Disclosure & Legal Aspects Of Asset Management Planning

1. Disclosure & Legal Aspects Of Asset Management Planning Presented by Phil Caffyn, Utility Consultants Ltd

2. [This slide added later] • This Presentation was made to the Strategic Asset Management Conference held at the James Cook Centra Hotel in Wellington on Tuesday, 22 August 2000. • Please feel free to share this Presentation with your Board and senior managers, but restrict circulation to within that group. • Please forward any requests for this Presentation by external parties directly to me for consideration.

3. [This slide added later] • This Presentation is not intended as a substitute for professional advice, and Utility Consultants accepts no liability whatsoever arising from any action or inaction on the basis of this Presentation.

4. Scope of Presentation

5. Discussion Topics Who else disclose AMP’s ?? Emerging trends in AMP disclosure Review of current disclosure legislation Objectives for disclosing AMP’s Why disclose AMP’s ?? Viewpoints from the Ministry Existing disclosure requirements

6. Discussion Topics Existing disclosure requirements Recommended improvements from Round #1 Disclosure under competition Possible changes resulting from the Inquiry Initial issues from the Inquiry Case studies Nova Gas & CitiPower Conclusions

7. Why Disclose AMP’s ??

8. Why Disclose AMP’s • Many industry participants would argue that the AMP isstrictly an internal matter, and doesn’t require external scrutiny. • Conversely, many industry critics would argue that the reform processes have led to a decline in asset condition that necessitates public scrutiny. • Disclosing AMP’s has little if any relationship with price control and regulatory economics. • Most stakeholders probably couldn’t understand an AMP anyway. • So why disclose AMP’s ??

9. Why Disclose AMP’s • Possible reasons for disclosure are… • Restore public confidence in the wake of several major infrastructure failures. • Ensure that Y2K concerns were being adequately addressed (due to delays in passing the Regulations, the first disclosure date was after the most significant Y2K roll-over). • Provide the government with an opportunity to be seen to be doing something about recent infrastructure failures. • Provide the industry with an opportunity to present their plans for avoiding such failures (and more importantly, to be seen to be doing something).

10. Why Disclose AMP’s • Force the industry to formalise and document the linkages between many aspects of asset management and operation that exist informally. • Ensure the acknowledgement of senior management by obtaining their sign-off. • Obtain a reassessment of the condition of NZ's infrastructure after it became apparent that much of this infrastructure was in poorer condition than previously though.

11. Who Else Discloses AMP’s ??

12. Argentina Argentina ETOSS requires the water utilities to disclose their AMP’s as one of the conditions for being granted a geographic monopoly (Decree #787/93)

13. USA Tennessee TRA reviews the available funding of any operator proposing to compete with an incumbent operator - not in as much detail as an AMP.

14. USA Tennessee As an aside, Tennessee are also changing from Rate Of Return to Incentive price control as various industries attract new entrants.

15. USA Wisconsin PSC assess the adequacy & reliability of current and future supply. Requirement to submit detailed technical plans was recently abolished in favor of the above.

16. Canada Canada A major Canadian utility indicated they would probably reject any request to disclose a detailed AMP as the Utilities Commission already has access to reliability and asset data.

17. Australia Victoria NEMMCO requires a Statement Of Opportunities to be submitted (detailed comment will be made later on).

18. Australia NSW IPART require a summary level AMP, although their interest is in what the impact on pricing will be.

19. Summary • Apart from NZ, the only other jurisdiction that presently requires disclosure of detailed AMP’s is the water regulator in Argentina. • Strong commercial incentives for correct disclosure in this case - compliance with disclosure requirements results in an extension of the incumbents’ geographical monopoly for the period specified in the Privatisation Deed.

20. Emerging Global Trends in Disclosure

21. Emerging Global Trends • Following global trends in AMP disclosure appear to be emerging.… • Regulatory bodies are focusing more on projected outcomes rather than the detail processes (noted in S177 of the NZ Inquiry report). • Assets subject to competition by a distinct entity are becoming increasingly exempt from financial and technical disclosure (detailed comment will be made later on). • Price control appears to be moving from Rate Of Return to Incentive as new entrants enter the industry, with the added twist that some Regulators are now “back-solving” X to turn Incentive Regulation back into Rate Of Return.

22. Objectives for Disclosing AMP’s

23. Key Steps in Defining Objectives Identify desired outcomes of each stakeholder Identify key stakeholders in the AMP process Massage these outcomes into suitable objectives Discuss whether disclosure is the best way of achieving these objectives

24. Stakeholders Directors, managers & employees Owners Contractors Connected customers Government Bulk suppliers & retailers Regulators Community at large

25. Desired Outcomes • The stakeholders desired outcomes can be summarised as… • Increase shareholder wealth. • Regulatory requirements that are straightforward to fulfil. • Reliable supply. • Cost-effective supply. • Reducing network losses or leakage. • Predictable capital investment environment. • Maintaining a competitive contracting environment. • Commercial certainty for contractors. • Public safety.

26. Desired Outcomes • Support regional economic growth. • Efficient allocation of resources within the economy. • Environmental aesthetics. • Ensuring that delivered rewards and disciplines match those of a competitive market as closely as possible. • Ensure general confidence in the integrity of infrastructure.

