Has Auckland had its last blackout? Final decision on Transpower's new Auckland power line

On 5 July 2007, the Electricity Commission issued its final decision approving Transpower's amended North Island Grid Upgrade Proposal for the supply of electricity into, and north of, Auckland. The final "result" is three Commissioners in favour of the proposal, one against, and one declining to be involved (due to his previous relationship with Transpower). In this article, senior associate Louise Hill discusses the background and legal framework for the decision reached by the Electricity Commission and outlines the next hurdles facing Transpower before the upgrade can commence.

The process leading up to the Electricity Commission's final decision¹ on Transpower's North Island Grid Upgrade Proposal (the proposal) has been surrounded by public protest and controversy. There has been much discussion over what form the upgrade should take and whether Transpower's proposals represent the most appropriate and cost effective option for ensuring security of electricity supply to the upper North Island. Members of the public have been vocal over the impact the proposal will have on the environment and on the communities directly affected by the infrastructure development associated with the proposal.

The Electricity Commission's decision was not unanimous. Commissioner Pinnell stated that the proposal "comprehensively fails" the grid investment test set out in the Electricity Governance Rules 2003 and designed to prevent "Transpower from gold-plating the grid and passing the cost through to consumers". One Commissioner (Commissioner Rodger) declined to participate in the decision, on the basis that until September 2006, when he joined the Commission, he was a director of Transpower.

In a further development, Minister Pete Hodgson (on behalf of the Minister of the Environment), announced on 9 August 2007 that he would "call in" Transpower's Notice of Requirements and applications for the proposal under the Resource Management Act (RMA), and would refer decisions about the proposal to a Board of Inquiry. The Minister determined that the proposal warranted a rare intervention under the Resource Management Act. The result of the "call in" is that the Board of Inquiry will hear all submissions and make a decision regarding the designations and consents for the transmission line, instead of the nine councils with jurisdiction over land where the line would be built.

The end result is that nearly two years after Transpower's initial Grid Investment Upgrade Proposal was first submitted to the Commission, the Commission has approved the current proposal. Transpower now has to navigate the Board of Inquiry process under the RMA. It will then have to negotiate easement and access arrangements with landowners (this should not be underestimated - aside from the actual costs of the equipment required for the construction of the proposal, property costs are the single largest category of costs for which Transpower sought approval), before actually commencing the construction phase.

Background to the decision

Transpower first submitted a Grid Upgrade Proposal to the Electricity Commission in September 2005. Under the original proposal, Transpower proposed the construction of a new 400kV double circuit line between Whakamaru and Otahuhu. This construction was seen as the first step in accomplishing Transpower's long-term strategic vision for 400kV to replace 220kV as the core grid transmission voltage. Transpower suggested that the proposed upgrade was necessary to avoid an increase in risk to security of supply in the Auckland and Northland region at times of peak loading from 2010.

However, on 27 April 2006, the Commission gave notice under rule 15.1 of Section III of Part F of the Electricity Governance Rules 2003 (Rules) that it intended to decline the original proposal.

A full commentary on Transpower's original proposal and the Commission's reasons for declining the proposal is available in an earlier Bell Gully article on our website Electricity Commission turns down Transpower's proposed 400kV Whakamaru - Otahuhu line to be installed by 2010: A review. In brief, some of the key reasons given by the Commission for its refusal of the original proposal included:

• Transpower's analysis did not consider all alternative proposals and its analysis of the benefits of its proposal were over-stated. In particular, Transpower's analysis did not consider the credible alternative project consisting of a new 220kV double circuit transmission line between Whakamaru and the South Auckland urban boundary.

• The Commission placed considerable value on delaying investment, giving time to consider advances in technology or changes in the electricity system that may mitigate against a new line being needed for Auckland, such as new generation in Auckland or Northland.

• The Commission's estimate of the capital cost of Transpower's proposal was higher than Transpower's estimate.

