clanak2

PART THREE
Why The Power

Supply Failed
7 ORGANISATIONAL ISSUES: FINDINGS
7.1 Governance and Accountability

Corporate governance is the system by which companies and similar organisations are directed
and controlled. Almost all of the powers derived from ownership are delegated by the
shareholders to the board of directors through the companyÕs Constitution or Articles of
Association, with a few retained by shareholders to be exercised by them at general meetings.
The directors are accountable to the shareholders for the management of the company. Board
accountability to shareholders is generally sanctioned by voting in new members or a new
board where performance is held to be unsatisfactory. Since boards share a collective
responsibility and act collectively and since they meet only periodically, they must delegate a
substantial part of their powers to the management of the company. This is usually done
through a statement of delegations, the position description of the Chief Executive Officer, a
statement of matters reserved for the board, or a similar procedure. Whatever method is chosen,
management, through the CEO, is accountable to the board for the day-to-day operation of the
company and the board is responsible for seeing that management is managing properly.
Management accountability to the board is generally sanctioned by performance incentives, or
removal for serious performance breaches. Thus the directors are accountable to the
shareholders for managementÕs actions or inaction.
Over the past decade there has been a great increase in the attention paid to corporate
governance. This has resulted from:
¥ new legislation which has raised the standards expected both in the area of company law and
in a wide variety of issues such as the environment, employee health and safety and
consumer protection;
¥ rising standards required by the courts internationally; and
¥ the growing power of institutional shareholders and the increasing readiness of all
shareholders to assert their rights and to demand better performance from companies and
higher standards from directors.
In response to these demands, directors are spending more time on their duties and techniques
have been developed which enable them to discharge their duties more effectively. The
composition of boards and the selection of directors have become matters of concern and many
board changes and a reduction in the average tenure of directors have become apparent. Much
more information is now available on ways in which boards have improved their performance
and it has become common for directors to seek guidance on these matters.
In public companies directors owe their duty to the company as a whole and not to any
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PART THREE: WHY THE POWER SUPPLY FAILED
individual shareholders, or groups of shareholders. They must take into account the longer-
term interests of the company, including the interest of future shareholders, as well as the
immediate situation; this requires that directors strive to enhance shareholder wealth in
perpetuity rather than maximise short-term benefits to satisfy the particular demands of
individual shareholders or classes of shareholders.
However, since the ongoing prosperity of a company depends to a large extent on its
stakeholders being content with its performance and having regard to its future, directors and
management must have continuing regard to the interests of stakeholders such as creditors,
employees and the community in which it operates. In particular, companies depend on their
customers for their revenue and it is essential that they strive to maintain and increase customer
satisfaction as far as it is consistent with their other responsibilities.
In order that they can discharge their duties effectively, it is important that directors should
have access to whatever information they consider necessary and it can be expected that they
will become aware of much that is confidential and sensitive.
Because companies vary greatly in size, complexity and ownership structure and the quality
and experience of the people involved also vary it is difficult to set out a simple formula for
good governance. Certain basic requirements must always be met, however, and there are
principles and practices that have been found to be valuable in all or most circumstances.
One of the most basic requirements is that a company manages its risks. The board is
responsible for the stewardship of the companyÕs assets, for its reputation and for arranging its
affairs so that its ability to generate profits and to grow is not undermined. The board must
satisfy itself that the risks facing the business have been identified and evaluated and that those
that are likely to occur, and/or carry the most serious consequences if they do occur, have been
adequately dealt with.
The Australian/New Zealand Standard on Risk Management (AS/NZS 4360:1995) sets out a
generic framework for risk assessment. There is no suggestion that a board needs to carry out
the detailed process itself, but it has a clear responsibility to decide what process the company
should adopt and to ensure that it is implemented properly.
The Inquiry has relied, in its analysis of corporate governance, on a paper commissioned from
Henry Bosch which appears as Appendix 6 to this report. The above section is a brief summary
of that report.
7.2 Summary of Submissions
Auckland Energy Consumer Trust

