Vector Limited 101 Carlton Gore Road PO Box 99882, Newmarket Auckland, New Zealand www.vectornetworks.co.nz Corporate Telephone +64-9-978 7788 3 June 2005 Corporate Facsimile +64-9-978 7799 Network Performance Group Networks Branch Commerce Commission By e-mail SUBMISSON - ASSET MANAGEMENT PLANS ( AMPs ) AND CONSUMER ENGAGEMENT: BEST PRACTICE RECOMMENDATIONS Introduction 1. This letter constitutes Vector s submission on the report, Electricity Distribution Business Asset Management Plans and Consumer Engagement: Best Practice Recommendations ( report ), prepared by Parsons Brinckerhoff Associates in conjunction with Saunders Unsworth Ltd (collectively referred to as PBA in this submission), and released for consultation by the Commerce Commission ( Commission ). Vector appreciates the opportunity to make this submission. 2. Vector s submission is in two parts. The first provides comments on the sections of the report related to consumer engagement. The second provides general comments on the sections of the report related to AMPs, followed by more detailed responses, provided in tabular format and structured according to the relevant headings of the report. 3. Vector would like to commend the Commission on commencing and progressing the work on best practise recommendations for consumer engagement. Once finalised, it will provide valuable guidance to lines businesses. Such guidance should help streamline the compliance process by providing additional clarity around the Commission s expectations. Given the subjective nature of the requirements, such additional guidance is important to Vector. 4. With respect to AMP-related work, Vector notes that, given the fact that the Commission has simply inherited the AMP requirement from the Ministry of Economic Development s information disclosure regulations, it is important that the Commission now thoroughly assesses not only the level of detail that should be disclosed, but the
2 fundamental need for the requirement and its overarching purpose. This has not been addressed in the report and, in Vector s view, such an analysis should be performed and consulted on, before this work is finalised. Comments - Consumer Engagement General Comment 5. Vector generally agrees with the report s assessment of and recommendations relating to consumer engagement. However, Vector has a number of comments and concerns with respect to the consumer engagement sections of the report. These are provided below in the order the relevant sections appear in the report. Relevant Thresholds Notice 6. Section 4.2.1 refers to the Electricity Lines Thresholds Notice 2003. The current consumer engagement requirements are pursuant to the Electricity (Distribution Thresholds) 2004. Whilst the wording is similar and the consumer engagement sections reviewed by PBA were prepared subject to the previous notice, some subtle yet important changes were made in the current notice. Vector would appreciate the Commission clarifying whether the best practice recommendations of the report apply equally to the requirements under the current notice. Re-packaging of tariffs by retailers and need for consensus of small consumers 7. Section 4.4.3 identifies a number of difficulties in engaging with small consumers, including: Re-packaging of tariffs Distribution businesses can offer tariff options, but these are often repackaged and renamed by retailers. It is totally at the discretion of the retailer as to what options are put to residential consumers ; and The fact that residential and small commercial consumers share network assets makes them quality takers it is simply not possible using current technology to supply small consumers in a particular geographic area with different levels of reliability. This means that there needs to be a consensus on the appropriate price/quality trade-off and this can be very difficult to achieve. 8. Vector agrees with these points. Unfortunately, the report does not provide guidance on how these issues can be resolved by distributors or the Commission. In Vector s view, these are important issues that the Commission needs to be cognisant of when assessing distributors against the consumer engagement criterion. Access to Retailer call-centre data 9. Section 6.3.2 of the report recommends that distributors should
3 seek appropriate access to call centre data and report and develop frameworks for reporting actual results and trends from this data. 10. Vector agrees, in principle, that such data may be useful for the purposes of consumer engagement. However, Vector notes that distributor access to such data is ultimately at the discretion of the relevant retailers. Therefore, it is possible that distributors will simply not be able to obtain it for any or some consumers. Engaging with small consumers 11. Section 6.4.1.2 notes that Small consumers generally do not have sufficient understanding of electricity distribution practices and economics to be able to express informed judgements about what levels of pricing or quality are appropriate to their electricity supply, or how price/quality trade-offs should be made. 