Grid maintenance expenses

Commerce Commission Workshop

2 March 2010

2

Overview• Maintenance expenditure on the grid has increased significantly

above CPI during the period of the Settlement• There is a need for further increased maintenance expenditure• Forecasts for next two years are $115.7 M and $119.8 M

respectively (cf 2009/10 draft forecast outturn of $104.7 M)• The main drivers for increased maintenance expenditure are:

– Increased scope of work on ageing assets• particularly the replacement of components of transmission line conductors

and towers (lines projects have increased from $6.4M in 2006/07 to $19.1M in 09/10)

– Accumulation of work deferred from previous years that cannot be delayed further without significant risk

– Increased complexity of undertaking work• Trees Regulations, Resource Management Act requirements, Landowner

relationships– Limited availability of skilled labour and increased input costs– Growth in the number of substation assets to be maintained

3

Background• Allowances for grid maintenance within the Settlement

were based on historic levels adjusted only for CPI.• An increasing quantity of grid assets (particularly

transmission line components) is now reaching condition criteria where maintenance replacement is required

• This “wave of work” is expected to continue for several years

• Maintenance has increased above CPI during the period of the Settlement

• Some non-critical maintenance has been deferred in previous years to keep total operating expenditure within acceptable limits

4

Maintenance and total OPEX

Maintenance 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12Threshold allowance (@CPI) 82.4 85.8 87.3 88.9 90.5 92.3Business Plan Budget 86.0 89.3 99.2 100.2Actual (or Forecast) 86.0 89.2 99.3 102.1 113.1 117.2

Total OPEX 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12Threshold allowance (@CPI) 198.1 206.1 210.0 213.7 217.5 221.9Actual (or forecast) 186.1 200 217.7 215.5 228.4 234.9

Variance against total Threshold -12.0 -6.1 7.7 1.8 10.9 13.0

Note: excludes reserves and pass through itemsCPI assumption 1.8% and 2.0%

Actual Forecast

Actual Forecast

5

Classification of maintenance

• Maintenance expenditure is categorised as follows:

Transmission lines

Routine maintenance

Maintenance projects

Substations

Routine maintenance

Maintenance projects

6

Grid Maintenance Summary 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

 Act$m

Act$m

Act$m

Fcst$m

Fcst$m

Fcst$m

Routine            Transmission 24.8 23.3 27.9 27.5 29.2 30.2AC Stations 36.8 37.7 42.4 40.3 43.4 47.5HVDC 9.3 6.9 7.2 8.2 9.2 8.2  70.8 68.0 77.4 76.0 81.8 85.9

Projects  Transmission 6.4 10.4 10.2 19.1 24.0 24.0AC Stations 7.9 10.0 11.3 6.3 7.0 7.0HVDC 1.0 0.8 0.4 0.8 0.3 0.3  15.4 21.2 21.9 26.1 31.3 31.3

   Subtotal 86.2 89.1 99.3 102.1 113.1 117.2cf Settlement Allowance 82.4 85.7 87.3 88.9 90.5 93.5

Pass Throughs  Rates 2.4 2.5 2.8 2.6 2.6 2.6

   

Total 88.6 91.7 102.0 104.7 115.7 119.8

cf Business Plan 84.9 87.4 95.3 100.2 - -

7

Transmission Line Age Profile (based on original commissioning date)

0

100

200

300

400

500

600

700

8000 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85

Age (years) as at Nov 09

Rout

e km

220 kV

110 kV

66/50 kV

HVDC

8

Transmission Lines• Maintenance expenditure has increased over the period of

the Settlement by approx 15 % p.a. • Routine maintenance cost drivers:

– Increased scope of work as a result of changes in risk management stance in accordance with Good Electricity Industry Practice:

• increased frequency of condition assessment (particularly following Otahuhu earthwire incident in 2006)

• pro-active management of access roads and bridges (particularly following Berryman case)

• more conservative management of trees close to lines (following serious safety incidents and actual tree strikes)

– Increasing complexity of work (Trees Regulations, Resource Management Act requirements), and increasing landowner engagement

– Increased input costs (contract hourly rates have increased above CPI, despite focus on cost-effective procurement)

9

Transmission Lines Routine Maintenance ($000's)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

2006/07 2007/08 2008/09 2009/10

Condition AssessmentPatrolsAccess Roads and BridgesFoundationsStructuresVegetation Control

Vegetation Control

Condition Assessment

Access roads & bridges

Other elements of routine maintenance are relatively stable over time

10

Transmission lines• Maintenance projects have increased from $6.4 M in 2006/07 to

$19.1 M forecast in 09/10• Further increase forecast to $24 M in 2010/11 and 2011/12• Drivers include:

– Increasing quantity of aged components on conductors and towers reaching condition criteria where replacement is required:

• Conductor components – joints, vibration dampers, conductor spacers• Tower components - insulator attachment points, bolts, steelwork,

foundation components, baseplates and stubs• Note: replacement of these components is treated as expense because they

are small parts of assets, rather than assets in their own right– Increased scope of work in testing of aged conductor to determine

remaining life before re-conductoring is required– Accumulation of work resulting from maintenance deferred from

previous years that cannot be further delayed without significant risk

11

Lines OPEX Projects Actuals ($000's)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2006/07 2007/08 2008/09 2009/10

Dismantling

Conductors

Foundations

Insulators

Structures

Tower Painting

Access Roads & Bridges

12

Structural steelwork replacement

Insulator attachment points

13

Conductor component replacements

Mid span compression joint Sub-conductor spacer

Vibration damper

14

Substations• Maintenance expenditure on substations and operations has not

increased significantly over the period of the Settlement to date• Routine maintenance cost drivers:

– Increased scope of work to address poor asset performance (particularly disconnectors)

– Increased scope of stations inspections for compliance with resource consent and HSNO regulations requirements

– Increased costs of service charges (incl access charges for cable route across Auckland Harbour Bridge)

– Increased input costs (contract hourly rates have increased above CPI)– Increased costs related to contractor training– For 2011/12, new maintenance requirements will arise from growth in

assets:• Otahuhu GIS substation, Drury and Whakamaru North substations, and new

Static Var Compensator systems• HVDC Pole 1 will be decommissioned partway through 2011/2012, but new

routine maintenance costs will arise for HVDC Pole 3 in the same period

15

Substations• Maintenance projects are variable between years,

typically $5 – 10 M p.a.• Dominated by major planned and forced repairs of power

transformers, and maintenance projects on buildings• Forecast for 2010/11 includes provision for:

– Further transformer repairs, including temporary arrangements to restore security

• Expect a small number of major failures to occur each year until the older transformers are retired over the next 15-20 years

– Emerging requirements for new project work to review seismic strength of existing substation buildings in response to new standard NZS 1170

OPEX efficiency initiatives• OPEX savings will follow capital replacements:

– Replacement of maintenance intensive types of circuit breakers:• Air blast• Minimum oil

– Replacement of maintenance intensive outdoor 33 kV switchyards with indoor switchboards

– Replacement of aged single phase transformer banks– Replacement of HVDC Pole 1 converter stations

• Review of outsourced contracting arrangements in progress:– Improve contractor performance – Simplify contract management – Achieve cost efficiencies

16