex and prescriptive? 62

63 Fcus area 1: Given the changing landscape in the energy sectr, are there adjustments that culd be made t the capex IM t better ensure the right transmissin investments are being made, including nn-transmissin slutins? Changing landscape evlutin twards a smart grid, changing business mdels, mre chice fr cnsumers ver hw they use energy and hw much they use Will change the way the transmissin grid is used, what investment is needed, and when it is needed Imprtant fcus area because: Transmissin investment has big impact n cnsumers Significant risks t cnsumers f ver/under investment Changing landscape increases these risks 63

64 Fcus area 1: Given the changing landscape in the energy sectr, are there adjustments that culd be made t the capex IM t better ensure the right transmissin investments are being made, including nn-transmissin slutins? (2) Ptential questins fr the Capex IM review: Shuld we change ur prcess r analytical apprach fr assessing Transpwer s capex prpsals? Shuld Transpwer adapt hw it assesses its capex prpsals? Are transmissin alternatives and interactins with transmissin and ndal prices being cnsidered apprpriately? Shuld the requirement fr Transpwer t cnsider transmissin alternatives be extended t base capex? Shuld we imprve the investment test? 64

65 Fcus area 1: Given the changing landscape in the energy sectr, are there adjustments that culd be made t the capex IM t better ensure the right transmissin investments are being made, including nn-transmissin slutins? (3) Investment tests lk at dynamic efficiency, s tend t favur large prjects, eg, NIGU prject: Optin Cnstructin csts ($m) NPV f cst and benefit ($m) 1. New 400 kv line New 220 kv line Duplex existing 220 kv line Optin 3 has least prject cst but highest verall cst in NPV terms. May nt be the best apprach in the changing landscape. 65

66 Fcus area 1: Given the changing landscape in the energy sectr, are there adjustments that culd be made t the capex IM t better ensure the right transmissin investments are being made, including nn-transmissin slutins? (4) Optins analysis is ften used t deal with changing landscape The capex IM allws fr this But ptins analysis is nt practical fr transmissin investments based n dynamic efficiency In the past, Transpwer cnsidered NPV analysis and mnte carl simulatin t estimate expected net market csts f investment ptins Is such detailed analysis necessary? Culd we treat majr capex with multiple stages differently? Culd we accept simpler apprach fr ptin analysis? 66

67 Fcus area 1: Given the changing landscape in the energy sectr, are there adjustments that culd be made t the capex IM t better ensure the right transmissin investments are being made, including nn-transmissin slutins? (5) Ecnmic investments: increase transmissin prices but prvide market benefits We can quantify transmissin prices but it is difficult t predict the behaviurs f market participants Fr example, NIGU series capacitr: will reduce lsses will pssibly reduce cst f electricity Hw shuld we treat such investments? 67

68 Fcus area 2: Des the capex IM supprt a prprtinate apprach t scrutiny? Prprtinate scrutiny is ensuring the effrt spent n scrutinising Transpwer s investment prpsals is cmmensurate with the ptential benefits t cnsumers f ding s Imprtant principle It led t the divisin between base capex and majr capex It guided us during the IM review when we cnsidered imprvements t the way DPPs and CPPs wrk tgether Imprtant fcus area because we want t fcus ur scrutiny where the greatest benefits t cnsumers are likely t result 68

69 69 Fcus area 2: Des the capex IM supprt a prprtinate apprach t scrutiny? (2) Ptential questins fr the Capex IM review: Are the threshlds and criteria still apprpriate? Which types f capex shuld be subject t mre scrutiny and which t less? Shuld we have the discretin t NOT scrutinise a prject? Shuld Transpwer be required t cnsider ptins and cnsult n all majr capex prpsals? Are we getting the infrmatin we need, when we need it, and in the frm we need it, s we can effectively assess ptential investments at the right times? Are the requirements fr the ITP clear and give a gd picture f Transpwer s strategy and expenditure requirements?

70 Fcus area 3: Once expenditure has been apprved, des the capex IM apprpriately deal with changing circumstances during a regulatry perid? D we have the flexibility we need t deal with changing circumstances during a regulatry perid? Our experience with the capex IM has shwn us that sme circumstances cannt be accmmdated under the current rules Imprtant fcus area because we dn t want t inhibit efficient investment where there wuld be material benefits t cnsumers frm that investment 70

71 71 Fcus area 3: Once expenditure has been apprved, des the capex IM apprpriately deal with changing circumstances during a regulatry perid? (2) Ptential questins fr the capex IM review: Whether sme capex shuld be set and frget Whether we shuld have a staged apprval apprach fr majr capex Wh shuld be able t initiate a reassessment f majr capex nce it has been apprved Hw the capex IM deals with Transpwer nt spending its base capex allwance Hw the capex IM deals with changes in input csts utside f Transpwer s cntrl Whether Transpwer shuld be allwed t undertake enabling wrks in anticipatin f majr capex

72 Fcus area 3: Once expenditure has been apprved, des the capex IM apprpriately deal with changing circumstances during a regulatry perid? (3) Capex IM already allws Transpwer the fllwing amendments t deal with changing circumstances: Amend the majr capex utputs Amend the cmmissining r expiry date Amend the allwance Terminate the prject and seek majr capex sunk cst adjustments Are there any thers fr us t cnsider? Only Transpwer can initiate these change prcesses 72

73 73 Fcus area 4: Are the incentive mechanisms in the capex IM effective? Nw that we have sme experience with applying the capex IM, it wuld be useful t reflect n the extent t which the suite f incentive mechanisms are ding what we intended they wuld Incentivise Transpwer t imprve efficiency, deliver utputs within apprved expenditure, and imprve the utputs Encurage dwnward pressure n csts, and share any cst efficiencies with cnsumers Ensure the apprpriate level f service is delivered, and prvide visibility f the utputs delivered Imprtant fcus area because ineffective incentive mechanisms wn t be driving the desired behaviurs r utcmes

74 Fcus area 4: Are the incentive mechanisms in the capex IM effective? Ptential questins fr the capex IM review: Are the incentive mechanisms targeting the right things and influencing Transpwer s behaviur as intended? Are the incentives rewarding r penalising Transpwer fr things within its cntrl? Are the incentive rates apprpriate? Are any f the incentives ineffective r wuld be better utside f the capex IM? D the incentives wrk well with the IPP quality standards? Are any f the incentives redundant? D we need any additinal incentives? 74

75 Fcus area 4: Are the incentive mechanisms in the capex IM effective? Majr capex efficiency incentive is based n assessing prject efficiencies and inefficiencies This is difficult t d Shuld we refcus ur incentive mechanisms n ther aspects f prject delivery such as inputs and utputs? Fr example, innvatin that saves csts

76 Fcus area 5: Are aspects f the capex IM t cmplex and prescriptive? Explring pprtunities t reduce cmplexity and cmpliance csts and imprve the clarity f the capex IM Imprtant fcus area because we shuld always be mindful f the csts ur regulatin places n regulated businesses Questins we might cnsider: Can we streamline the prcess requirements fr making and assessing capex prpsals? Can we simplify the incentive mechanisms withut reducing their effectiveness? 76

77 Fcus area 5: Are aspects f the capex IM t cmplex and prescriptive? Cmplex rules may restrict ability t respnd t changing circumstances Fr example, can we allw flexibility fr prjects that evlve frm base capex t majr capex and accept any previus cnsultatins by Transpwer befre we agree n the timeframes and cnsultatin requirements?

78 78 Transpwer s presentatin

79 79 Final questins and cmments

80 Cntact us Cntact: Submissins: Karen Smith

81