12. Vector agrees that it is difficult to provide for two way communication between small consumers and distributors. Vector also agrees that the best way to ensure small consumer s views on price-quality trade-offs are taken into account, is for distribution businesses to (as proposed in section 6.4.1.2): ascertain whether residential [and small commercial] consumers (in general) are satisfied with the service they receive, and whether there are changing consumer expectations that can be realistically met. 13. Vector proposes that the quote above be used as a basis for amending the Thresholds Notice to separately define the consumer engagement criterion for small consumers. Such an approach is more realistic and relevant to that customer group. The requirement would also include a provision to take changing consumer expectations into account when making asset management decisions. The current specification of the consumer engagement criterion would then continue to apply to large consumers only. General Comments - AMPs Purpose of AMPs AMPs primarily a tool of disclosure 14. The disclosure of AMPs is required as part of the Electricity Information Disclosure Requirements 2004 ( requirements ). The requirements are currently under review and the work on best practice with respect to AMPs must, in Vector s view, be considered within the wider context of that review. Accordingly, the overarching objectives of disclosure in general and disclosure of AMPs in particular should be consistent. 15. Vector, therefore, reiterates its view (expressed in prior submissions on the review of the disclosure requirements) that the purpose of disclosure is to establish a
4 robust and consistent information base for setting, administering and evolving the thresholds over time. The thresholds are the flagship tool of the regulatory regime to drive efficiency gains, and the purpose of information disclosure (including AMPs) is to support that tool by ensuring sufficient information is disclosed for it to function well. Information disclosure should not, in Vector s view, be seen as a stand-alone regulatory discipline, given the presence of the thresholds. 16. Vector also notes that, where possible, compliance costs on lines businesses should be reduced. Given the fact that the Commission has simply inherited the AMP requirement from the Ministry of Economic Development s information disclosure regulations, it is important that the Commission now thoroughly assesses not only the level of detail that should be disclosed, but the fundamental need for the requirement and its overarching purpose. This has not been addressed in the report and, in Vector s view, such an analysis should be performed and consulted on, before this work is finalised. 17. In Vector s view, the main use of the information contained in the AMP is as an input into demonstrating compliance with the consumer engagement criterion. This raises the question of whether a separate AMP disclosure should be required, or whether the provision of consumer engagement related information should simply be incorporated into the thresholds compliance statement (when the statement seeks to demonstrate consumer engagement compliance). 18. It is important, therefore, that the Commission clearly states its view on the overarching purpose of the AMPs, which historically has not been defined, and continues to be unclear. The report does set out four key purposes for AMPs, however, no analysis or explanation is provided as to why these purposes are appropriate. Vector does not agree with the way these have been framed (discussed below). Key purposes as outlined in the report 19. Four key purposes for AMPs have been described in section 5 of the report, viz: This can be summarised into four key purposes: From a distribution business perspective: to provide focus and cohesion in asset management processes and strategies, to align these with overall corporate goals and to provide internal communication and understanding of asset management practices; and to allow external stakeholders, including end-users, the opportunity to understand asset management at their local distribution business and to assess how that will impact on them. From the Commission s perspective, to allow it meet its statutory obligations and encourage efficiency by: allowing transparency in assessing the effectiveness and maturity of asset management at distribution businesses, the quality of service provided and asset investment decisions; and
