Information Disclosure Requirements for ENERGY: Sector Briefing on Emerging Views

1. Information Disclosure Requirements for ENERGY:Sector Briefing on Emerging Views 7 October 2011

2. Session 1: Introduction Purpose of this briefing Revised timeline for ID requirements Agenda This session will cover:

3. Purpose of this briefing Update on our emerging views on ID requirements Identify areas where more work is needed to ensure sufficient information is disclosed, and in an appropriate format to assist interested persons: • To assess whether the purpose of Part 4 is being met; and • To understand the performance of regulated suppliers, their relative performance, and changes in performance over time Provide an overview of our thinking on assessing cost efficiency Set out the next steps in developing draft information disclosure requirements

4. REVISED Timeline for Information Disclosure

5. Agenda

6. Session 2: Emerging views on ID This session will cover: The role of the Commission Overview of feedback received from stakeholders Our views on: • The role and purpose of ID • Our role in delivering on the purpose of ID, in particular through reporting on supplier performance Our emerging views on information disclosure requirements 2011 Asset Management Plan Review

7. The Role of the Commission As we outlined in our Statement of Intent, the Commission’s role is to promote the long-term benefit of consumers in regulated markets What tools do we have to deliver the outcomes we are seeking? • Develop and amend regulatory rules (e.g. IMs, regulatory instruments) to improve markets • Advise on and/or put in place the best form of regulation • Monitor how well markets are working • Publicise information about sector performance • Take enforcement action where businesses do not comply; tailoring our approach to each issue • Engage with relevant regulated businesses and help them understand regulatory rules Information Disclosure (and Summary & Analysis)

8. Stakeholder Feedback (1) We have met with a range of stakeholders to understand whether and how they use ID, seek their views on key proposals (as discussed in workshops) and their thoughts on usefulness of ID generally Discussions with a wide range of parties: • Gen-tailers (e.g. Genesis, Contact, Meridian) • Consumers and their representatives (e.g. Federated Farmers, Domestic Energy Users Network, NZ Defence Force, Fonterra) • Consultancies (e.g. Smartpower, Group Energy Purchase) Generally, stakeholders welcomed these opportunities as many consider it difficult to engage in our formal consultation processes due to time and resource constraints We intend to continue talking to a range of stakeholders • Not just limited to consumers and suppliers but also other potential users of ID, e.g. equity analysts, policy makers, investors

9. Stakeholder Feedback (2) Many stakeholders (even large ones) consider it is not their role to analyse all the information disclosed for all regulated suppliers • Stakeholders do not currently do so, and do not have the resources for this type of analysis Instead, they look to the Commission to analyse the information, and to comment on outcomes, issues and/or performance Implication: We need to consider what information we need to do undertake informative analysis, and tailor the ID requirements accordingly Key message from stakeholders:

10. Stakeholder Feedback (3) Other feedback from stakeholders: • Significant use of pricing information. Therefore strong support for proposals to: • Require disclosure of capital contributions (as per workshop) • Require explanations of changes in prices and revenue requirements over time • Require an indication of medium term pricing strategy (if any) • Urgent need for transparency on gas pipeline capacity • Some support for more disaggregated reliability statistics – not just network averages • Support proposal to require AMPs every two years, subject to an update report in the intervening year • In general, little support for requiring disclosure of non-standard contracts (a current requirement)

11. Role of Information Disclosure (1) s 53A — The purpose of information disclosure regulation is to ensure that sufficient information is readily available to interested persons to assess whether the purpose of Part 4 is being met Among other things, interested persons need information to assess whether an EDB or GPB is: • Managing the assets for the long term • Making cost/quality trade offs consistent with present and future customer requirements • Striving to achieve efficiencies in all aspects of their business, and sharing these with consumers

12. Role of Information Disclosure (2) In practice ID will: • Disclose information to inform an assessment of the relative performance of companies • Thus, incentivise suppliers to perform better by highlighting how well their peers are performing • Potentially increase the total information available to suppliers about their own businesses ID will help enable: • Suppliers to identify better ways of running their businesses from their peers • Consumers to be better informed about the price and quality they are receiving from their supplier • Shareholders or consumer owners to be better informed about how well their business is being managed and thereby improve their ability to govern the business effectively • The Commission to more effectively regulate price and quality • Current and potential investors better understand the businesses

