ELECTRICITY DISTRIBUTION BUSINESS ASSET MANAGEMENT PLANS AND CONSUMER ENGAGEMENT : BEST PRACTICE RECOMMENDATIONS

Transcription

1 IN CONJUNCTION WITH SAUNDERS UNSWORTH LTD PARSONS BRINCKERHOFF ASSOCIATES ELECTRICITY DISTRIBUTION BUSINESS ASSET MANAGEMENT PLANS AND CONSUMER ENGAGEMENT : BEST PRACTICE RECOMMENDATIONS Prepared for APRIL 2005

2 SECTIONS TABLE OF CONTENTS 1. EXECUTIVE SUMMARY SCOPE OF WORK Asset management plans review Consumer engagement FINDINGS ON ASSET MANAGEMENT PLANS FINDINGS ON CONSUMER ENGAGEMENT Integrating consumer engagement practices with AMPs INTRODUCTION ASSET MANAGEMENT PLANS Intent of disclosed Asset Management Plans Encouraging efficiency through transparency Encouraging efficiency through best practice asset management CONSUMER ENGAGEMENT FINDINGS FROM THE ASSET MANAGEMENT PLAN REVIEW GENERAL FINDINGS SPECIFIC FINDINGS BY AMP SECTION Summary Background and objectives Assets covered Service levels Network development planning Lifecycle asset plan (maintenance and renewal) Risk management Evaluation of performance DISCUSSIONS WITH STAKEHOLDERS Perceived value and use of the disclosed asset management plans Problems with current requirements Concerns and suggestions for improvement CONSUMER ENGAGEMENT BY DISTRIBUTION BUSINESSES METHODOLOGY REVIEW OF THE REQUIREMENTS TO ENGAGE CONSUMERS Electricity Lines Threshold Notice Relevance of Consumer Engagement REVIEW OF DISTRIBUTION COMPANIES CURRENT ENGAGEMENT PRACTICES Review of Threshold Compliance Statements and price/quality trade-offs Summary of Key Points from the Interviews THE EXTENT TO WHICH THE REQUIREMENTS ARE BEING FULFILLED Market Segments...32 AMP Report final April

3 4.4.2 Large Consumers Small consumers BEST PRACTICE FOR ASSET MANAGEMENT PLANS DEFINITION OF ASSET MANAGEMENT BEST PRACTICE BY AMP SECTION Summary Background and objectives Assets covered Service levels Network development planning Lifecycle asset plan (maintenance and renewal) Risk management Evaluation of performance BEST PRACTICE FOR CONSUMER ENGAGEMENT THE LEGAL PERSPECTIVE INTERNATIONAL EXAMPLES OF BEST PRACTICE UK Cabinet Office Code of Practice International Best Practice in Consumer Engagement RECOMMENDED BEST PRACTICE FOR CONSUMER ENGAGEMENT Best practice communication principles Channels of communication Recommended elements of communication Minimum requirements for a survey BEST PRACTICE CONSULTATION PER MARKET SEGMENT Small Consumers Large Consumers INCORPORATING FEEDBACK INTO ASSET MANAGEMENT PLANS RECOMMENDATIONS WITH REGARD TO THE DISCLOSURE AND ENGAGEMENT PROCESSES DISCLOSURE OF ASSET MANAGEMENT PLANS Proposed revisions to the disclosure requirements CONSUMER ENGAGEMENT CONCLUSION...66 APPENDICES: APPENDIX A: ELECTRICITY DISTRIBUTION BUSINESSES FOR WHICH PLANS WERE REVIEWED APPENDIX B: PARTIES INTERVIEWED APPENDIX C: AUDIT NEW ZEALAND GUIDELINES FOR ASSET MANAGEMENT PLANNING APPENDIX D: PROPOSED REVISIONS TO THE ELECTRICITY INFORMATION DISCOSURE HANDBOOK AMP Report final April

4 1. EXECUTIVE SUMMARY 1.1 SCOPE OF WORK Asset management plans review Under requirement 24 of the Electricity Information Disclosure Requirements, 2004 ( Requirements ), electricity distribution businesses are required to annually disclose an Asset Management Plan (AMP). A key purpose of information disclosure is to encourage economic efficiency through making available data that allows assessment of distribution business performance in terms of allocative, dynamic and productive efficiency. AMPs are particularly important with respect to productive and dynamic efficiency, in their focus on planning and implementation of operation and maintenance procedures and the efficiency of capital investment. Preparation and disclosure of AMPs is therefore considered important from two main perspectives, to encourage efficiency through : internal best practice best practice asset management requires a holistic approach, that is captured and supported by an effective AMP (regardless of whether this is disclosed or not) and transparency - simulating the efficiency drivers of a competitive environment by allowing both internal and external stakeholders to compare the performance of a business against its peers. In view of this, the (Commission) has requested the preparation and disclosure of AMPs by electricity distribution businesses to be investigated, in particular to : review current AMPs for compliance with the Requirements and the Electricity Information Disclosure Handbook ( Handbook ), identifying specific areas of weakness and remedial actions required to comply with the Requirements; recommend best practice in terms of the planning, scope, structure, content of electricity distribution business AMPs and the consultation process for preparing those plans; and propose specific revisions to the Commission s requirements for information to be included in AMPs, to incorporate recommended best practice Consumer engagement Part 4A, subpart 1, of the Commerce Act 1986 (the Act), establishes a targeted control regulatory regime for distribution businesses 1. In terms of this, the Commission must assess distribution businesses against thresholds set by the Commission, identify for further investigation any businesses that breached those thresholds, and, if warranted, to declare control over those businesses. As part of the quality thresholds established in terms of the Act, distribution businesses are required to engage effectively with their customers, in particular with regard to the 1 The Act refers to lines businesses, but since that includes Transpower, which is not covered under this review, we use the term electricity distribution businesses, or distribution businesses. AMP Report final April