5 imposing on all distribution businesses a minimum level of rigour and best practice principles with regard to asset management. 20. With regard to the first key purpose, Vector considers that it is the responsibility of each business (rather than the Commission) to ensure that asset management processes and strategies are aligned with overall corporate goals, as part of sound business practice. This objective is hard to reconcile with the fact that the AMP is a disclosure requirement, and as such can only be used to require lines businesses to describe their behaviour, rather than directly requiring certain behaviours. 21. If this objective is to be retained, it should be reframed as an objective from the Commission s perspective and refer to ensuring that lines businesses demonstrate focus and cohesion in asset management processes and strategies, to align these with overall corporate goals and to provide internal communication and understanding of asset management practices. 22. With regard to the second key purpose, Vector considers that this refers to the overall purpose of information disclosure, being 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 1 23. Vector considers that this key purpose should be reframed to be consistent with the quote above and be the sole purpose of AMP disclosure. This purpose should then be considered within the context of the thresholds (which will drive efficiency improvements over time) being the flagship of the regime, with information disclosure supporting their administration and development. 24. With regard to the third key purpose, Vector considers that it would be encapsulated by the suggested new definition of the second key purpose above. 25. With regard to the fourth key purpose, Vector (as noted above) does not consider that an AMP, being an information disclosure requirement, can or should be used to impose certain behaviours on lines businesses. If this objective is to be retained, it should refer to ensuring that lines businesses demonstrate at least a minimum level of rigour and best practice principles with regard to asset management. Internal use of AMPs 26. Vector is concerned with some of the comments made in the report that infer an internal purpose for and use of the AMPs by lines businesses that in Vector s case (and, no doubt, in the case of many other lines businesses) simply does not reflect the business reality. The report states: 1 Section 57T of the Commerce Act 1986
6 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 information If well prepared, the AMP should not only become a focus driver for internal asset-related activities 2 our discussions would suggest that the major value of preparing and disclosing the AMPs has been to the distribution businesses themselves, or at least, to those that use it as more than a mere regulatory compliance document most distribution businesses interviewed suggested that they find great value from the preparation process itself as it brings asset management under the attention of parties throughout the business 3 27. In the case of Vector, it is important to note (as conveyed by Vector to PBA during our discussion with them as part of the review) that the AMP is prepared solely for the purpose of complying with the disclosure requirements and as part of Vector s consumer engagement. Vector does not consider that it derives any of the internal value referred to in the report from the preparation of the AMP. 28. While Vector accepts that for some businesses, the final result of internal asset management processes is the published AMP, as per the Commission s requirements, for many others this is not the case. Vector, therefore, agrees with the report finding that (emphasis added) some distribution companies prepare their AMP with the main purpose of meeting regulatory requirements companies are entitled to take this approach. 29. It is important, therefore, to acknowledge that in many cases the AMP is an onerous and costly requirement that provides absolutely no value to the distributor. It is not appropriate, in Vector s view, to impose the onerous AMP requirement on all lines businesses simply for the purpose of ensuring that some form of centralised asset management takes place. 30. Therefore, when considering the benefits of AMP disclosure (and the level of detail to be required), the cost involved in the preparation of the AMP should only be compared to the value of information disclosed in terms of its contribution to achieving the purpose of information disclosure. In other words, the Commission should assess whether, given the wide range of information disclosed under the disclosure requirements (besides the AMP) and in threshold compliance statements, the incremental value of distributors disclosing a detailed stand-alone AMP in its present form exceeds the costs involved in preparing it. Cost of preparing AMPs 31. The report states: 2 Section 2.1.3 of the report 3 Section 3.3.1 of the report