27. Analysis of Outcomes • Analysis of the preceding requirements would suggest that only one of the identified stakeholder requirements would be met by disclosing AMP’s, as most of these requirements can be met through other legal, commercial or regulatory processes. • In fact, any requirement for extreme detail in the AMP’s could work against the network owners requirement to maintain a competitive contracting environment. • So based on all these requirements, what should the objectives of AMP disclosure be ??

28. Objective of Disclosure • After whittling down the list of stakeholder requirements, it is apparent that the only obvious objective of disclosing AMP’s is to ensure a degree of confidence in the integrity of infrastructure. • Results of this analysis would tend to concur with the answers to the “Why disclose AMP’s ??” section in which we concluded that restoring and maintaining public confidence was a major objective.

29. Key Features of Disclosure • Having defined this objective of AMP disclosure, the key features of the disclosure process should include the following... • Exclude issues addressed by other legal, commercial and regulatory processes. • Focus on outcomes rather than inputs. • Be restricted to people suitably qualified to interpret an AMP. • Recognise competitive aspects of the network business and ensure that these are suitably unbundled and excluded from disclosure.

30. Existing AMP Disclosure Requirements

31. Electricity Electricity (Information Disclosure) Regulations 1999 Section 25

32. Electricity • Requires all electricity lines companies excluding Transpower to disclose an AMP by prescribed dates. • Schedule 2 to the Regulations defines the information that must be included in the AMP, which is broadly…. • General description of the business. • Details of the asset management process, including interactions with other corporate plans. • Description of key information systems. • Clear identification of stakeholders.

33. Electricity • Description of all assets included, along with a justification for the assets existence. • Details and justification for proposed levels of service. • Details of key planning inputs and steps in the planning methodology. • Policies addressing each stage of an asset’s life. • Capital & maintenance spend plans. • Policies and plans for addressing risks. • Review of performance against targets.

34. Gas Gas (Information Disclosure) Regulations 1997 requires financial disclosure Being amended to require AMP disclosure, similar to Electricity

35. Gas • The AMP will be required to disclose the following (similar to Electricity)…. • General description of the business. • Details of the asset management process, including interactions with other corporate plans. • Description of key information systems. • Clear identification of stakeholders. • General description of all assets included, along with a justification for the assets existence. • Details and justification for proposed levels of service.

36. Gas • Details of key planning inputs and steps in the planning methodology. • Policies addressing each stage of an asset’s life. • Policies and plans for addressing risks. • Review of performance against targets.

37. Gas • The precise disclosure requirements for Gas are likely to differ from Electricity in the following areas.… • The disclosed AMP must closely reflect the operational AMP in structure, but may with-hold the depth of information used in daily operations (by implication, the operational AMP should therefore be structured around the disclosure headings, rather than preparation of a separate sanitised AMP). • Will not be required to include capital & maintenance spend plans. • Should include only “descriptions” of assets and processes rather than “details” .

38. Gas • Greater focus on asset condition than Electricity. • Performance targets are to be more tightly referenced to service reliability targets. • Reasoning behind these differences are on the MoED's web site for those interested, which is at www.med.govt.nz

39. Water & Wastewater No requirement to publicly disclose LGA Act #3 1996 requires a LTFS to be prepared and for depreciation to be funded Audit Office believes that a robust AMP is an essential prerequisite

40. Viewpoints From the Ministry

41. Viewpoints From the Ministry • The following viewpoints are general comments from discussions with the MoED. • They do not represent the official views and opinions of the MoED.

42. Viewpoints From the Ministry • Positive viewpoints expressed have been along the following lines…. • Worthwhile in that lines companies have been forced to consolidate disjoint information, and document informal policies and processes. • Especially worthwhile that lines companies have been forced to devote serious attention to contingency planning and disaster recovery. • The opportunity to evaluate spend plans against projected outcomes has proved useful.

43. Review of Current Legislation

44. Electricity Electricity Act 1992 Section 170 provides for disclosure regulations to be enacted Section 170 (k) provides for exemption from disclosure

45. Gas Gas Act 1992 Section 55 provides for disclosure regulations to be enacted Section 55 (k) provides for exemption from disclosure

46. Water No requirement to publicly disclose LGA Act#3 1996 requires an LTFS and for funding of depreciation Audit Office view a robust AMP as a prerequisite to these outputs

47. Recommended ImprovementsFrom Round #1

48. Recommended Improvements • Initial comments from the MoED arising from Round #1 (disclosure to 31 March 2000) are along the following lines…. • MoED would prefer that all specified headings are included with null comments rather than ignoring that particular heading ie. use the Schedule 2 headings as a template • Lack of obvious non-asset solutions to network issues (suggests that the asset creation mindset may still prevail in some areas). • Risk management was not well covered - although some detailed risk mitigation has been performed, very few lines companies have a structured risk management plan (or don’t mention it if they do).

49. Initial Issues From the Inquiry

50. Inquiry Background • The present government ordered an Inquiry into the electricity industry, the findings of which were reported in June 2000. • Broad objective was to investigate whether the present regulatory regime is contributing to the government’s objectives of “efficient, reliable and environmentally sustainable electricity”. • The Inquiry board were also directed to make particular comment on 11 key issues, of which 4 related specifically to transmission & distribution.