5 price/quality trade-off that exist in the service provided to them and in taking their views into account when making asset management decisions. In the operation of a distribution business a trade-off between cost and quality of supply is unavoidable. An efficient distribution business will not attempt to provide a near perfect electricity supply irrespective of cost but will strive to strike a balance between the quality of supply provided and the price that consumers are willing to pay. To do so effectively, requires businesses to seek and understand the views of their consumers in respect of the price-quality trade-off. In addition, the balance that has been struck needs to be clearly communicated to consumers. This is to allow consumers to understand the quality of service they can anticipate over time, and also to provide them with sufficient information to query or change the price/quality trade-off if it is deemed inappropriate. It is a key purpose of the threshold regime, and in particular the requirements relating to consumer engagement, to support the communication and understanding of this tradeoff and to ensure that it is taken into account by distribution businesses when making asset related decisions. The Commission has requested that the current practices of distribution businesses with regard to the consumer engagement prescribed in the Act be reviewed, and in particular to : recommend best practice with respect to meaningful engagement by distribution businesses with consumers as outlined in clause 6(1)(e) of the Electricity Lines Thresholds Notice 2003, namely to : (i) (ii) (iii) (iv) properly advise consumers about price-quality trade-offs available to them in relation to the goods and services provided by the distribution business; consult with its consumers about the quality of goods and services that they require, with reference to the prices of those goods and services; properly consider the views expressed by consumers during and after that consultation; and adequately take these views into account when making its asset management decisions. propose ways in which consumer engagement can be integrated into the asset management decision-making processes of distribution businesses. Capturing asset management decision-making is a key function of AMPs and it is therefore important to ensure an effective link between the consumer engagement practices of distribution businesses and their AMPs. 1.2 FINDINGS ON ASSET MANAGEMENT PLANS The quality of the AMPs reviewed varied, ranging from excellent documents that clearly demonstrate the important role they play in the companies asset management process, to documents that were seemingly only prepared to meet minimum disclosure requirements. In general all AMPs provided most of the information requested in the Requirements, although some had substantial gaps. General problems noted included the following. The interpretation of some of the terms in the Requirements caused problems for most distribution businesses, sometimes resulting in inadequate or inappropriate information being provided. AMP Report final April

6 A number of AMPs provide text-book descriptions of certain aspects of asset management, rather than describe how these aspects are approached in their own businesses. Some AMPs appear to contain descriptions of how distribution companies wish to see themselves performing with regard to certain aspects of asset management, rather than describe actual practices at the companies. An AMP is intended to be a self-contained document, that includes all relevant information to allow the regulatory objectives of the disclosure to be met. This should not prevent other company documents being referenced, as was the case for many AMPs, but in such cases the pertinent information should still be included in the AMP, especially where these documents are not publicly disclosed. In a small number of cases, AMPs did not follow the lay-out suggested in the Requirements. This approach should not be discouraged, as it generally indicates that the AMP is a working document for a distribution business and has been adapted to best suit the purpose of that business. However, it should be ensured that all the information required for disclosure purposes is still provided and is easy to locate. A discussion of our overall findings for the compliance of AMPs with each part of the Requirements is provided in section 3.2. A number of interviews were conducted with representatives of distribution businesses and external parties that have an interest in the disclosed AMPs, to determine the extent to which the AMPs are used, their value to external stakeholders, and problems related to the preparation and disclosure process. We found that there is substantial value to external parties from the disclosed documents and a number of direct uses for the AMPs have been identified, including the following : Large customers from time to time review their line charges and the quality or the capacity of their electricity supply, using AMPs as one of their information sources. Smaller customers usually do not read AMPs, as these are too technical for general understanding, but it is very important for them to know that such plans are prepared and that a responsible body like the Commission examines the plans to ensure that distribution businesses manage their networks in a prudent manner. It was also noted by representative bodies that the level of interest in the AMPs would be much higher if major network problems or a serious degradation of supply quality became evident. Contractors and engineering consultants are reported to frequently refer to the AMPs to gain information about the volume of upcoming work in a region and to ascertain work practices in other regions. Business consultants often refer to the AMPs when investigating the companies in question AMPs not only provide a valuable insight into the extent of a network and the activities carried out on it, but also about the competency-levels of management and operational staff. Distribution businesses are large users of each others AMPs to learn about new techniques or from issues experienced elsewhere, improve their own plans, or understand what is happening outside their distribution areas. However, our discussions would suggest that the major value of preparing the AMPs has been to the distribution businesses themselves, especially to those that use it as more than a mere regulatory compliance document. This value results from the discipline and focus required on asset management to prepare a good AMP, and the manner in which AMP Report final April