On 31 May 2006, Transpower informed the Commission of its intention to amend the original proposal and requested that the Commission suspend its consideration of the original proposal. The Commission agreed to this suspension. Transpower advised the Commission that it intended to provide another proposal for the Commission's consideration and that it no longer wished to progress the 400kV proposal originally submitted by Transpower in September 2005. Accordingly, the Board of the Commission revoked the notice of intention issued on 27 April 2006.

On 20 October 2006, Transpower submitted its revised proposal, which is described below. It is this revised form of the proposal which has received the Commission's final approval.

The approved proposal

In brief, Transpower would:

• Build an overhead double-circuit transmission line from Whakamaru to a near transition station near the South Auckland urban boundary by 2011. This transmission line will initially be capable of 220kV operation, and later, when load growth requires it, will be capable of being operated at 400kV, although operation at 400kV will be subject to later Commission approval of and Transpower commission of 200kV-400kV transformers and associated switchyards near the existing Whakamaru substation and in the vicinity of the South Auckland urban boundary.

• Construct and commission two underground cables from the new transition station in the South Auckland area to the Pakuranga substation (rather than Otahuhu to increase diversity of supply). The new underground cables are capable of 220kV operation.

• Construct and commission the necessary substation/transition station facilities near the existing Whakamaru substation, a transition station in the vicinity of the South Auckland urban boundary, and Pakuranga substation.

• Dismantle the existing 110kV Arapuni - Pakuranga transmission line.

• Carry out the works necessary to convert and connect the existing 110kV Otahuhu - Pakuranga line to 220kV operation, for which it is already designed and consented.

The proposal also provides for Transpower to plan the works, including:

• the acquisition of designations, consents and easements to allow for future upgrade to 400kV operation through future addition of new transformers and associated works near the Whakamaru substation;

• a new switchyard near the transition station; new 220kV underground cables to the Otahuhu substation;

• new overhead lines or underground cables to connect the new switchyard to the new transition station; and

• extensions to the Otahuhu switchyard.

Thus, while Transpower will require the Commission's approval to subsequently operate the new line at 400kV, the current approval permits Transpower to commence work required to obtain that approval.

Transpower estimated that the major projects would all be completed by 2011. In this timing, Transpower has allowed two years for delivery risk. That is, while Transpower considers the need date is 2013, the proposed commissioning date of the proposal is 2011.

Transpower sought approval of costs incurred in the implementation of the proposal of $824 million in 2011 dollars ($683 million in 2006 dollars). This is the 90% upper limit on project costs. This amount includes the cost of transmission works, acquisition of property rights and project management.

The Commission's role

The Electricity Commission (Commission) is required, as set out in Part F of the Electricity Governance Rules 2003 (Rules), to consult on and approve (or not) investments proposed by Transpower in a grid upgrade plan.

The proposal is an "investment proposal" which, once approved by the Commission, allows Transpower to recover the approved costs of that investment ($824 million in 2011 dollars) from designated transmission customers in accordance with the transmission pricing methodology set out in Section IV of Part F of the Rules.

The Commission is required to consider and assess investment proposals in accordance with the processes and considerations set out in Section III of Part F of the Rules. In particular, rule 13.4 provides that, in order to approve the proposal, the Commission must be satisfied that the proposed investment:

• reflects good electricity industry practice in meeting grid reliability standards;

• complies with the processes set out in the Rules; and

• meets the requirements of the grid investment test. The grid investment test is set out in clause 4 of Schedule F4, and essentially requires that a proposed investment that is necessary to meet the reliability standard must maximise the expected net market benefit or minimise the expected net market cost compared with a number of alternative projects and that such conclusion is sufficiently robust having regard to the results of a sensitivity analysis (if one is conducted).

The Rules do not require Transpower to identify and propose the cheapest option for grid enhancement. Rather, in broad terms, an investment proposal must meet the reliability standard set by the Rules, comply with good electricity industry practice in doing so, and must be cost effective by minimising the expected net cost to the market or by maximising expected net benefit to the market, in comparison with a number of alternative projects.

In analysing an investment proposal the Commission must also have in mind the objectives and outcomes specified in the latest Government Policy Statement (GPS) on Electricity Governance issued in October last year. These include:

• timely decision making;

• business confidence arising from more certainty around long-term planning and infrastructure development, adequate capacity to allow for the development of renewable generation; and

• priority to be given to reliability over cost where there is an element of uncertainty.