13. APPROACH TO DETERMINING ID REQUIREMENTS Our objective is that the ID requirements in the draft determination should be: • Sufficient to meet the purpose of ID, i.e. to assess whether the Part 4 purpose is being met, • While being cost-effective for suppliers to produce • In relation to the sufficiency of information, the requirements should ensure there is sufficient information for us to assess the performance of suppliers over time, and performance between suppliers This will help us to promote greater understanding of the performance of suppliers To be cost-effective, where possible, information requirements should align with the type of information that suppliers need to run their business

14. Information Required Under ID

15. Emerging Views: Information Disclosure The next three slides summarise our thinking on the main topics discussed at the Information Disclosure workshops held in May and June 2011 As we will set out the detailed draft requirements with comprehensive reasons in December 2011, we are not seeking submissions on these emerging views

16. Emerging Views: Financial Information • A range of financial issues were discussed at the Financial Workshop (10 June 2011). • As a result of feedback from suppliers, we are developing a less onerous draft requirement for consolidated financial information, e.g. it is proposed that the requirements would not require the reconciliation of asset registers. This draft requirement will be released for consultation in the draft ID determinations. • The treatment of related parties is still a concern. The draft requirement are likely to provide for disclosure on an arms-length basis, supported by information as to why the related party values are on an arms-length basis.

17. Emerging Views: Pricing Information • Discussed at the pricing-related disclosures workshop (31 May 2011). • Gas and electricity distribution sectors are to be treated consistently where possible and appropriate. • Support from stakeholders for the changes to pricing methodology requirements as discussed at the workshop, including a view that more explanations are required for changes in prices. • We are not proposing to continue the requirement to disclose terms and conditions of non-standard contracts. • We propose that EDB and GPB pricing statistics align with each supplier’s defined customer groups, not the “connection point classes” specified in Schedule 11 of the 2008 EDB ID requirements. • The Electricity Authority is seeking submissions on criteria for assessing alignment with its Information Disclosure Guidelines and Pricing Principles (due 17 October). We will factor this into our process, seeking alignment where possible.

18. Emerging Views: Asset Management Information • We held a workshop on GPB AMP requirements (20 May 2011) and a workshop on proposed Asset Maturity Assessment Tool (AMMAT, 10 June 2011). • Stakeholders support biennial AMPs and AMMAT disclosure. • We are likely to include a new requirement to disclose AMMAT self-assessments. • Review of 2011 EDB AMPs to be released shortly (next slides). • We will outline further thinking on asset related information, and the format in which this information is required, in Session 3 of this briefing. We will also discuss this topic with technical reference groups. • Our proposals for changes to ID requirements relating to asset information will be incorporated into the draft ID requirements.

19. 2011 Asset Management Plan Review (1) Parsons Brinkerhoff (PB) report to be released next week Review included a site visit to two EDBs Review was targeted. Assessed the three disclosure areas identified in 2009 with relatively weak compliance: • Service levels • Network development planning • Expenditure forecasts, reconciliations and assumptions Results were very positive. Of 28 EDBs reviewed, 21 EDBs achieved a higher average rating (across the three assessment areas) than they did in 2009 The highest average rating (across the three assessment areas) achieved by an EDB in 2009 was exceeded by 10 EDBs in 2011 Concludes that in regard to compliance with the current requirements, no major changes to the requirements are required

20. 2011 Asset Management Plan Review (2) Service levels: No EDB received a ‘non-compliant’ rating. 52% of ratings were assessed as ‘compliant’. Network development planning: <2% assessed as ‘non-compliant’. 63% of ratings assessed as ‘compliant’. Expenditure forecasts, reconciliations and assumptions: 12% assessed as ‘non-compliant’. 61% of ratings assessed as ‘compliant’. 2009 Service levels 2011 2009 Network development planning 2011 2009 Expenditure forecasts, reconciliations & assumptions Non - Compliant Partially Compliant 2011 Compliant 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

21. Session 3: Asset Management Information What we mean by asset management information Overview of proposed approach to asset management information Interaction with the CPP requirements History and evolution of information requirements Discussion of specific asset management information requirements Way forward for AMP requirements This session will cover:

22. What we mean by asset management information (1) Asset management information covers information on: • The physical network (Network) • Expenditure on the network (Expenditure) • Drivers of expenditure (Drivers) • Performance of the network (Performance) Asset management information is needed for interested parties to assess whether: • Assets are being managed for the long term • The required level of performance is being delivered • Costs are efficient and efficiencies are being achieved Consumers Service requirements Network Performance Expenditure Drivers