The AECT, Mercury’s majority shareholder, submitted that the governance structure for the
company is unsatisfactory. Despite the Trust being the majority shareholder, it is unable to
appoint all the Directors and has no policy formulation role in Mercury.
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ORGANISATIONAL ISSUES: FINDINGS
The Establishment Plan required for the corporatisation of the Auckland Electric Power Board
in 1992 provided that Auckland Energy Limited (later changed to Mercury Energy Limited) be
the successor energy company and that the AEPB’s assets and liabilities were to vest in it by 1
April 1993. The share allocation plan provided that the total shareholding of 300 million
shares representing the AEPB’s undertaking were to vest in the Trust. This was based on the
views of the Interim Trustees that:
• the AEPB assets belonged to the Auckland community represented by the territorial local
authorities and accordingly should be held in trust; and
• the electricity consumers should receive the Trust’s income for the duration of the Trust to
compensate them for the anticipated price rises which were an inevitable outcome of the
corporatisation of the AEPB.
Consistent with those views and in order to comply with trust law, under the Trust the
consumers became income beneficiaries and the territorial local authorities capital
beneficiaries.
Thus the Trust was given 100% ownership of Mercury which had an authorised capital of $400
million. The Establishment Plan, however, provided that 75% of the authorised capital would
be held by the Trust and in due course the remaining 25% (the C shares) would be offered to
the public through the Initial Public Offering (IPO).
The C shares carried with them the right to 49.5% of the shareholder vote and the right to
appoint five of the nine directors to the Board. Six C shares were issued to six partners of the
law firm Russell McVeagh McKenzie Bartleet and are held in trust at the direction of all the
Mercury directors.
The Trust submitted that the compromise structure of Mercury set up by the Establishment Plan
has resulted in a situation where, for all practical purposes, the C class shareholders control
the Board by being able to appoint a majority of the directors. The five C class directors
therefore have two roles, first as directors and secondly, as the majority of directors, the ability
to control the destiny of those six shares, which in turn could be utilised to prevent the Trust
passing a special resolution. Thus the minority shareholders and the majority of the Board
have the ultimate ability to exercise control of Mercury, except in relation to major
transactions.
The unusual corporate structure derived from the opinion widely held in commercial circles
that political influence from the elected trustee/shareholders would prejudice the company’s
ability to act in a fully commercial manner and would also prevent the company from raising
equity capital necessary for future expansion.
A conscious decision was made during the establishment plan process to avoid the application
to Mercury of the accountability provisions of the Energy Companies Act 1992. As a result,
Mercury was not required to have a statement of corporate intent. The Trustees consider that
this was an unwise decision. Corporate accountability was to be achieved through an IPO, with
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new capital raised thereby being committed to specific energy-related projects. However, the
Establishment Plan did not contain any time limit for an IPO.
The failure to implement an IPO to give such accountability, together with the absence of a
statement of corporate intent, has resulted, in the opinion of the Trust, in a flawed system of
corporate governance and limited accountability.
The Trustees have been concerned at the lack of accountability and sought to overcome this,
but have been unable to obtain sufficient information from Mercury to enable them to achieve
effective monitoring of the affairs of the company.
The only occasion the Trustees were ever given information in any way relating to security of
supply related to the CBD tunnel. The cost of this project (then estimated to be $90 million) did
not reach the level at which shareholder approval is required under Mercury’s major
transaction provisions. But on 28 June 1995 the Trustees were informed of the tunnel project
and were provided with a brochure that was to accompany the public announcements of the
project.
Correspondence from the Trust to Mercury in late 1994 seeking a mix of financial and
economic information about the company went unanswered.
The Trust is committed to changing the governance structure of Mercury and has concluded,
on legal advice, that the Establishment Plan now has little or no effect.
The Trust seeks to ensure that Mercury is subjected to strong commercial disciplines. It plans
to ensure the adoption of a standard, commercial constitution with a one-share, one-vote
provision and considers that the IPO should occur within a set timeframe subject only to
commercial advice on achieving maximum benefits.
Auckland City Council

The Auckland City Council submitted that the Trust must be regarded as a weak shareholder as
it has no financial incentive (and limited capability) to aggressively manage the affairs of
Mercury to ensure that it continues to perform to its full potential. In the case of a large,
complex company like Mercury, it is essential that it have an active and capable shareholder
that is able to contribute effectively to the management of the company. The lack of such a
shareholder is arguably the underlying reason why the recent power supply crisis occurred. A
more sophisticated shareholder with a strong commercial interest may have been more
prepared and knowledgeable to ask searching questions of the company’s management on such
issues as Mercury’s maintenance and contingency planning, the Council submitted.
Mercury Energy Limited

Commenting on governance arrangements, Mercury submitted that it has operated as a
commercial entity with competent and professional corporate governance.
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The shareholding structure of Mercury implements the Establishment Plan and reflects the
choices made and agreements finally reached at that time relating to the need to balance public
and private ownership, meet the challenges of the new competitive environment and operate as
a successful business.
The timing of the IPO of shares envisaged by the Establishment Plan has been affected by
various factors including, in the start-up phase, Mercury’s lack of need for extra funding;
uncertainties which at various times have existed in relation to Power New Zealand; the
February outage; and the electricity reforms announced by the Government in 1998. Mercury
appointed advisers for the IPO in 1997 and the position is being kept under review.
On the appointment of directors, Mercury submitted that the five C class directors first
appointed have remained directors to this time. They hold office until the IPO, after which they
retire annually by rotation. Pending the IPO, the constitution provides that if a vacancy occurs
among the C class directors, then the holders of the C shares shall fill the vacancy. At present
all of the C shares that have been issued are held by Mercury’s solicitors (as bare trustees acting
on the instructions of the existing directors). The Establishment Plan provides that before a
vacancy is filled the prospective appointment is to be referred to the Minister of Energy.
Regarding communications with shareholders, Mercury submitted that, in terms of the