Notice of Intention to approve the proposal

The Commission issued its Notice of Intention to approve the proposal under the Rules on 31 January 2006. The Commission, in its reasons for decision of its Notice of Intention to approve the proposal, stated that the proposal demonstrates a much better understanding by Transpower of how the Commission interprets and applies the Rules than was the case in relation to the original proposal. The Commission also stated that it has benefited from a better understanding of the rationale for Transpower's investment proposals. The Commission considered that this greater level of understanding has led to a substantial level of agreement between the Commission and Transpower.

The "base case" adopted by the Commission in analysing the proposal was the same base case used by Transpower in assessing the proposal and in its application. The base case is the 220kV transmission line. This was determined to be an appropriate reference option because it is essentially the "business as usual" reference case, since the existing grid already comprises 220kV as its core voltage. This reference option involved building a new 220kV double circuit transmission line between Whakamaru and Ormiston Road, south of Otahuhu, with 220kV underground lines from Ormiston Road to Pakuranga and then subsequently to Otahuhu (this was a modified version of the alternative 220kV proposal used to assess Transpower's original proposal). The key distinguishing feature between the proposal and the alternative option is the ability for the transmission line to which the proposal relates to be converted to 400kV operation in the future.

The Commission's analysis concluded that, unless there is a reduction in the growth in demand or assurance of new generation near Auckland, substantial transmission upgrades will be required. On the basis of information provided to date, the Commission considered that the proposal:

• reflects good electricity industry practice in meeting grid reliability standards; and

• minimises expected net market cost compared with the 220kV alternative (the view of the majority).

The view of the majority was that the proposal meets the requirements of the grid investment test, and thus the decision of the Commission (by a majority) was to approve the proposal.

Public conference

The Notice of Intention to approve the proposal was followed by a public conference in May 2007 where the Commission heard from a number of concerned individuals, groups and companies. The key concerns raised related to:

• Whether Transpower had significantly underestimated the costs of the proposal. Some suggested that the Commission is required to consider all costs, including non-market costs, of the proposal. Many submissions expressed concern that Transpower has significantly underestimated the costs of securing access to easements over properties in order to construct the transmission line to which the proposal relates. Other submissions queried Transpower's capital cost estimates.

• The impact of electromagnetic fields on people living in the vicinity of the proposed transmission line.

• The impact of the transmission towers on the environment. Some submissions stated that the Commission should undertake a full environmental impact assessment.

• Whether Transpower and/or the Commission had disregarded other, better, alternatives which should have been used as comparisons under the grid investment test. Many submissions expressed concern about the alternatives selected for the purpose of applying the grid investment test. Some were concerned that the 220kV alternative represented a "gold plated" alternative designed to compare unfavourably with the proposal.

The Commission's final decision

In its final decision, the majority of the Commission determined to confirm the proposal. On the basis of the information provided, the Commission considers that the proposal reflects good electricity industry practice in meeting the grid reliability standards, and the view of the majority remained that the proposal minimises expected net market cost compared with the 220kV alternative.

The majority of the Commission were satisfied that the proposal:

• meets the requirements of the grid investment test with a result of similar magnitude to that described by Transpower in its application;

• is consistent with meeting its principal objectives under the Electricity Act 1992; and

• has a slight advantage to the alternative 220kV proposal in achieving the outcomes sought in the GPS.

In addressing each of the four main issues raised (as described previously), the Commission stated that:

• The Commission does not consider that it is able to take into account costs such as possible decreases in the value of properties located near the route of the transmission line, except to the extent that such matters impact on the cost of easements or likely costs associated with the RMA process. The Commission noted that loss of amenity value is a relevant consideration for the consent authority when it considers the Notices of Requirement and applications for resource consent. In addition, while acknowledging the risks and uncertainties, the Commission considered that it remained appropriate to rely on the property costs put forward by Transpower for the purposes of applying the grid investment test to the proposal. In relation to capital costs, the Commission obtained advice on capital cost estimates from Parsons Brinckerhoff Associates. The Commission considered that both estimates were within reasonable accuracy bounds in respect of each other, and has no basis to establish that the Parsons Brinckerhoff estimates were more accurate than Transpower's estimates, in which case the Commission stated that it intends to continue to rely on the estimates provided by Transpower.