23. Asset management tools and processes What we mean by Asset management Information (2) Network data: • Data on the physical network • Quantity of assets that make a up the network • e.g. topology, age, redundancy Expenditure: • Expenditure on the network (actuals and forecasts) • Both opex and capex Drivers: • Reason why a company spends money • Gap between consumer requirements and actual performance of the network Performance: • How the network performs • Measures of service delivered to consumers Asset Management information • Required by the companies internally to produce asset manage plans and run the business Network Data Expenditure Drivers Performance Consumer Requirements Asset Management Plan

24. Overview of proposed approach to Asset Management Information (1) Suppliers already provide much of this type of information through ID and in existing AMPs • Proposed approach is not a fundamental change from what is required to produce the AMP However, the format of existing disclosures makes it difficult for interested persons to assess whether the Part 4 purpose is being met, or for us to undertake summary and analysis More standardisation and a consistent format will make the information more useable — in particular in understanding the link between the network, expenditure, drivers and performance (taking account of customer service requirements) • This will also benefit companies as it will allow companies to make better comparisons of relative performance Proposed approach is to require disclosure of: • An AMP (based on a refinement to the current requirements) • A set of standardised data templates covering network data, expenditure, drivers and performance • A narrative setting out the assumptions used in populating the data templates Technical reference groups to resolve practical issues, e.g.: • Should the templates be included in the AMP or as an appendix

25. Overview of proposed approach to Asset Management Information (2) To be cost-effective, where practical, information disclosure requirements should be consistent with the type of information that suppliers need to run their business: • Where possible we would like to align the information requirements with existing data, and readily available data formats, if this can provide information sufficient to meet the purpose of ID • In specific areas, where businesses do not already hold the information, we propose including a ‘unknown’ category—so that businesses are not required to provide information they do not currently collect , e.g. detailed asset condition information for high volume low value asset • We recognise that for some areas there will be a transition period while the quality and completeness of the information provided will be improved We will work with the technical reference groups to help ensure the ID requirements meet the needs of the Commission, regulated businesses and other interested parties

26. Interaction with CPP requirements While aspects of the proposed ID requirements will differ from to the current CPP information requirements: • ID development will build on CPP information requirements • Different objectives: • ID focus is on actuals with higher level forecasts • CPP focus is on history & forecasts by project/programme • External verifier is not required (IM 5.5.2 Verification) We propose to develop consistent definitions and assumptions for ID and CPP requirements: • Avoid creating inconsistent new sets of data mappings by businesses • Where possible, ID requirements would simplify preparation of a CPP application to a greater degree than is currently possible It is important that the ID requirements are consistent where possible with the existing CPP requirements (i.e. Schedule D and E of the IM)

27. Evolution of ID requirements ‘Inform’ used here means that earlier information requirements provide a starting reference point for later developments The current electricity & gas IDRs have informed the CPP IM. This, in turn, will inform the IDRs under Part 4 Gas Plus input from: Gas (Information Disclosure) Regulations 1997 Requirements for summary and analysis Input Methodology for Customised Price Paths (2010) Inform Development of Information Disclosure Requirements (2011 – 12) Briefing and technical reference groups Inform Electricity Inform Electricity Distribution (Information Disclosure) Requirements 2008 Non-exempt EDBs only Views of interested parties

28. Expenditure (1) Current ID requirements disaggregate expenditure into the following categories Are the definitions clear and being applied consistently? Can all categories be forecast and over what time horizon? How are categories with multiple drivers allocated (apportioned or by primary driver)? Is further disaggregation required and cost effective? (see next slide)

29. Expenditure (2) Are the current categories consistent and detailed enough to make the link between drivers, expenditure and performance? What are the options for capex? • Currently focus on why money is spent, i.e. the activity or driver (connections, system growth, asset replacement, etc.) • Expenditure could be further disaggregated based on what the expenditure is spent on (i.e. type of asset) • Type of asset could simply be line/pipe or substation/pressure reducing stations or more detailed, for example overhead line, underground cable, transformer, switchgear, regulators, values , SCADA and other secondary equipment • Types of asset could be split by voltage/pressure or voltage/pressure range e.g. LV, HV, LP, MP, etc. • Or any combination of the above What are the options for opex? • Further split into sub drivers or activities, for example routine and preventative maintenance includes fault rectification, routine inspection, testing, vegetation management activities • Cost could be further disaggregated into these areas • Similar to capex, some areas (for example routine and preventative maintenance) could be split by asset type and/or voltage/pressure Options to be discussed and developed with the technical reference groups before releasing draft ID requirements - important to ensure IDR meet the needs and are cost effective

