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

Disclosure & Legal Aspects Of Asset Management Planning

Presented by Phil Caffyn,

Utility Consultants Ltd

[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.


• 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.

Scope of Presentation

Discussion Topics

Why discloseAMP’s ??

Objectives fordisclosing AMP’s

Who elsediscloseAMP’s ??

Emergingtrends in AMP

disclosure

Existingdisclosure

requirements

Viewpoints fromthe Ministry

Review ofcurrent disclosure

legislation

Discussion TopicsExisting

disclosurerequirements

Possiblechanges resultingfrom the Inquiry

Recommendedimprovementsfrom Round #1

Initial issuesfrom the Inquiry

Conclusions

Case studiesNova Gas &CitiPower

Disclosureunder competition

Why Disclose AMP’s ??

Why Disclose AMP’s• Many industry participants would argue that the

AMP is strictly 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 ??

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).

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.

Who Else Discloses AMP’s ??

Argentina

ETOSS requires the water utilities to disclose their AMP’s as

one of the conditions for being granteda geographic monopoly

(Decree #787/93)

Argentina

USA

TRA reviewsthe available funding of any

operator proposing to compete withan incumbent operator - not in as

much detail as an AMP.

Tennessee

USA

As an aside, Tennessee are alsochanging from Rate Of Return toIncentive price control as variousindustries attract new entrants.

Tennessee

USA

PSC assess theadequacy & reliability of current

and future supply. Requirement tosubmit detailed technical plans was

recently abolished in favor of theabove.

Wisconsin

Canada

A major Canadian utilityindicated they would probably reject

any request to disclose a detailed AMPas the Utilities Commission already

has access to reliabilityand asset data.

Canada

Australia

NEMMCO requires aStatement Of Opportunities

to be submitted (detailed commentwill be made later on).

Victoria

Australia

IPART require asummary level AMP, although

their interest is in what theimpact on pricing will be.

NSW

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.

Emerging Global Trends in Disclosure

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.

Objectives for Disclosing

AMP’s

Key Steps in Defining Objectives

Identify keystakeholders in the

AMP process

Identifydesired outcomes

of each stakeholder

Massage theseoutcomes into

suitable objectives

Discusswhether disclosureis the best way ofachieving these

objectives

Stakeholders

Owners

Connectedcustomers

Bulk suppliers& retailers

Directors,managers &employees

Communityat large

Contractors

Government

Regulators

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.

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.

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 ??

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.

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.

Existing AMP Disclosure

Requirements

Electricity

Electricity(Information Disclosure)

Regulations 1999Section 25

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.

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.

Gas

Gas(Information Disclosure)

Regulations 1997 requiresfinancial disclosure

Being amendedto require AMP

disclosure, similar toElectricity

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.

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.

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” .

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

Water & Wastewater

LGA Act #31996 requires a LTFSto be prepared andfor depreciation to

be funded

Audit Officebelieves that a robustAMP is an essential

prerequisite

No requirement topublicly disclose

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.


• 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.

Review of Current Legislation

Electricity

ElectricityAct 1992

Section 170provides for

disclosure regulationsto be enacted

Section 170 (k)provides for

exemption fromdisclosure

Gas

Section 55provides for

disclosure regulationsto be enacted

Gas Act1992

Section 55 (k)provides forexemption

from disclosure

Water

Audit Officeview a robust AMPas a prerequisite to

these outputs

LGA Act#3 1996requires an LTFSand for funding of

depreciation

No requirement topublicly disclose

Recommended ImprovementsFrom Round #1

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).

Initial Issues From the Inquiry

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.

Inquiry Background

• Three of these 4 issues relate reasonably specifically to asset management….• Whether asset valuations and efficiency

assessments should form part of the regulatory regime.

• Whether existing disclosure provides adequate and reliable information for assessing performance.

• Whether the present incentives for ensuring system security are appropriate.

• The following comments are recommendations from the Inquiry board.

• They do not represent government policy unless they are incorporated into law.

Initial Recommendations• Initial recommendations from the Inquiry report

are as follows.…• The government should set minimum security and

reliability standards for Transpower.• Transpower should publish an annual Statement Of

Opportunities that will describe their network, their existing investment plans, and where losses and constraints will occur, with a view to allowing the market to address such losses and constraints.

• The market should be encouraged to invest in distributed generation and demand side management to relieve constraints, with an onus on Transpower to step in should the market not respond.

Initial Recommendations• Transpower’s pricing methodology be changed to

better reward investment that relieves constraints.• Initial comment that distribution disclosure should

focus more on outcomes than inputs, lest the disclosure process become prescriptive and costly.

• The Commerce Commission should commission a one-off re-calibration of all distribution ODV's.