• The Commission stated that from information provided to it, it was clear that a number of scientific and health organisations are considering the long-term effects of electromagnetic fields on the health of individuals and communities. However, at present the prevailing standards remain those set out in the guidelines published by the International Commission for Non-Ionising Radiation Protection (ICNIRP). On this basis and on the basis of a report provided to the Commission by PB Power, the Commission stated that the easement width proposed by Transpower (65 metres) for the proposal meets a much higher standard than the ICNIRP guidelines require. In the absence of clear information regarding an anticipated change to existing standards relating to electromagnetic fields, the Commission did not consider that it had any grounds for concluding that Transpower's easement width was inadequate.

• The Commission noted that its responsibility was to consider environmental sustainability, which requires an holistic assessment of the electricity system as a whole in light of the proposed investment. The environmental impact analysis is required to be left for the appropriate body under the RMA. As part of its holistic assessment, the Commission concluded that the proposal is likely to better support remote generation, which is more likely than Auckland generation to be based on renewable energy sources.

• The Commission considered again alternative proposals to the proposal and concluded that the 220kV alternative was most likely to challenge the proposal, in terms of whether the proposal minimises expected net market costs.

The Commission noted in its decision that it anticipates Transpower will, during the RMA process, actively seek to mitigate some of the environmental concerns. These may include options such as additional undergrounding, route diversion, varying tower height, increasing easement width and the use of single circuit towers. The question is whether Transpower's contingency of $105million which has been allocated, for, amongst other things, further design refinement during the RMA process will be sufficient to cover the mitigation measures adopted. The current status of the RMA process is described below.

Dissenting opinion

In the original Reasons for Decision document, published in relation to the Notice of Intention to approval the proposal, Commissioner Pinnell dissented from the majority. Commissioner Pinnell stated that he supported the majority decision of the Commission on all regulatory tests except one. While he was of the opinion that a substantial upgrade of transmission is required into Auckland, and that the options put forward by Transpower are all capable of providing secure supply, Commissioner Pinnell believed that the proposal failed the grid investment test and that there is at least one option having better value, namely the 220kV alternative.

In his dissenting opinion, Commissioner Pinnell notes that the proposal:

• comprehensively fails the grid investment test and in doing so passes unnecessary costs on to consumers; and

• is less economic than the alternative 220kV proposal by a significant margin.

Further, he is concerned that there is no evidence to confirm energising at 400kV before duplicating the line represents good electricity industry practice.

On the grid investment test, Commissioner Pinnell noted that he does not agree with seven of the assumptions made by the majority, four of which he considers are crucial to the proposal passing the grid investment test. These include the electricity demand growth projections used by the majority to assess the proposal and the majority's assumption on where new electricity generation sources for Auckland would be located. If Pinnell's preferred assumptions were used as a basis for the grid investment test, it would result in a shift in the economics that would be substantially adverse to the proposal.

Commissioner Pinnell considered that when the proposal is energised at 400kV and becomes highly loaded, the upper North Island would be very dependent on this line, and any double circuit failure, even if of short duration, makes widespread blackouts due to voltage collapse and cascade failure a distinct possibility. Restoration would take days if the failure was physical damage to the conductors or towers, and hours if caused by trippings such as lightning strike.

Commissioner Pinnell stated that the 220kV alternative would have a much larger capacity than any other existing transmission line in New Zealand, and is capable of meeting the needs of Auckland and Northland until about 2050. Only if load growth turns out to be substantially greater than expected or if no new local generation is built in the upper North Island would there be a need for additional capacity in the next 30 years. Commissioner Pinnell favoured an alternative such as the 220kV alternative, and then reassessing once the 220kV alternative had reached its maximum capacity (around 2050), at which point other options may be available that are not available now.

