Summary: Ministerial Inquiry into the Auckland Power Supply Failure

Energy Minister Max Bradford today released the report of the Ministerial Inquiry into the Auckland Power Supply Failure.

The Inquiry was announced by Mr Bradford on March 12 1998 following the power failure to Auckland's central business district beginning on February 20 1998. The Inquiry was set up by the Government in order to examine what happened, why and what lessons could be drawn for the future. Issues of legal liability and compensation were not part of the terms of reference.

Members of the Inquiry were Mr Hugh Rennie QC (Chairman), Mr Don Sollitt and Dr Keith Turner.

Key findings

The report is critical of Mercury's, and its predecessor the Auckland Electric Power Board's risk management and contingency planning, and its operations and asset management practices.

Corporate governance is also identified as an issue. The Inquiry found that the governance structure of Mercury Energy did not cause the power supply to fail, but through its effect on governance an opportunity to prevent it was lost.

Security of supply

The Inquiry has commended Mercury for its recent decision to improve capacity and security with a proposed new circuit from Mt Roskill to Liverpool Street.

However, the Inquiry has recommended that the Mercury Energy network should be closely monitored and that Mercury appoint an independent expert team to review future security.

More specifically, the Inquiry recommended that "Mercury Energy obtain, and publish, an independent expert validation of its current and committed plans for restoration of CBD security of supply as it will be by 1 December 1998 and also as it will be upon completion of the tunnel project."

The Government has sought assurance from Mercury that this action will be taken, for reasons of both infrastructure security generally and for New Zealand's international reputation.

Governance issues

The Inquiry also makes recommendations to Mercury Energy/Auckland Energy Consumer Trust and to the Government seeking stronger corporate governance.

Government response

The Government will take advice on the status of Mercury Energy's establishment plan and will encourage Mercury to improve its governance arrangements. The electricity reforms, which require separate ownership of lines and energy businesses, provide a good opportunity to resolve the governance issue.

Recommendations to Government - enhanced information disclosure

Inquiry recommendation 12 asks the Government to require network operators to disclose asset management plans and security standards.

Government response

There would likely be benefit in requiring such disclosures. It is likely to provide important additional information for scrutiny without imposing significant compliance costs on companies.
The Minister of Energy has directed officials:

• to develop detailed proposals for disclosure of asset management and security standards;
  
• to consult with the electricity industry on these proposals; and
  
• to report back to the Government on final proposals so that they can be effective from 1 April 1999.

Recommendations to Government - enhanced customer contracting

Inquiry recommendation 13 asks the Government to encourage or facilitate the development of enhanced customer contracting in the electricity industry in order to ensure that contracts reflect appropriate security of supply standards.

Government response

Customer contracts should cover security of supply issues. It is part of good business practice. The required ownership separation of lines and energy companies will create real incentives for this to occur.

Retailers will want clear and comprehensive contracts and will focus on security of supply in a more commercial way than was possible when the negotiations were between power companies and consumers. Final consumers will benefit from this as they will increasingly have real choice of electricity retailer. It will, however, be important for the Government to monitor progress with a view to taking action if necessary to ensure that real progress is maintained.

The Minister of Energy indicates that:

• he does expect enhanced customer contracting to be a priority for all in the electricity industry;
  
• the Government's move to require the ownership separation of lines and energy companies should encourage the rapid development of such contracting; and
  
• the Government will monitor progress with a view to taking specific action if real progress is not made in achieving those enhancements.

Lessons to be learned

The Inquiry considers that the lessons to be drawn from its findings for other network companies include:

During the operational life of network assets, evaluation of risks must be undertaken as a systematic process.

Proper customer contracts are important in order to provide strong incentives for network energy businesses to manage security on commercial criteria.

In a network company with monopoly characteristics, it is essential that the board must be directly accountable to the shareholders, with a clearly defined statement of corporate intent defining common shareholder and board objectives, especially in relation to security of supply.