Proposed capital expenditure Categories

Proposed capital expenditure Categories Please note: The structure of the following sessions is firstly to present the position the Commission has proposed for the long term and secondly to consider any mechanisms required to manage the transition from the current position The proposed position is intended to form a basis for discussion The Commission is interested to hear views on the proposed approach Purpose of this session is to provide a summary of the proposed capital expenditure categories the rationale for the proposed materiality level for defining large projects

Developing the proposed approach When developing the proposed approach the Commission considered (amongst other things) The Part 4 Purpose Statement The GPS The regulatory approach taken in Australia The regulatory approach taken in the United Kingdom The approach taken under the Settlement Agreement between Transpower and the Commission Analysis of historical data on Transpower’s capex programmes Other reports, advice, submissions etc.

Governance and Management Engineering and technical The Commission’s focus is at the business case level for large projects and at the qualitative governance and management level for minor projects Service level obligations Governance and Management Policies, strategies and procedures that deliver services required at least cost Business management Assessment and approval of expenditure plans and variations Projects subject to an investment test commensurate with the size of project Supported by quantitative building block information provided at a level that demonstrates practical application of sound policies, strategies and procedures Top (by cost) project review and sampling of balance Ratios and base data Review of the application of policy and potential efficiency gains Expenditure plans Large Projects Minor Projects Asset management data (condition, age, network loadings and performance etc.) Engineering and technical Asset management planning and implementation

Trade offs Balance needed between the extent to which regulatory controls are applied and the flexibility Transpower requires to undertake its business The requirement to promote incentives to invest (Purpose Statement) and the required accountability for investments (2006 GPS) An appropriate level of regulatory scrutiny vs the effects of intrusion on the business The need for accuracy vs the need for flexibility The impact of controls on the business’s ability to be responsive] The intended positive outcomes of regulation vs the unintended downsides

Minor Projects - characteristics A high number of relatively small value individual projects Grid asset projects are principally replacement and refurbishment (RRE) with a small enhancement component Options likely to be limited for grid asset projects Information Systems Technology (IST) expenditure has a large development component Both RRE and IST projects can be structured in aggregated project groups/programmes A degree of flexibility required to optimise and prioritise minor projects during the RCP due to planning uncertainties Accuracy of planning and forecasting increases as projects complete process stages and gain Transpower approvals.

Large project characteristics Can be both RRE and IST projects High value require rigorous assessment and analysis Not all projects will be of a size that will require a full investment test Likely to be options to consider The range of values can be extremely large (e.g. millions to 100’s of millions) Planning accuracy is expected for large projects Unforeseen projects may arise during the RCP

Discussion

Proposed materiality level Large projects = $1.5 million and above Minor projects = below $1.5 million Aggregated project groups = $10 million in any one year with an individual total project limit of $1.5 million

Large project materiality level Settlement approach Enhancement projects have a materiality level of $1.5m Replacement and refurbishment projects do not have a limit Individual assessment of larger projects (approx 40 per year) and sampling of the balance

Large project materiality level Rationale for proposed level All projects require a level of testing and analysis commensurate to their size - the materiality level is considered to set the point at which the Commission applies individual project scrutiny The range and scale of Transpower’s projects does not negate the need for good testing and analysis of projects at the lower end (but still significant value) of the range Minor projects and programmes require different treatment to large projects due to planning accuracy and substitutability characteristics Including large projects in the minor project ‘bucket’ has the potential to reduce efficiency disciplines if large projects are deferred

Large project materiality level Key considerations are: Appropriate size (value) of project to require individual assessment The level at which an incentive for accurate planning at an individual project level is desirable Likelihood of multiple options for analysis Size of projects that are likely to be contingent The ability to group projects into programmes Number of projects that would be required to be assessed through a commensurate investment test

Discussion