7 In rare cases we found that distribution businesses had a number of associated and more detailed internal asset management plans in place, from which they draw to prepare the disclosed AMP. The AMP therefore, to some extent, merely becomes a summary of asset management practices in the company 4 32. Vector has sophisticated internal asset management processes in place, which manifest themselves in a regularly updated network management plan, a far more technical and detailed pool of information, which is regularly updated and used for internal purposes. Vector therefore agrees with the first sentence of the quote above. However, a significant amount of work is required to extract relevant information from the network plan and present it in a manner that meets the AMP requirements and is appropriate for external publication. The network plan contains commercially sensitive and technical information in a format suited strictly for internal use. 33. Vector does not agree that the published AMP merely becomes a summary of the network plan. Vector estimates that the amount of work required to prepare the published AMP (with the benefit of being able to draw on the network plan) at around 160 man hours. This is a significant burden and should not be taken lightly. Vector welcomes comments in the report that note this, viz: The regulatory compliance burden on distribution businesses is already substantial and should not be increased unless there is a compelling reason to do so 5 34. However, Vector is concerned that the suggested changes to the AMP requirements will significantly increase the compliance burden for little, if any, incremental benefit. Vector also notes that the regulatory compliance burden, by the Commission s own logic, should be reduced where possible, yet the report has not in any way considered how this can be done. Vector considers this to be a significant shortcoming, which should be addressed. 35. The best way to do this would be for the Commission to re-evaluate the need for the AMP as a stand-alone document, by applying a net benefit test with reference to the overall purpose of disclosure. Should the Commission be satisfied that ongoing disclosure of the AMP has merit, the need for each section of the AMP should then also be separately evaluated. Suggested changes to AMP requirements are not minor 36. Vector finds it difficult to reconcile the specific changes being proposed to the AMP requirements with the comment quoted above and other comments in the report, viz: Overall, the opinion we gleaned was stakeholders believed that the current disclosure process was working reasonably well and did not need to change. 6 4 Section 3.3.1 of the report 5 Section 3.3.1 6 Section 5 of the report
8 The current disclosure process and format is generally accepted and understood, and major changes should therefore be avoided unless there is a compelling reason for them. 7 Based on PB Associates assessment of the AMPs and our interviews with distribution businesses and other external parties, we do not recommend that any substantial changes should be made to the current disclosure process 8 37. The report also notes (first para of section 3.3.3) that there were relatively few suggestions on improving the current disclosure regime and the structure or content of AMPs. Despite this, the changes proposed are significant. Extensive additions have been proposed to the amount and detail of information to be disclosed, as well as a requirement for Board sign off. Vector estimates that the cost of preparing the AMP in terms of man hours would at least double, if the changes were adopted as currently proposed (detailed comments on the proposed changes are provided in a separate section below). 38. Vector has not been able to reconcile most of the proposed changes to the AMP requirements with any specific concerns, or requests for additional information from interested parties that were outlined in the report. 39. The report provides neither a quantitative nor qualitative net benefit analysis for the changes. In PBA s own words, before changes are contemplated, a compelling reason must exist, yet no such reasons have been identified for the changes proposed. Vector considers that any benefits from the changes would likely be outweighed by the additional compliance costs imposed. Vector considers that it would be inappropriate for the Commission to implement such extensive changes to the AMP requirements without performing and consulting on a net benefit analysis. Issues of interpretation are best dealt with on an individual basis 40. The report sites that, on a number of occasions, lines businesses misinterpreted the requirements when preparing their AMP. As a result, a large number of the changes proposed seek to further clarify existing requirements. This results in additional and unnecessary prescription. Vector considers that, unless the misinterpretation is by the vast majority of lines businesses, a better approach would be for the Commission to take up the relevant matters directly with the parties that misinterpreted the requirements, rather than changing the wording. 7 Section 5 of the report 8 Section 7.1 of the report
