RFI enquiries and Electricity Commission responses
ISCR enquiry (email) 11 September 2008
The New Zealand Institute for the Study of Competition and Regulation (ISCR) is considering a joint tender with Amsterdam-based SEO Economic Research. Accordingly, clarification of the following is requested:
- Does the Commission have any concerns or preferences regarding contracting? For example, would the Commission consider having two companies (one incorporated in New Zealand and one overseas), contracting for the work, through either:
a. Individual contracts with the Commission; or
b. A contract with the New Zealand organisation which sub-contracts part of the work to an overseas organisation.
- Paragraph 13 of the RFI refers to failures in generation or transmission infrastructure. Elsewhere in the RFI transmission is the focus (for example paragraphs 15, 20 and 22). In addition, distribution failures are not mentioned.
a. Can it be assumed that distribution failures are not to be examined?
b. Could the Commission confirm whether transmission failure is the focus of the exercise?
- Paragraph 23 refers to the possibility of the project looking at planned (in addition to unplanned) transmission outages “to the extent that the Commission considers reasonable”. Could the Commission clarify the extent to which it considers it reasonable to consider planned outages for the purposes of responding to the RFI?
- Paragraph 23 suggests that the work is to look at both direct and indirect costs of unplanned outages, while paragraph 64 (b) (ii) suggests that indirect costs will only be examined “as considered reasonable by the Commission”. Could the Commission clarify its expectations regarding indirect costs?
- Paragraph 113 (a) provides that the Commission may seek meetings with and formal presentations from one or more respondents. If an overseas-based organisation were to be contracted for some or all of the Investigation, and in the event that meetings/presentations are required, would either phone or video conferencing with that organisation be acceptable to the Commission?
Response to ISCR enquiry
- The Commission will require each individual or organisation that is to be party to a tender submitted for the Investigation to meet the respondent requirements of the RFI and the RFT. These requirements include the provision of information on the respondent profile and their capability to undertake the work being tendered. While the Commission has a preference for contracting with a single provider for the Investigation, all tenders will be considered on their individual merits, and tenders that include some of the work being undertaken by sub-contract will be considered.
- The Commission confirms that the primary focus of the Investigation is to be the value of unserved energy associated with failures of transmission assets.
As mentioned in paragraph 16 of the RFI, imbalances between supply and demand (and unserved energy) can occur in times of supply shortages. In addition to the availability of water or fuel to produce generation, decisions by generators to offer supply to the market can also be influenced by other factors, such as the reliability, cost and performance of their generation assets, and the price they would receive in the market. In such circumstances, generation unavailability which is not attributable to one or more failures of transmission assets or which has similar characteristics to transmission outages, are considered to be outside of the scope of the Investigation.
Generation failures often do have different characteristics to transmission failures. For example, lost or reduced generation from one source can normally be substituted by an alternative (though more costly) source, without unserved energy eventuating. Further, generator outages (for example, following a failure of a core component) can continue for months at a time, whereas supply disruptions caused by a transmission assets failure can normally be restored within hours, or at worst, days.
Nevertheless, some generation-caused outages have similar characteristics to transmission outages, and so, though not a primary focus of the Investigation, the Investigation should consider such failures of generation assets.
The economic impact from unserved energy caused by a generator being shut down as a result of a transmission failure can be the same as that caused by the generator failing for other reasons, and so sudden generation failures could reasonably be considered within the Investigation. An example of such a failure would be when multiple transmission assets fail suddenly in a cascading sequence, causing an unplanned and involuntary generator shutdown. Nevertheless, for the reasons noted above, the Investigation is to focus on the impact of failures of transmission infrastructure.
With respect to distribution failures, a similar logic (to that for generation failures) applies. That is, distribution assets are managed by asset owners in accordance with a separate regulatory framework. Though not a primary focus of the Investigation, the Investigation may consider failures of distribution assets to the extent that such failures are related, in terms of characteristics and impacts, to transmission asset failures. An important consideration, in allocating attention within the Investigation to distribution failures, will be decisions that will be informed on the basis of any data gathered.
- In relation to planned versus unplanned outages, the Commission confirms that the Investigation is to focus on unplanned outages, but that the economic costs of planned outages are also to be considered. The Commission, in the RFI, has noted that planned outages are different in nature to unplanned outages, and that planned outages present far greater opportunities for actions to be taken to reduce or eliminate the costs (or losses) associated with those outages. In this sense, there are good grounds for focussing only on unplanned outages given the focus on the unserved energy.
This notwithstanding, the Commission considers that it will be useful to allocate some attention within the Investigation to the impact of planned outages. The Commission does not currently have a firm view on how much attention should be directed to planned, compared with unplanned outages, or to how the impacts of planned outages should be identified.