7 it draws in parties from right across the business to consider the asset management goals, practices and performance. Overall, we found that stakeholders and most distribution businesses found the current disclosure process for AMPs to be working reasonably well and did not propose any major changes. The litmus test was that when asked, distribution businesses generally indicated that they would continue to prepare AMPs even if the disclosure requirement was removed, although some changes to the format may be made. Some problems and concerns that were raised, included the following : Distribution businesses face a heavy compliance burden and are wary of any changes that would increase this load. Some commented that they would prepare an internal AMP in any case and public disclosure did not add much value, but substantially increased the effort put into the presentation of the document. Most distribution businesses find it difficult to assess consumer requirements and incorporate these into their asset management processes. While all consult with consumers, no clear answers to the price/quality trade-off issue are forthcoming. Such trade-offs that can be made are also difficult to accommodate in practice, especially for smaller consumers. AMPs are by nature dynamic documents and maintenance and development plans are subject to changes based on external circumstances. Annually submitted documents could be outdated soon after publication and thus convey incorrect information. In addition, in assessing performance against plan, a poor impression could be left with outsiders that do not understand this dynamic environment. These concerns were noted and addressed where possible. Overall we concluded that the value gained from the preparation and disclosure of the distribution business AMPs is substantial and outweighs the cost and effort required to prepare them. No changes to the disclosure process are therefore recommended, except for the inclusion of a requirement to have AMPs approved by the Board of Directors of the disclosing entity before disclosure. Based on the review of the AMPs and the interviews, a definition for asset management in an electricity distribution business context and best practice principles for AMPs are suggested, in section 5 of the report. Flowing from this, changes to the Requirements are suggested in section 7.1. These do not deviate largely from the current Requirements, but provide more clarity where confusion was evident in the past. Businesses already submitting good AMPs should find that the suggestions have little impact on the information they have to provide. In addition, we also recommend changes to the Electricity Information Disclosure Handbook, as described in Appendix D. We are somewhat more prescriptive in the Handbook on what information should be included in each Section of the AMP. We anticipate the impact of this will be to reduce the gaps we found in many AMPs, to reduce the amount of high level theory provided and to increase the focus on the asset management processes and practices that are actually implemented. However, it is still not the intention to rigidly prescribe to distribution businesses how their AMPs should look or how they should practice asset management at their companies. 1.3 FINDINGS ON CONSUMER ENGAGEMENT The information disclosed on consumer engagement was examined and interviews were held with a number of distribution businesses and other interested parties about this aspect. Key findings included : AMP Report final April

8 Some businesses were likely to be in greater compliance with the consumer communication component of the quality threshold than their Threshold Compliance Statements indicated, which could reflect uncertainty about the Commission s requirements. Some, but not all distribution businesses had adopted a market segment approach to understanding their consumers and to developing strategies to respond to consumer feedback. Distribution businesses were well attuned to the large consumers, had allocated resources to that segment, and most had good business processes established to serve this segment. However, engaging with smaller consumers and ascertaining their requirements is more problematic and virtually all businesses struggled with the price/quality trade off in relation to the small user segments of their markets. Some businesses noted that guidance on what was meant by the term quality would be useful, while others preferred to define this themselves. There was general agreement that some guidelines from the Commission about minimum standards for quality would be useful. For most distribution businesses the relationship with retailers is uneasy at best. It was acknowledged that a more constructive relationship would be of benefit. Distribution businesses make investments in assets with a 30 to 40 year life, while consumer feedback, particularly from residential users, reflects the here and now. These two widely diverging perspectives have to be accommodated in an economically logical manner. Various examples of international best practice communication with consumers are discussed in section 6.2. The extent to which distribution business fulfil their obligations with regard to consumer engagement varies greatly. In general, larger consumers requirements are well served, predominantly because there are far fewer of them, higher consumption levels warrant additional investment and they are more interested in and understanding of electricity supply issues, making effective communication easier. Price/quality trade-offs are therefore relatively easy to establish and implement for this sector. It is recommended that a high level of one-on-one contact is maintained with large consumers, using dedicated staff to facilitate effective two-way communication. It will often be feasible to provide dedicated electricity supplies, tailor-made to these consumers price/quality requirements. In addition, it may also be possible to incorporate measures such as demand control, time-of-use pricing, fail-safe supplies or power factor correction that could have beneficial price/quality implications. However, for smaller consumers the situation is more problematic. This is due to a variety of factors, including apathy or lack of understanding, the virtual impossibility of providing economically viable price/quality tradeoffs and the lack of a direct customer relationship (the interposed business model means retailers own the consumers). Smaller consumers are quality takers they share network assets and it is not economically viable to differentiate between users on a common network. This means that consensus about price/quality trade-offs are required, which in practice is very difficult to achieve. In light of this, the onus should remain on distribution businesses to determine the appropriate service quality levels for the various parts of their networks. This information should be clearly communicated to all consumers, demonstrating the quality of supply that they could expect, as well as actual past performance against these quality AMP Report final April