Specific Comments - AMPs Report section Issue Vector Comment 2.1.2 Refers to AMPs providing transparency on lines business policies for extracting efficiencies through innovation and in particular by adopting new technology Vector notes that some information regarding innovation and new technologies is likely to be commercially sensitive and lines businesses should be able to withhold such information where appropriate. 2.2, first bullet Refers to the Electricity Lines Thresholds Notice 2003. The current consumer engagement requirements are pursuant to the Electricity (Distribution Thresholds) 2004. Whilst the wording is similar and the consumer engagement sections reviewed by PBA were prepared subject to the previous notice, some subtle yet important changes were made in the current notice. Vector would appreciate the Commission clarifying whether the best practice recommendations of the report apply equally to the requirements under the current notice. 3.1 e) Refers to the fact that lines businesses often do not disclose the threshold return for proceeding with capital projects. 3.3.1 Refers to the fact that all distribution businesses agreed that they would continue preparing an AMP if the disclosure requirement was removed. The threshold rate of return is a confidential, commercially sensitive piece of information and Vector therefore considers that it should not be required to be disclosed. Vector would like to clarify that, as noted during our discussions with PBA, Vector would continue preparing an extensively scaled back AMP for the purpose of consumer engagement, as the feedback provided to us by consumers suggests that a 5-10 page summary of asset management is sufficient and preferable to most interested parties, as they do not use the detailed information currently provided. In Vector s experience, the only parties to analyse the detail of the AMP to date are consultants looking to sell services to distributors. Vector does not consider it appropriate for the Commission to require disclosure of detailed information simply for the benefit of consultants. 3.3.3, 5 th bullet 3.3.3, 6 th bullet Refers to the need for lines businesses to form a policy with regard to distributed generation and that this should be explained in the AMP. Refers to a distributor that issued a short (5 page) summary of the AMP to their consumers, which received overwhelmingly positive feedback. Vector notes that the Ministry of Economic Development (MED) is currently working on a set of regulations for the connection of distributed generation (DG) to distribution networks. It is important that any AMP requirements, related to DG, are informed by and consistent with the MED s work in this area. Vector notes that it is the distributor referenced and that the feedback received from interested parties also indicated that, for the vast majority of interested parties, the 5 page document was sufficient and they did not require or have a use for the full AMP document.
10 Report section Issue Vector Comment 5, 5 th bullet Expresses the view that there is sufficient value from the disclosure process to the Commission and other stakeholders to retain the requirement to disclose AMPs on an annual basis. Vector notes that the report provides neither a qualitative nor a quantitative analysis of the incremental net benefit from disclosing AMPs annually, as opposed to every two or three years (which in Vector s view this would be negative); nor an analysis of the net benefits of disclosing the AMPs at all. In Vector s view, such an analysis should be performed and consulted on. 5, 6 th, 7 th, 8 th and 9 th bullet Notes that: the compliance burden on distributors is substantial and should not be increased unless there is a compelling reason to do so; any guidelines should apply equally to all businesses; the current disclosures are generally accepted and understood, and major changes should be avoided unless compelling reasons for them exist; and lines businesses should be allowed to adapt AMPs as required, as long as, in doing so, all information that is required to be disclosed is provided. Vector notes that it, as well as many other distributors, provides regular updates with regard to asset management (such as updates to the work schedule for capital projects), which often supersede the AMP shortly after its release. These updates (if necessary in a prescribed format) in combination with a less frequent disclosure of the AMP (for example, through incorporating it into threshold compliance statements that seek to demonstrate consumer engagement compliance every two years) may, in Vector s view, be sufficient to fulfil the Commission s objectives. Vector supports these recommendations. Vector notes that the proposed extensive changes to the AMP requirements are inconsistent with the recommendations in the 1 st and 3 rd bullet, as the report does not provide compelling reasons for the changes. Vector also notes that, consistent with the first bullet, the Commission should seek to not only avoid increasing the compliance burden, but also to reduce it where appropriate. One way to reduce it would be to allow a longer period between AMP disclosures, or by incorporating the disclosure of information contained in the AMP as part of threshold compliance statements that seek to demonstrate consumer engagement compliance. Vector considers that the report does not provide sufficient analysis to warrant ruling out this option and that the Commission should look at this issue in more detail. 5.2.2.3 Suggests that a ten-year asset management planning period should be adopted. Vector does not consider that it is necessary to prescribe the planning period. Vector cannot reconcile this suggestion for prescription with any concern identified in the report.