Pinnell also believes that the savings to consumers by rejecting the proposal would far outweigh the costs of reviewing a new proposal, and that there was adequate time for such a review without threatening the timely delivery of capacity enhancement.

The majority stated that there is a need to upgrade the capacity of the transmission line supplying electricity into Auckland and further north, and that there will be a need to upgrade it further some decades hence. The majority considered that the proposal is for the best in the longer term, and more cost effective than the alternative, which involves constructing another 220kV line when the second upgrade is needed.

Judicial review?

It remains to be seen whether any interested party will challenge the Commission's decision through a judicial review.² The grounds for a judicial review are likely to be limited to a challenge based on the processes taken by the Commission in reaching its decision and in particular whether they gave due consideration to alternative proposals.

Call in of proposal under the Resource Management Act

On 28 May 2007, Transpower lodged Notices of Requirement under the Publics Works Act with seven councils whose areas are affected by the proposed transmission line and substations. This marked the start for the RMA process. A Notice of Requirement is the way a network utility operator gives formal notice to a city or district council of its requirement for designation of land for a project under the RMA. A designation, once included in a district plan, gives effect to the Notice of Requirement and enables the utility operator to undertake specified activities without obtaining land use consents from the city or district council.

On 9 August 2007, Minister Pete Hodgson announced that he was calling in Transpower's Notice of Requirements and applications for the proposal, and will refer decisions about the proposal to a Board of Inquiry. This means that the Board of Inquiry will make decisions regarding the Notices of Requirement, instead of the nine affected councils. The call in process effectively combines the councils' consideration and the Environment Court appeal process.

The Minister stated that he was calling in Transpower's proposal because he considers the proposal to be a project of national significance on the basis that the proposal:

• has aroused widespread public concern and interest regarding its actual or likely effect on the environment;

• involves significant use of natural and physical resources;

• affects more than one region or district;

• involves technology, processes or methods which are new to New Zealand and which may effect the environment; and

• is likely to result in or contribute to significant or irreversible changes to the environment.

The Minister will publicly issue notice of the proposal and invite submissions in the near future.³ Any person can make a submission within 20 days of public notification. Hearings will also be held and those submitters that indicate that they want to be heard will have the right to speak along with Transpower. Councils will be able to make submissions and attend hearings.

A Board of Inquiry will decide on the Notices of Requirement. A Board of Inquiry must be chaired by a current, former or retired Environment Court judge, and can have a total of three to five members.

Once established, the Board of Inquiry will consider Transpower's proposal. Following the hearing, the Board of Inquiry will issue a draft decision. Councils, submitters, Transpower and the Minister will then have an opportunity to comment before the Board makes its final decision.

For access to documents relating to the Electricity Commission's decision, including: the Commission's final decision in respect of the Proposal; various documents that the Commission considered in making its decision; and Commissioner Pinnell's dissenting opinion, visit: www.electricitycommission.govt.nz/opdev/transmis/auckgridinvest/final For more information on the RMA process under the Board of Inquiry visit the Ministry for the Environment website - www.mfe.govt.nz/rma/call-in-transpower

Bell Gully's views

Bell Gully believes in the sustainable development of New Zealand's capital infrastructure, for the benefit of all New Zealanders.

The decision of the Electricity Commission to approve Transpower's upgrade proposal and the Minister's decision to call in the project are both good steps in the right direction.

Sure, easy to say if you don't have a large pylon built in your backyard. However, in some cases the national interest has to take precedence over local interests.

For further information, please contact:

Garry Downs
Partner

Chris Gordon
Partner

Louise Hill
Senior Associate

¹ The decision of the Commission was by a majority comprising Deputy Chair Harris and Commissioners Close and Dell. Commissioner Pinnell dissented. Commissioner Rodger abstained from voting having joined the Commission from the Board of Transpower in September 2006.

² It has been reported that Federated Farmers and New Era Energy are considering making a judicial review application but are waiting to see what position is taken by Manukau City Council which also opposes the proposal. www.stuff.co.nz/sundaystartimes/Auckland/4123130a22395

³ This is expected to be on 8 September 2007.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.