Quality Framework Proposal Commerce Commission Workshop 2 March 2010

Background Quality monitoring scheme for Transpower required as part of future regulatory framework Weaknesses of current System Minutes model are acknowledged Measures should be factors under company control or which company is best placed to manage Propose to model on Service Target Performance Incentive Scheme used by Australian Energy Regulator (AER) Modified to suit New Zealand environment Initially monitoring scheme only But suitable to move to financial incentive scheme in next regulatory period

Development of Scheme (1) Select appropriate measures to reflect important performance issues for customers During first regulatory period, scheme is monitoring only Expect in longer term to incorporate financial penalties and rewards Typically 1% of revenue at risk or potential reward Set targets for expected future performance based on historical performance Select a representative historical period, including most recent Target may be modified if historical period does not adequately reflect reasonably expected future performance, e.g. Increase or decrease in capital work Aging of assets Changes in regulatory environment

Development of Scheme (2) Set performance bands above and below target (Caps and Collars) beyond which no further rewards or penalties would apply Reward/Penalty on a sliding scale up to maximum based on distance from target value Caps and collars need not necessarily be symmetrical around target Assign weighting to each measure Targets and Caps & Collars and Weightings are reviewed each regulatory period

Example – Target with dead band and asymmetric Cap and Collar 5

Measures used in AER Scheme Basic basket of measures are: System Availability Loss of Supply Event Frequency Average Outage Duration (NB: An outage is defined as branch forced/fault unavailability, but is not necessarily an interruption) Parameters for each measure are: Target (possibly including a dead-band) Note: deadbands are no longer a common feature Cap and Collar values for maximum reward or penalty Relative weighting of each measure

Analysis of Measures System Availability Security risk Strengths – Measure Indicates: Weaknesses System Availability Security risk Perverse incentives Loss of Supply Event Frequency Customer Impact Highly visible Highly variable Average Outage Duration Responsiveness Easily skewed

Observations about AER Scheme Measures, values and methodologies applied vary considerably between companies to accommodate unique circumstances including local climate, transmission network, available data: e.g. definitions of measures, inclusions & exclusions, historical periods used, calculation of cap & collar values, sub-parameters of measures may be varied as considered appropriate Proposed targets, caps & collars are premised on the approval of the TNSP’s proposed capital and operating expenditures

Transpower’s proposed measures Loss of Supply Event Frequency No > 0.05 System Minutes  No > 1 System Minute System Availability AC Transmission Circuits  HVDC Link These are Transpower’s current internal KPI’s They correspond to measures used in Australia Average Outage Duration excluded from initial measures

Exclusion of Average Outage Duration from Initial Measures Transpower has not traditionally used as a key performance indicator, but does recognize potential value of this measure Transpower has no experience to date in the analysis of Average Outage Duration as a measure Establishing reasonable targets, caps and collars is more problematic Uncertain effect on measure resulting from: Changes in safety practices Changes in manual reclose policy to improve public safety Plan to commence monitoring and reporting this parameter as basis for future inclusion in the basket of measures

Implementation Issues Methodology for setting Targets and Caps & Collars for measures Appropriate period on which to base these Agreed definitions And what’s included / excluded from measures Event caps e.g. cap on max outage duration Weighting of each measure

Next Steps Determine appropriate methodology for setting targets, caps and collars Submit detailed proposal to Commerce Commission