9 standards. For this information to be meaningful, a broad degree of consumer segmentation is required. This one-way decision making and communication does not obviate the need for distribution businesses to still ascertain regularly whether consumers (in general) are satisfied with the service they receive and whether there are changing consumer expectations that can be realistically met. Various communication channels are suggested, with the prime method being consumer surveys. Suggestions for preparing effective surveys are discussed Integrating consumer engagement practices with AMPs Accommodating large consumers in asset management planning is relatively straightforward. These consumers contribute significantly to overall demand patterns and forecasts, and hence directly influence the layout of supply networks. In general they also require above average service levels, or may be party to unique agreements which may imply dedicated network developments, that would in turn be reflected in asset management decisions. In addition, most larger consumers are able to understand and interpret the AMPs, or can engage parties to assist them in this. AMPs are therefore considered an appropriate tool to provide relevant information to large consumers. As part of the one-on-one interaction recommended with large consumers, their requirements should be noted and, where appropriate, reflected in the AMPs. The situation for smaller consumers is different. The appropriate price/quality balances determined by distribution companies for various parts of the network should be translated to service level and design standards and captured in the AMPs. These would drive network maintenance and development policies. In addition, performance against these standards should be assessed and also captured in the AMPs. However, to make this information assessable and meaningful to smaller consumers, it should also be conveyed separately in an easy-to-understand format, ensuring that this reaches consumers. Information and trends obtained from consumer surveys and other forms of interaction should be continually assessed and, where appropriate, changing service levels or design standards should be investigated. Where practical and economically feasible, such changes should be implemented. In this respect, it is important that distribution businesses have well developed internal processes that allow feedback to be assessed and, where appropriate, integrated into the business planning cycle, including the AMP. AMP Report final April

10 2. INTRODUCTION 2.1 ASSET MANAGEMENT PLANS In terms of requirement 24 of the Electricity Information Disclosure Requirements, 2004 ( Requirements ) made under section 57T of the Commerce Act 1986 (the Act), all Electricity Distribution Businesses ( distribution businesses ) in New Zealand are required to publicly disclose an asset management plan ( AMP ) within three months of the beginning of each financial year. 2 The information that is required to be disclosed is described in Schedule 2 to The Requirements and in Section 4 of the Electricity Information Disclosure Handbook ( Handbook ). 3 The (Commission) has requested PB Associates to : review current AMPs for compliance with the Requirements and the Handbook, identifying specific areas of weakness and remedial actions required to comply with the Requirements; recommend best practice 4 in terms of the planning, scope, structure, content of distribution business AMPs and the consultation process for preparing those plans; and propose specific revisions to the Commission s prescriptions for information to be included in AMPs, to incorporate recommended best practice. In fulfilling this assignment, we reviewed the publicly disclosed AMPs for 2004 of all 28 distribution businesses, as listed in Appendix A, against the specifications for AMP disclosure as presented in the Requirements. The specific findings for each distribution business have been provided in confidence to the Commission and for release to each respective distribution business. 5 General findings and recommendations based on the AMP reviews are presented in this report. This report also contains recommendations for changes to the Requirements with regard to the preparation and content of distribution business AMPs. These recommendations are based on the quality of the plans reviewed, reviews of international asset management practice and discussions with various stakeholders, including the Commission, distribution businesses and third parties Intent of disclosed Asset Management Plans Central to the review of the AMPs is an understanding of the intent and importance of disclosing AMPs as part of the current regulatory regime, both in terms of their contribution to facilitating the efficient operation of distribution businesses and from their regulatory purpose of information disclosure. The overall purpose of the information disclosure regime, as set out in the Act, is : 2 The Requirements refer to Disclosing Entities. The term distribution businesses is used in this report for the same. 3 Issued by the New Zealand on 31 March Best practice has been defined by the Commission as a specific action or set of actions exhibiting quantitative and qualitative evidence of success together with the ability to be replicated and the potential to be adapted and transferred. It should not be considered to be current average or standard practice. It is likely not even the best of current practices but may contemplate a reasonable level of innovation, taking into account the current state of knowledge in the electricity industry internationally, developments in comparable methods in other areas and reasonable compliance costs in moving all distribution businesses to the proposed level of compliance. 5 We understand that these reports have yet to be approved by the Commission, before their release. AMP Report final April