30. Drivers of Expenditure What are the key drivers of expenditure? • Customer Connection – a customer wanting to connect to the network • System growth – a part of network where demand is forecast to exceed capacity • Asset Replacement and Renewal – asset in in poor condition that need replacing • Fault and Emergency Maintenance – the number of faults Identifying the key drivers of expenditure already set out in the current AMP guidance Is it possible to develop templates which tabulate the key drivers in some consistent way that can be linked to levels of expenditure? For example: • Schedule of asset conditions by asset (consistent with the asset data and expenditure schedules) • Schedule of zone substation demand relative to capacity (taking account of future demand growth)

31. Network Data Currently EDB AMPs require for each asset category: • Description and quantity of assets • Description of voltage levels • Age profiles Could this data be standardised into a consistent spreadsheet format common to all businesses? • A standard schedule of asset types and voltages would need to be developed • Much simpler than ODV — may be only 15–30 asset categories • Ideally aligned with the way expenditure is disaggregated • Could also be used to capture volume of activity (i.e. number of asset replaced) What information could be provided on topology to understand how the network is configured to supply customers, acknowledging differences in: • Customer density and demand density • Different terrain (urban, rural, remote, rugged ,etc.) • Understanding the 11 kV network key - backbone of the network

32. Performance Current ID and/or AMP requirements required reporting of: • Consumer oriented performance targets (SAIDI, SAIFI, CAIDI, etc.) • Asset performance information, e.g. fault rates Is there enough information to: • Link performance to service requirements and in turn to the drivers of investment? • Understand the impact of expenditure on performance? • Make fair performance comparisons between companies Consumer oriented performance targets based on system average: • Possible Average measures provide very limited information on the drivers of good or poor performance • development of feeder performance measures (FAIDI and FAIFI) Can reporting of asset performance measure (fault rates, etc.) be standardised?

33. Asset management Plans Maintain requirements to disclose an asset management plan Start point for AMP requirements will be existing requirements, modified where required: • Some requirements superseded by annual disclosure of standardised template information (i.e. the asset management information) • Align planning year to company balance date Requirements updated to include: • Assessment of asset management maturity (AMMAT) • Reporting of innovation • Resilience/HILP • Energy efficiency improvements • Possible move to biennial disclosure Key question how is the AMP and the template information are integrated • Included in the AMP (appendix) • Standalone

34. Session 4: Assessing relative efficiency Introduction What we mean by ‘cost efficiency’ Assessing operating expenditure Assessing capital expenditure Assessing total expenditure Case study This session will cover:

35. Assessing Cost Efficiency: introduction Examining supplier performance has a number of benefits, e.g.: • Suppliers may identify better ways of running their businesses from their peers • Shareholders or consumer owners better informed about how well their business is being managed, thereby improving their ability to govern the business effectively • The Commission can assess whether suppliers are operating efficiently • We have a duty under Part 4 to publish a summary and analysis of disclosed information. An assessment of cost efficiency will form one component of the summary and analysis • We are also considering how to assess other components of performance, and will seek input from interested parties on these in due course This presentation and accompanying paper set out our thinking to date on approaches for assessing supplier cost efficiency • The views presented are preliminary and do not provide a definitive view on our approach The approaches and likely data requirements will be discussed in the technical reference groups

36. What do we mean by cost efficiency? Can a supplier reduce its expenditure while maintaining the same outputs (and quality) in the longer term? In regulated sectors, assessments of cost efficiency often use other suppliers in the sector as a benchmark (i.e. comparative efficiency assessments) • This approach requires network characteristics that impact on costs (e.g. geography, climate, size of network) to be taken into account so as not to confuse inefficiency with differences in operating circumstances outside management control Comparisons with other sectors and approaches based on engineering theory and network insight (i.e. indirect comparisons) provide an alternative approach to assessing cost efficiency • These approaches may be appropriate in the absence of a sufficient number of comparable suppliers with robust data