The Commission intends to make these decisions at the RFT stage in consultation with potential tenderers. Views expressed in response to the RFI will be taken into account at that time.
- With regards to direct and indirect costs, the Commission confirms that both paragraphs 23 and 64 are correct, in that, while the Investigation is to consider both direct and indirect costs, indirect costs are to be considered according to what the Commission considers is “reasonable” given the aims of the Investigation.
As with planned versus unplanned outages, the Commission intends to discuss the nature of direct and indirect costs with potential tenderers as part of the RFT documentation and evaluation process, and to provide greater detail on what is expected in relation to each at that time. In the interim, however, the Commission welcomes any comments that respondents to the RFI may have on the issues raised in the RFI, including the issue of direct versus indirect costs and how they might be assessed in the Investigation.
- The Commission confirms, on a without prejudice basis, that, in the event that an overseas-based organisation expresses an interest in undertaking some or all of the Investigation requiring overseas travel, phone conferencing and/or video conferencing, that these costs may be acceptable to the Commission. The acceptability of such an approach will be dependent on the individual circumstances as outlined in submitted tenders.
The Commission has a preference for undertaking the Investigation through in-person contact with the successful tenderer(s), and expects that costs incurred by any overseas tenderer in undertaking the Investigation in this way will be specified within the submitted tender. Notwithstanding this preference, restrictions on the ability of one or more parties to a tender to travel to New Zealand for the Investigation would not per se rule out those parties from consideration by the Commission.
ISCR questions (within response to RFI) 22 September 2008
- When using surveys to reveal consumers' preferences it will be very difficult to differentiate between outages caused by [supply side] failures and those caused by distribution failures. How important is it to the Commission that distribution failures are left out of the monetisation of outages?
- What does the term indirect cost mean? ISCR assumes it refers to external (unpriced) cost. Or is the Commission referring to the priced cost that is an indirect consequence of an outage?
- What is meant in para 26: High Impact Low Probability (HILP) events are not a focus of the Investigation but should also be considered? Measuring welfare loss due to these extreme situations will take a considerable amount of time and effort. ISCR takes it that is not what is meant in the RFI. Does the Commission mean that a study of the literature suffices?
- How strict is the deadline of the second phase. If surveys are used then ISCR's experience is that the schedule is too tight. Would three months for stage 2 be a problem?
- Could the Commission give an indication of the budget for Stage 1, 2 and 3?
- How many contact moments/meetings with a steering committee (set up by the Commission) does the Commission foresee?
Response to ISCR questions 22 September 2008
- Though not a primary focus of the Investigation, the Investigation may consider failures of distribution assets to the extent that such failures are related, in terms of characteristics and impacts, to transmission asset failures. A consideration in the design of the survey(s) used is that consumers only see the end result (an outage) and may not be able to differentiate between transmission and distribution failures. The survey(s) should therefore focus on outages caused by failures of supply side (transmission) assets and on the types of decisions that will be informed on the basis of the data gathered, and accordingly, should not specify failures of distribution failures unless doing so is unavoidable.
- The term indirect cost as used in the RFI refers to external costs that are incurred in the short-to-medium term as an indirect consequence of an outage. Many such costs can be characterised as relating to economic opportunties (benefits) foregone as a result of the outage (e.g. lost earnings). They can also relate to economic costs (losses) that are sustained as an indirect or secondary consequence of the outage (e.g. accidents that would have been avoided had the outage not occurred).
Because of the wide range of costs that the term indirect costs can encompass (from short-term costs with clear cause-effect relationships to long-term social or macro-economic costs for which no clear link to outages can be identified), and because of the general lack of consensus as to the meaning of indirect costs, the Commission expects to clarify within the initial meetings during Stage 1, key definitions such as this, for the purposes of the Investigation.
- The reference in paragraphs 25 and 26 to High Impact Low Probability (HILP) is intended to differentiate between major long-term disruption to supply due to extreme and largely unavoidable events, and the types of anticipated transmission failures that transmission planning (and investment) addresses. The Commission is seeking the views of tenderers as to the identification and analysis of costs associated with HILP events, and will be available to discuss the issue further during the initial meetings in Stage 1. The Commission will not expect the successful tenderer(s) to measure welfare loss due to extreme situations (meaning that in that respect, a review of literature will suffice).
- It would be possible to allocate additional time to Stages 2 and 3 if considered absolutely necessary.
- An indication of the budget for the Investigation has been provided in the draft contract for consultancy services. The Commission is not rigidly bound to the figures cited.
- The Commission envisages that up to four initial meetings will be needed during Stage 1.
This page is related to: Transmission.