11 to promote the efficient operation of markets directly related to electricity distribution and transmission services by ensuring that large line owners and large electricity distributors make publicly available reliable and timely information about the operation and behaviour of those businesses, so that a wide range of people are informed about such factors as profits, costs, asset values, price (including terms and conditions of supply), quality, security, and reliability of supply of those businesses. 6 Hence the primary objective of information disclosure is to promote the efficient operation of electricity transmission and distribution markets by providing a dataset that enables an external and independent assessment of performance in terms of the three component objectives: allocative efficiency concerning pricing and returns; productive efficiency concerning operating inputs in relation to outputs; and dynamic efficiency covering capital investment and innovation. AMPs are particularly important with respect to both productive and dynamic efficiency, which relate to the planning and implementation of current operation and maintenance procedures and also to the efficiency of capital investment in the network Encouraging efficiency through transparency Assessment of investment efficiency typically involves assessing outputs in relation to the assets employed, and assessing the rationale for investment in new capital augmentations. AMPs can be used for an external assessment of the effectiveness and efficiency of operations and maintenance practices. When combined with an ex-post analysis of network investments, they can also be used as a means to assess investment efficiency. In addition, AMPs can provide transparency on lines business policies for extracting efficiencies through innovation and in particular by adopting new technology and implementing non-network solutions to meeting consumer demands (e.g., load management and distributed generation). Public disclosure of AMPs simulates the efficiency drivers of a competitive environment by allowing both internal and external stakeholders to compare the performance of a business against its peers Encouraging efficiency through best practice asset management The preparation of structured AMPs assists management to ensure the efficient provision of electricity distribution services, irrespective of whether or not distribution businesses are required to publicly disclose the information. Best-practice asset management implies a holistic, company-wide view of assets that is aligned with overall company goals and vision. It encompasses the philosophies, processes, and tools to maximize asset value through optimization of asset performance over the total asset lifecycle and is particularly important for asset-rich businesses, such as electricity distribution businesses. The long life of electricity distribution business assets, compared with the lives of assets typically used by other businesses makes good asset management even more critical, particularly in today s increasingly volatile business environment. 6 This goals (for subparts 1 and 3) was taken from the Purpose Statements in both subsections 57E and 57T of the Act AMP Report final April

12 Responsible and efficient management of distribution businesses would therefore dictate great emphasis on effective asset management practices. The AMP serves to capture this and acts as an important tool with which to consolidate and present the asset management processes within the business in an integrated and consistent manner. If well-prepared, the AMP should not only become a focus and driver for internal assetrelated activities, but also an effective means in communicating responsible stewardship to external stakeholders. 2.2 CONSUMER ENGAGEMENT In the operation of a distribution business there is a trade-off to be made between cost and quality of supply. Assuming an efficient operator, there are only a limited number of strategies available to improve the quality of supply. One approach is to construct a network that is more resistant to faults triggered by external causes. A distribution business can also increase maintenance levels to reduce the risk of equipment failing in service and to reduce response times when a fault does occur. Unfortunately such approaches also have cost implications. Hence an efficient distribution business will not attempt to provide a near perfect electricity supply irrespective of cost but will strive to strike a balance between the quality of supply provided and the price that consumers are willing to pay. This price/quality trade-off is explicitly recognised in the target control regime for distribution businesses (Part 4A, subpart 1, of the Act). In terms of this regime, the Commission must assess distribution businesses against thresholds set by the Commission, identify for further investigation any businesses that breached those thresholds, and, if warranted, declare control over those businesses. 7 As part of the quality thresholds thus established, distribution businesses are required to meaningfully engage with consumers to determine their demand for service quality, having regard to the available price-quality trade-offs. They also have to demonstrate that consumers views are taken into account when making asset management decisions. To assist it in meeting its obligations under the Act, the Commission has requested us to: recommend best practice with respect to meaningful engagement by distribution businesses with consumers as outlined in clause 6(1)(e) of the Electricity Lines Thresholds Notice 2003, namely to : (i) (ii) (iii) (iv) properly advise consumers about price-quality trade-offs available to them in relation to the goods and services provided by the distribution business; consult with its consumers about the quality of goods and services that they require, with reference to the prices of those goods and services; properly consider the views expressed by consumers during and after that consultation; and adequately take these views into account when making its asset management decisions. propose ways in which consumer engagement can be integrated into the asset management decision-making processes of distribution businesses. This part of the assignment was managed by Saunders Unsworth Ltd, working in conjunction with PB Associates. A survey of international practice with regard to consumer engagement and consultation by private and public sector electricity distribution businesses was conducted, and the information disclosed by distribution businesses on consumer engagement in their 2004 threshold compliance statements was examined. In addition interviews were held with various interested parties, including 7 This is the so-called threshold regime. AMP Report final April

13 a number of distribution businesses. Based on the results of this work, recommendations for best practice consumer engagement and incorporating this into the AMPs have been developed and are presented in this report. AMP Report final April