11 Report section Issue Vector Comment 5.2.2.5 Recommends that Board approval should be required for the AMP. This recommendation, if adopted, would increase compliance costs on distributors and effectively reduce the amount of time businesses are able to spend on preparing the plan (due to the fact that board meetings do not always fit neatly with regulatory disclosure dates and documents are generally submitted a week prior to a meeting). It is not clear to Vector what the underlying concern is for recommending this change. If the concern exists, the Commission should outline it and explain why Board signoff is the appropriate way to address it, before imposing this additional cost. Should Board sign off be required, the timeframe for the preparation of the AMP should be increased by at least two weeks. 5.2.3.1, 3 rd bullet Recommends that the AMP should identify and discuss any major customers that account for more than 10% of the total load served in the distribution area. Vector considers that 10% is an arbitrary figure and will not always be the most appropriate. Vector suggests that flexibility should be accorded to distributors when deciding how to define major customers for the purpose of the AMP. 5.2.3.2 Recommends a number of additional detailed disclosures for the AMP. As noted in the general comments, Vector is concerned that additional disclosures are being proposed without sufficient analysis to suggest these are needed. Vector considers the Commission should outline what concerns the additional detailed disclosure is addressing, and why it is the best way to address those concerns. This would include a net benefit test, comparing the benefits of additional disclosure to incremental costs incurred by distributors to provide it. 5.2.3.3 As above. As above. 5.2.3.4 Provides recommendations on the content for the justification of asset section. As noted in the report, essentially, assets that enter a distributor s ODV and are not optimised, are justified. However, this principle is not explicitly incorporated in the requirements (nor does the report recommend that this should be done). In Vector s view, it should be and the focus of the section should be (as also noted in the report) on assets that the distributor considers to be justified, despite the fact that they have been optimised or are essential non-system fixed assets.
12 Report section Issue Vector Comment 5.2.4.3 c) Recommends that the AMP should demonstrate how stakeholder needs were ascertained and how these were taken into account in setting service level targets, as well as highlighting any distinct price-quality trade-offs offered. Vector considers that how the distributor ascertains stakeholder needs, takes these into account, and what price-quality tradeoffs are offered, is more appropriately discussed in a compliance statement seeking to demonstrate compliance with the consumer engagement criterion of the quality threshold. The Commission has decided that lines businesses may demonstrate compliance with this criterion every two years. Implementing the recommendation would essentially override the Commission s earlier decision and require distributors, through the AMP, to annually demonstrate compliance with this criterion. Vector suggests that this recommendation should not be implemented. Alternatively, as suggested by Vector, the AMP as a stand-alone document could be discontinued and the disclosure of relevant asset management information could be incorporated into threshold compliance statements that seek to demonstrate consumer engagement compliance. 5.2.5.2 Recommends a number of additional detailed disclosures for the AMP. As noted in the general comments, Vector is concerned that additional disclosures are being proposed without sufficient analysis to suggest these are needed. Vector considers the Commission should outline what concerns the additional detailed disclosure is addressing, and why it is the best way to address those concerns. This would include a net benefit test, comparing the benefits of additional disclosure to incremental costs incurred by distributors to provide it. 5.2.5.4 5.2.6 Appendix D, Service Level Requirements Appendix D, Lifecycle Asset Management Planning As above. As above. Notes that targets for service levels should be provided for each indicator for each year of the AMP planning period. Recommends a number of additional detailed disclosures for the AMP. As above. As above. Forecasting of service level performance to derive reasonable targets for ten years ahead will likely be inaccurate and of little benefit to interested parties or the distributor. Vector considers that targets for up to the first 3 years of the planning period would be sufficient. As noted in the general comments, Vector is concerned that additional disclosures are being proposed without sufficient analysis to suggest these are needed. Vector considers the Commission should outline what concerns the additional detailed disclosure is addressing, and why it is the best way to address those concerns. This would include a net benefit test, comparing the benefits of additional disclosure to incremental costs incurred by distributors to provide it.
Closing comment 41. Thank you for considering Vector s submission. Should you require further assistance, please contact Anton Murashev, Vector s Regulatory Analyst, (021 273 0709; anton.murashev@vectornetworks.co.nz). Kind regards Simon Mackenzie Group General Manager Networks