37. Assessing operating expenditure (1) Based on our preliminary assessment, we propose that where possible, assessments of EDB or GPB opex are made relative to other EDBs or GPBs There are a sufficient number of New Zealand EDBs to allow an assessment of EDB opex using comparative efficiency techniques The limited number of GDBs and GTBs means that data from international comparators or sub-company data is likely to be required • Insights from comparing domestic GPBs may be limited and assessments of relative performance using statistical techniques may not be valid • International comparator data is potentially available from the US Federal Energy Regulator and from the Australian Energy Regulator

38. Assessing operating expenditure (2) • A comparative efficiency approach will require the identification of the drivers of costs across the industry, as well as any supplier-specific factors • Different components of opex have different drivers. A high level aggregation could make it difficult to identify the drivers • More disaggregated analysis may be better able to explain differences in costs across suppliers

39. Assessing capital expenditure • Direct comparisons of capex between suppliers of limited usefulness • Capex driven by network needs, which are likely to be unique to each supplier and thus incomparable across the industry • Furthermore, where possible, we are keen to avoid an assessment of capex based on historic expenditure • Capex is driven by needs of network at the time and an assessment based on one or several years’ of data may not be representative • Historic capex may bear little relationship to future expenditure (e.g. due to historic underinvestment) • We do not consider it appropriate to revisit sunk costs with the benefit of hindsight • Our proposed approach uses an engineering-based assessment of the level of activity proposed combined with comparisons of forecast unit capex (see next slide) • Much of the data required to apply the proposed approach is already provided in EDB AMPs (and will be provided in GPB AMPs). However the data is currentlynot standardised or provided in a user-friendly format

40. What are the key assets/activities for review in the capex forecast? Benchmark unit costs (intra- and inter- operator) What is the forecast level of these drivers? (e.g. demand forecast) Assess level/quantity proposed given these forecasts What drives this activity? (e.g. capacity, asset condition) What is the forecast unit cost of each activity? (i.e. forecast expenditure:forecast volume of work) Efficient expenditure What is the likely effectiveness of this expenditure? (e.g. increased capacity)

41. Assessing total expenditure • Up to this point, discussion focused on assessing opex and capex separately using different approaches • However, this may not provide an accurate assessment of supplier efficiency if there are significant opex-capex trade-offs • To mitigate this issue, costs may be aggregated prior to assessment: • Assess total expenditure • Assess combined components of opex and capex where significant trade-offs are identified • Potential approaches for assessing aggregated costs: • Comparative efficiency approach • Engineering assessment of the level of activity proposed combined with unit cost comparisons • Nature-of-work comparisons • Reference model

42. Case study: Comparing EDBs

43. Data and approach • Comparisons of total opex less pass-through costs across EDBs using information disclosure data for the period 2008-2010 and pass-through cost data from EDB compliance statements • Analysis uses unit costs, scatter plots and simple regression analysis • Intended as an illustration of the techniques we think are appropriate for assessing opex efficiency, and to highlight where additional information is required • This analysis is not intended as an assessment of EDB cost efficiency

44. Opex per km of circuit (average 2008-2010) High unit costs for EDBs 10, 26, 28 and 29 appear to be driven to some degree by high ICPs per km of network (see next slide)

45. EDBs have high unit costs given ICPs per km of circuit EDBs with the highest unit costs also have the most densely connected networks

46. Opex per ICP (average 2008-2010) Relatively high opex per ICP at EDBs 4, 15 and 25

47. EDBs 4 and 5 EDB 25 appears to be unique in terms of network topology

48. EDB 25 EDBs 4 and 15 Line of best fit and high voltages observed at EDBs 8 and 18 suggest unit costs could be lower? High unit costs for EDBs 4 and 15 driven by operating a higher voltage network? Or is this a proxy for some other costly network characteristic? EDBs 8 and 18

49. Opex per gwh supplied High unit cost at EDB 21 due to low energy consumption per ICP? EDB 21is ranked third lowest in terms of energy consumed per ICP, behind EDBs 15 and 16 However, unlike EDBs 15 and 21, EDB 16 does not appear to have a particularly high unit cost

50. Opex Regression analysis ln OPEX = 1.87 + 0.56 ln(km of circuit) + 0.37 ln(GWh distributed) + 0.02 ICPs per km of circuit • Simple model similar to those used by other regulators • Model explains 92% of the variation in opex between EDBs and years • However does not account for company-specific factors which may affect costs (e.g. topology)