14 3. FINDINGS FROM THE ASSET MANAGEMENT PLAN REVIEW In this section, an overview is presented of the general findings resulting from the review of the individual AMPs. The results from discussions held with various stakeholders are also presented. The findings are generally presented in accordance with the framework prescribed in the Requirements. However, we have separated network development planning and maintenance planning. This is in accordance with our recommendations on best practice AMPs, as described in section 5.2, and also conforms to the practice of most AMPs. 3.1 GENERAL FINDINGS a) Some distribution companies prepare their AMP with the main purpose of meeting regulatory requirements. While this may not maximise the benefits they could enjoy from preparing the plans and could thus imply a wasted effort, companies are entitled to take this approach. b) The interpretation of some of the terms in the Requirements appears to have caused problems for most distribution businesses, sometimes resulting in the provision of inadequate or inappropriate information. c) A number of AMPs provide text-book descriptions of certain aspects of asset management, and do not appear to describe the actual practice of the distribution business in that area, in that the text is general and not specific to the distribution business s actual system fixed assets. d) In a number of cases, AMPs appear to contain descriptions of how distribution companies wish to see themselves performing with regard to certain aspects of asset management, rather than describe actual practices at the companies. Again such descriptions are non-specific and lack detailed reference to planning outcomes. e) In many cases methodologies were described but relevant quantitative thresholds were not provided. For example, there is little point in saying that capital investment projects will not proceed unless they make an adequate rate of return, but then not to specify what the threshold return is or how it is derived. Similarly there is no point in saying that reliability driven projects are tested against the cost of non supply without specifying the assumptions made in respect of the cost of non-supply. f) An AMP is intended to be a self-contained document, with all the relevant information included to allow the regulatory objectives of the disclosure to be met. This should not prevent other company documents being referenced but in such cases the pertinent information should still be included in the AMP, especially where these documents are not publicly disclosed. In many cases, by referring to other internal documents but neglecting to include the relevant information in the AMP, distribution businesses did not disclosure their asset management practices to the extent necessary for informed external assessment. g) In a small number of cases, AMPs did not follow the lay-out suggested in the Requirements. This approach should not be discouraged, as it generally indicates that the AMP is a working document for a company and has been adapted to best suit the purpose of that company. However, in such cases it is important to provide some form of road-map to indicate how the various sections of the document relate to the disclosure information required, or where the required information can be found. Further it may be necessary for distribution businesses AMP Report final April

15 to include some information in the document solely for the purpose of fully meeting the Requirements. 3.2 SPECIFIC FINDINGS BY AMP SECTION Summary a) All the AMPs contained an executive summary that conformed to the disclosure requirements. In some cases, however, we found that information was contained in the summaries that were not repeated in the main body of the AMP. This is confusing and could result in important information being missed when the AMP is consulted by stakeholders. b) The purpose statement is a very important part of an AMP, and sets the tone for the whole document. In some cases companies were upfront and stated that the purpose of the AMP was only to fulfil their obligations in terms of the Requirements. This is acceptable, and far preferable to intimating further purposes or uses for the plan, where these do not in fact exist. For other distribution businesses it was clear that the AMPs had a much more important role in the business and in a number of cases, excellent purpose statements were provided which captured the essence of good asset management. c) Some companies referred to the Electricity (Information Disclosure) Regulations and failed to note that the Requirements have replaced the Regulations as the governing statutory document. d) Most companies prepared their AMPs for a ten-year period. This period is however not prescribed and can be varied to suit the needs of each company, while retaining a medium to longer term view. Some companies indicated that there was a stronger focus on the initial five years of the plan, as forecasts for this period are inevitably more accurate and longer-term planning could still be amended as the situation change. This is considered appropriate Background and objectives Interaction with corporate goals, business planning process and other plans In general, this section was not well prepared. a) Few AMPs contained an asset management vision, or a description of corporate goals with regard to asset management. It was therefore not possible to assess how asset management, and the AMP in particular, assist in achieving the vision or meeting corporate goals. b) The description of the interaction of the AMP with other business processes and documents was often very limited. Examples of common problems include the following. - In many cases it was not indicated how the AMP relates to the budgeting process and how projects from the AMP are included in the annual budgets or works programmes. - While many companies mentioned the existence of a Statement of Corporate Intent in which their Boards intentions were stated, the relation of this with the AMP, and the extent to which the AMP accommodated these intentions, was not always clear. - It was often not possible to determine whether an AMP, or the asset planning process, supports corporate decision making and strategic planning, or AMP Report final April