• Future valuation methodologies be tightened (presumably going even further than the present review of ODV methodology).

• That the Commerce Commission pay particular attention to pricing movements that follow ODV movements (and as noted by the Inquiry, ODV reductions not followed by price decreases).

Summary

• Nothing that really relates specifically to the disclosure of AMP’s, other than the recommended Transpower SOO (which will be discussed later in the context of competition).

• Quite the contrary, the Inquiry board noted the emerging global emphasis on outcomes rather than inputs.

Possible Changes Resulting From the

Inquiry

• The following comments are based on the recommendations from the Inquiry board.

• They do not represent the official view of any government agency.

Possible Changes

• The government may set minimum security and reliability standards for Transpower.

• A possible mechanism for promulgation of these standards could be Transpower's SCI (which the Inquiry recommended be modified).

• Could be a spill over into gas, water and waste water standards that could effect major pipeline operators such as NGC and Water Care.

• Transpower may have to produce a Statement Of Opportunities outlining where other industry participants could provide least-cost solutions.

Possible Changes

• Market mechanisms (including pricing) may be amended to allow other participants to implement least cost solutions that benefit the national economy, with Transpower providing a back-stop should other participants fail to act.

• Distribution disclosure may be amended slightly to better emphasise outcomes rather than inputs (but this probably won’t happen for at least another few cycles).

• Distribution ODV's may be subject to a one-off re-calibration and tighter controls over subsequent ODV's.

Possible Changes

• Closer scrutiny of the relationship between ODV's and line charges.

• These last two items could also spill over into gas, water and wastewater.

Disclosure Under Competition


• Discussion to date has dealt solely with assets operating as monopolies.

• Key objective of regulation is to impose the rewards and disciplines of competitive markets on to monopoly operators.

• This very statement suggests that assets subject to competition should not also be subject to regulation (disclosure).

• This is embodied in the Gas (Information Disclosure) Regulations 1997 which provided for Nova Gas’ landfill pipelines to be exempted from financial disclosure.


• This situation gives rise to 4 options for disclosure under competition…• All assets should be subject to AMP disclosure

regardless of competition.• All assets subject to competition should be

excluded from AMP disclosure.• Only the incumbents’ assets should be subject to

AMP disclosure.• Only the new entrants’ assets should be subject to

AMP disclosure.


• Each of these options gives rise to many issues, the most obvious of which are….• New entrants are likely to have new assets, hence

their physical condition will probably be less critical than established incumbent assets (could be 15 years before any maintenance is required).

• Conversely, modern assets have slimmer design margins, making prudent O&M practices even more critical.

• Competition is likely to force both the incumbent and the new entrant to lift their game, and this should be assurance enough to the public without disclosure.


• Two closing comments on the issue of disclosure under competition before we look at the case studies….• MoED

Consistent policy across gas, electricity and telecomm’s is to subject only incumbent operators to financial disclosure, because only the incumbent’s have market power.

• CitiPowerCompetition and regulation do not sit well together.

Case Study #1Nova Gas

Nova Gas

• Nova Gas owns and operates pipelines in several areas, including Wellington, Taranaki, Hawkes Bay and Auckland, and competes with incumbent assets.

• As mentioned earlier, certain Nova Gas assets are exempt from financial disclosure because they compete with incumbent assets (note the MoED policy).

• Consistent with the MoED's policy, Nova Gas should probably also be exempt from AMP disclosure.

Case Study #2CitiPower

CitiPower

• CitiPower owns and operates the electricity distribution network in central Melbourne.

• Powercor (from western Victoria) have installed a competing network in the Docklands area (very lightly loaded at the moment).

• CitiPower argue that their assets which are now subject to competition should not be subject to any form of disclosure (or any form of regulation at all).

Citipower

• NEMMCO require a SOO to be published, which enables new entrants to cherry-pick the high value areas of a network, leaving the incumbent to fulfil the obligation to supply low value customers.

• In fact CitiPower commented that “we may as well put our Strat Plan and Biz Plan on the web for everyone to see”.

Conclusions

Conclusions

• Key objective of AMP disclosure is ensuring public confidence in infrastructure.

• Any requirement to disclose AMP’s should not overlap other regulatory processes.

• Emerging global trend is for disclosure of projected outputs rather than descriptions of inputs and processes.

• Viewpoint of the MoED is that AMP disclosure has been worthwhile.

Conclusions

• Recommendations from Round #1 are fairly minimal, except that risk management and non-asset solutions were not well addressed.

• The Inquiry has recommended a few changes, but these don’t really focus on AMP disclosure per se.

• Disclosure under competition is a complex area in which regulatory processes do not appear to sit well - current policy in NZ is for only the incumbent to be subject to regulation.

The end


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