Grid maintenance expenses Commerce Commission Workshop 2 March 2010

2 Overview Maintenance expenditure on the grid has increased significantly above CPI during the period of the Settlement There is a need for further increased maintenance expenditure Forecasts for next two years are $115.7 M and $119.8 M respectively (cf 2009/10 draft forecast outturn of $104.7 M) The main drivers for increased maintenance expenditure are: –Increased scope of work on ageing assets particularly the replacement of components of transmission line conductors and towers (lines projects have increased from $6.4M in 2006/07 to $19.1M in 09/10) –Accumulation of work deferred from previous years that cannot be delayed further without significant risk –Increased complexity of undertaking work Trees Regulations, Resource Management Act requirements, Landowner relationships –Limited availability of skilled labour and increased input costs –Growth in the number of substation assets to be maintained

3 Background Allowances for grid maintenance within the Settlement were based on historic levels adjusted only for CPI. An increasing quantity of grid assets (particularly transmission line components) is now reaching condition criteria where maintenance replacement is required This “wave of work” is expected to continue for several years Maintenance has increased above CPI during the period of the Settlement Some non-critical maintenance has been deferred in previous years to keep total operating expenditure within acceptable limits

4 Maintenance and total OPEX

5 Classification of maintenance Maintenance expenditure is categorised as follows: Transmission lines Routine maintenance Maintenance projects Substations Routine maintenance Maintenance projects

6 Grid Maintenance Summary2006/072007/082008/092009/102010/112011/12 Act $m Fcst $m Routine Transmission AC Stations HVDC Projects Transmission AC Stations HVDC Subtotal cf Settlement Allowance Pass Throughs Rates Total cf Business Plan

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8 Transmission Lines Maintenance expenditure has increased over the period of the Settlement by approx 15 % p.a. Routine maintenance cost drivers: –Increased scope of work as a result of changes in risk management stance in accordance with Good Electricity Industry Practice: increased frequency of condition assessment (particularly following Otahuhu earthwire incident in 2006) pro-active management of access roads and bridges (particularly following Berryman case) more conservative management of trees close to lines (following serious safety incidents and actual tree strikes) –Increasing complexity of work (Trees Regulations, Resource Management Act requirements), and increasing landowner engagement –Increased input costs (contract hourly rates have increased above CPI, despite focus on cost-effective procurement)

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10 Transmission lines Maintenance projects have increased from $6.4 M in 2006/07 to $19.1 M forecast in 09/10 Further increase forecast to $24 M in 2010/11 and 2011/12 Drivers include: –Increasing quantity of aged components on conductors and towers reaching condition criteria where replacement is required: Conductor components – joints, vibration dampers, conductor spacers Tower components - insulator attachment points, bolts, steelwork, foundation components, baseplates and stubs Note: replacement of these components is treated as expense because they are small parts of assets, rather than assets in their own right –Increased scope of work in testing of aged conductor to determine remaining life before re-conductoring is required –Accumulation of work resulting from maintenance deferred from previous years that cannot be further delayed without significant risk

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12 Structural steelwork replacement Insulator attachment points

13 Conductor component replacements Mid span compression jointSub-conductor spacer Vibration damper

14 Substations Maintenance expenditure on substations and operations has not increased significantly over the period of the Settlement to date Routine maintenance cost drivers: –Increased scope of work to address poor asset performance (particularly disconnectors) –Increased scope of stations inspections for compliance with resource consent and HSNO regulations requirements –Increased costs of service charges (incl access charges for cable route across Auckland Harbour Bridge) –Increased input costs (contract hourly rates have increased above CPI) –Increased costs related to contractor training –For 2011/12, new maintenance requirements will arise from growth in assets: Otahuhu GIS substation, Drury and Whakamaru North substations, and new Static Var Compensator systems HVDC Pole 1 will be decommissioned partway through 2011/2012, but new routine maintenance costs will arise for HVDC Pole 3 in the same period

15 Substations Maintenance projects are variable between years, typically $5 – 10 M p.a. Dominated by major planned and forced repairs of power transformers, and maintenance projects on buildings Forecast for 2010/11 includes provision for: –Further transformer repairs, including temporary arrangements to restore security Expect a small number of major failures to occur each year until the older transformers are retired over the next years –Emerging requirements for new project work to review seismic strength of existing substation buildings in response to new standard NZS 1170

OPEX efficiency initiatives OPEX savings will follow capital replacements: –Replacement of maintenance intensive types of circuit breakers: Air blast Minimum oil –Replacement of maintenance intensive outdoor 33 kV switchyards with indoor switchboards –Replacement of aged single phase transformer banks –Replacement of HVDC Pole 1 converter stations Review of outsourced contracting arrangements in progress: –Improve contractor performance –Simplify contract management –Achieve cost efficiencies 16