16 whether the Board sets targets in isolation, mainly based on non-asset considerations, which are then accommodated in the AMP. c) In some cases diagrams were provided to highlight the interaction with other company processes or plans. While this was often helpful, in a few cases the descriptions in the text did not match the diagrams. It appears that some diagrams may have been taken from articles or consultant reports on what is considered good practice. In a few instances very similar diagrams were found in different AMPs Planning periods adopted a) Some confusion exists about what is meant by the term planning periods. The term is not defined in the Requirements but in the ODV Handbook it is used in relation to the determination of the appropriate provision for future load growth before capacity optimisation is required. However it is not clear that the ODV Handbook meaning was intended in the context of AMPs. Most distribution businesses merely took the planning period to be the same as the period covered by the AMP Stakeholder interests a) Most AMPs provided a list of stakeholders that were recognised as having an interest in the business. However, while many (but not all) identified the different interests of stakeholders, very few AMPs described how the interests of stakeholders were ascertained. b) Few of the AMPs provided a description of how stakeholders interests are taken into account in the AMP. In addition none of the AMPs discussed how conflicting stakeholder interests, which are inevitable given the range of stakeholders considered, are addressed in developing asset management strategies and policies Accountabilities and responsibility for asset management a) Many AMPs provided only a high-level description of how the responsibility for asset management is allocated in the business. These were often limited to a basic organisational description or chart, explaining that asset management was the responsibility of a Network Manager or similar designation, or alternatively that the ultimate accountability for asset management lies with the CEO or the Board. These descriptions are not useful and provide no indication of the way asset management is structured and the resources devoted to it. b) Many distribution businesses have outsourced all or part of their asset management activities. However, the description of these arrangements is often vague and it is not clear what responsibilities have been taken over by the contractors and how they have organised themselves to fulfil their obligations, or how external contractors are managed Asset management systems and processes a) While most of the AMPs identified asset management systems, not all noted how these systems are used within the organisations and how they support asset management processes. b) Only a few AMPs had any description or discussion of asset management processes adopted. AMP Report final April

17 c) In a number of cases, a list of applications (mainly software-based) used for asset management purposes was provided. However, an indication of the degree of integration of these systems, and the information flows between them was mostly lacking. d) It was not always clear from the discussion on asset management systems that all relevant asset data was being captured Assets covered Description of the asset configuration a) Most AMPs contain good high level descriptions of the distribution networks descriptions and of the asset configuration. However, some have shortcomings in the following areas : low voltage assets are often not discussed; the extent to which networks have been undergrounded is not noted; secondary systems, including SCADA, ripple control, protection and metering, are often not discussed; and zone substations are sometimes not individually identified (where present). b) Some AMPs did not differentiate well between the network configurations used for different load types or areas served. At the very least, the differences between urban and rural networks should be described, as well as areas or load types for which unusual asset configurations are used Identification of assets by category a) The standard for identifying asset-categories varied greatly between the AMPs. As noted above, in some cases, some asset types are not described at all. b) Most AMPs provided an indication of asset quantities for the major asset types in each category, but in some cases this was only partial. c) Although not an explicit requirement of the Requirements, many AMPs provided an indication of the value of the major asset categories. This is useful, as it sets a basis against which development and renewal expenditure can be assessed Justification for assets a) This section was generally not well completed, but that can at least in part be ascribed to the fact that the Requirements do not explain what is meant by the term justification. b) Many distribution businesses related the asset justification to the optimisation criteria used for the ODV Handbook if relatively few assets have been optimised out, this would indicate that the assets are justified. Others noted, without elaboration, that the assets used are the minimum required to provide an acceptable quality of supply to their consumers. c) A few AMPs provided a more in-depth analysis of different parts of their consumer and load profiles that dictated the need for different levels of assets employed. AMP Report final April

18 Unusual loads or geographical features are in some cases identified that gave rise to unusual asset configurations Location, age and condition a) Given the importance of asset condition to asset management, the description of asset condition provided in many AMPs was surprisingly weak. However, others demonstrated a very good understanding of asset condition and indicated a clear link between this and their planning for renewal or refurbishment. b) Most AMPs included some discussion on ageing profiles, but in some this was sketchy and did not cover all major asset types. In a few cases the ageing analysis was excellent and the conclusions drawn from the analyses very clear. c) Many companies preferred to discuss asset condition under the description of maintenance practices, as there is often a causal link between asset condition and maintenance or renewal programmes. This is acceptable Service levels This section was generally not well handled by the distribution businesses. a) Targets were often poorly defined, mutually inconsistent and sometimes incompatible with the asset management strategy. b) In some cases, targets in the AMPs were different from those presented in other planning documents such as the Statement of Corporate Intent. c) In some cases performance or service level indicators were identified but no targets presented. d) Many AMPs presented targets for one year only rather than for the whole AMP period. If this is intentional, in other words the distribution business is satisfied with its current performance levels and will try to maintain them for the AMP period, it should be clearly stated. e) In some cases, service level measures were included that were not adequately described in the AMPs. These may have been used for other disclosure purposes, but it is a requirement of an AMP that it should be self-contained and not require external supporting information or references Consumer-oriented service-levels a) All AMPs used the SAIDI and SAIFI indices to measure reliability, with the majority also stating the CAIDI index. 9 These figures have to be reported for the reliability thresholds and are therefore readily available. However many AMPs did not define SAIDI and SAIFI and left it to the reader to infer that the indicators were defined in the same way as for other information disclosure purposes. 10 b) Some businesses differentiate between their reliability targets for urban and rural areas. This is good practice, as supply reliability in urban areas is generally much better than distribution businesses can economically achieve in rural areas.. An 8 Examples include the use of single-wire-earth-return systems where the load density is exceptionally low or there is a need to build very long line spans (usually in remote rural areas); or the installation of dedicated reticulation networks with high redundancy levels for specific high-consumption or supply-sensitive consumers. 9 As the three indices are interrelated, in theory provision of the third does not add value. 10 It should be appreciated that the disclosed SAIDI and SAIFI may not be the same as the average reliability seen by the consumer since, for example it excludes Transpower outages and momentary interruptions. Furthermore, distribution businesses often did not appear to include outages due to distribution transformer or low voltage faults. AMP Report final April

19 average figure across the whole network, where the network serves both urban and rural areas, therefore provides no indication of the level of supply reliability that an individual consumer can expect. c) Many AMPs set further service level targets, defined in terms of response times to supply interruptions, supply restoration times or similar measures. These times were typically adapted for different parts of the network. d) A number of AMPs included deterministic reliability planning standards (typically N-2, N-1 and N-0) as service levels, varying between parts of the network. However, we do not believe this is particularly appropriate as a service level or target, but rather as a planning standard. If taken a step further and analysing the percentage of the network that does not comply with the required planning standard and setting performance targets for improving compliance, it may become useful. However, no distribution business adopted this approach. 11 e) A number of AMPs included various quality of supply objectives. These generally related to voltage regulation, harmonic distortion and momentary supply interruptions. In many cases these were expressed in terms of compliance with standards rather than in the form of targets and no measure approach was given. Some distribution businesses monitor performance against the number of verified voltage complaints received over a year, which seems a useful indicator Other targets a) A number of AMPs did not include any asset efficiency or performance targets. In some cases the metrics were described but targets were not set. b) The most widely used efficiency target is transformer capacity utilisation. Many companies measured network losses and the number of faults per 100 km of line (which some considered a reliability measure). c) Many companies used load factor as an efficiency target, but we do not believe this is appropriate as it is not related to asset efficiency. d) A small number of AMPs considered financial performance targets, such as direct costs per kilometre of line, or indirect costs per connection point. e) Many AMPs included health & safety targets (generally the number of lost-time injuries) and environmental targets (generally the number of events with a negative environmental impact) in this section. This is good practice for companies who take these aspects seriously, as asset management should be closely aligned with corporate goals and values Justification of targets levels a) This section was generally very poorly completed and in many cases completely ignored or addressed in a perfunctory manner only. b) The common justification for service level targets was historical performance levels or regulatory or legal requirements. Some companies qualified their targets levels based on what is physically achievable given network configurations and available expenditure levels this is a sensible approach. 11 We also noted that the manner in which the N-x reliability definition is applied is not consistent across distribution companies and in many cases not well defined. 12 While this indicator is a useful internal target, if it is to be used for comparison across different networks, it will however have to be normalized to the number of connections, line length or some similar measure. AMP Report final April

20 c) There is little evidence that stakeholder consultation played a significant part in setting service level targets Network development planning Most distribution businesses provided separate discussions on network development planning and network maintenance planning. This makes sense, as these activities are often undertaken by different groups in the business, are separately budgeted for and involve a different type of activity. We have therefore adopted this split approach in our evaluation. There may be some difficulty in allocating the asset renewal function to the correct category but, in line with most companies approach, we view it as a maintenance function rather than a network development function, even though asset renewal costs must be classed as capital for financial reporting purposes Planning criteria and assumptions a) In some cases planning criteria were not defined at all. This may in part be because of inadequate availability of funds, which makes it difficult to adhere to a blanket set of criteria but rather forces a distribution business to focus on only those projects it can afford. However, this was not stated upfront and the criteria for prioritising projects for implementation under these circumstances were generally not clearly described. b) Many companies used the required security of supply levels as the main network planning criteria network developments were planned to ensure that these levels are maintained given the anticipated load growth. In most cases these were deterministic reliability levels ( N-x ), with different security levels pursued for different load magnitudes and network types. c) Some of the better AMPs also discussed other planning criteria, which generally related to ensuring acceptable safety and environmental standards, regulatory or statutory compliance and network performance under contingency conditions. d) A minority of AMPs provide some indication that a probabilistic planning approach is being considered or implemented. However, this is still in a somewhat rudimentary stage and no network can be said to be planned on a fully probabilistic basis. e) Very few AMPs considered the concept of planning period, used in the ODV Handbook, in discussing planning criteria. The planning periods used by a distribution business in developing capital investment projects can determine the capacity, and hence the cost, of new assets is determined and also indicates the distribution business s philosophy in relation to the management of planning risk. f) In general, while the process for identifying the need for development projects (to meet the planning criteria) was described adequately, the process for then prioritising these projects was not discussed sufficiently (if at all) Load Forecasts and Network Constraints a) Load forecasts in the AMPs were mostly based on historical growth patterns and taking into account known demographic trends and planned developments. This is an acceptable approach and offers reasonable accuracy in the short to medium term. Forecasts of demographic trends were generally obtained from local or district councils, although some distribution businesses indicated that they consulted widely with major consumers and developers as well to form an idea of where future developments are likely. AMP Report final April