constitution, the Trust has no general entitlement to information. However, the Board has
recognised that Mercury’s special relationship with the Trust justifies additional lines of
communication to it from an ownership rather than a management perspective.
Accordingly, the Chief Executive of Mercury has made regular quarterly presentations to the
Trust which cover topics such as financial performance, dividends, budgets, capital projects
(including the CBD reinforcement project) and strategic investment. These sessions also enable
the Trust to raise any matters of concern to them. There is also a practice of chairman to
chairman communication over issues of concern to the Trust or the Board.
Mercury’s constitution contains core asset protection provisions, which require the approval in
writing of the Trust for any transactions that fall within the scope of these provisions.
There has not been any split vote at Board level in Mercury or (to the best of Mercury’s
knowledge) its predecessor AEPB on network security or maintenance matters. However,
proposals for funding were at times rigorously debated, especially if large capital expenditure
was involved.
In a separate submission to the Public Sittings in Auckland, the five independent directors
submitted that governance matters had no part in causing the failure. Consequently, many of
the governance/ownership issues raised in several submissions were, in their view, irrelevant
to the Terms of Reference of this Inquiry.
On the subject of the relationship with the shareholders, the independent directors submitted
that, while not all the requests of the Trustees were consented to, the Board did agree to provide
a great deal of information and to do so in the form of regular briefings for the Trustees.
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Suggestions that there was no accountability of the independent directors overlook the
provisions of the Companies Act 1993 and of the common law which provide a substantial level
of accountability of any director, they submitted.
The independent directors consider that it has been a coherent and effective Board. It has not
operated in factions. The Trust appointed four directors, two of whom were themselves trustees.
They were always free to express and advocate the Trust’s views at Board meetings.
In a separate submission to the Public Sittings, John Collinge said there is ongoing co-
operation between the Mercury directors appointed by the Trust and the independent directors
in a constructive manner to pave the way for the future.
The 100% ownership of the Trust should be recognised in the form of a one-vote, one-share
provision. In this way all of the directors become accountable to the shareholder in the normal
way. The Trust can then monitor the input of directors and replace or confirm them upon
retirement as would any owner. The change would equate shareholders’ economic interests
with voting rights and result in a normal commercial governance structure.
Mark Green
Mark Green submitted that Mercury should be forced through legislation to sell the overhead
power lines that have been installed along the railway line from Penrose to the CBD. The
purchaser should be a party unrelated to Mercury and the sale should take place when Mercury
is able to supply the CBD by alternative means (presumably when the tunnel is completed).
Peter O’Brien
Former Trustee and Mercury director Peter O’Brien submitted that Mercury’s failure to supply
problems would not have been averted if the Trust had received all the information it had
requested, if the Initial Public Offering had occurred at an early date as anticipated and if the Trust
had political control over the appointment of either a majority or all of the members of the Board.
He suggested that, as the company directors have not seen the commercial need to float the
additional shares as set out in the establishment plan, the Trust should itself be required to sell
down a quarter of its shareholding in Mercury.
7.3 Corporate Governance Issues

This section explores some of the issues that arose during the InquiryÕs investigations, which
are important for the InquiryÕs findings on corporate governance as it relates to the power
supply failure.
7.3.1 Governance and Accountability Arrangements

The governance structure of Mercury Energy is unusual and the lines of Board accountability
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are not clear. Though the establishment plan contemplates an IPO, there has been a long
transition period in which adequate accountability lines have not been established. There is no
agreement as to the appropriate accountability arrangements in the event that an IPO does or
does not take place.
The AECT has not been accorded cornerstone shareholder status, although AECT expected this
treatment in the absence of a public float. The Mercury Energy Board briefings of the Trust,
while regular, did not contain sufficient information for the Trust to adequately monitor its
investment and did not allow the Trust to be consulted on critical policy issues such as the
strategy plan in 1995. The strategy plan was presented to the Trust at least four months after
approval by the Board.
The AECT did not have adequate briefings on critical investment decisions for which its
approval was required. The Trust was asked to approve the new Tunnel Project only a matter of
days before public announcement and on the basis of public leaflets already prepared for release.
Neither the AECT nor the Mercury Energy Board seriously attempted to initiate actions to fill
the vacuum prior to the IPO by developing a Memorandum of Understanding or a Statement
of Corporate Intent as a means for agreeing on objectives.
While the AECT sought advice on how to address the inadequacy of Mercury Energy Board
accountability, it failed to pursue its concerns with the Board directly. These matters have only
just been brought to a head after a period of five years. The cable failures have given rise to an
improved effort of cooperation between the Trust and the Mercury Energy Board. However, the
outcome of this cooperation is yet to be measured for its effectiveness.
7.3.2 Risk Management Accountability

Henry Bosch has observed the importance of the role of the board in risk management. The
issue of board and management roles in risk management arose during investigations into the
operations of the Risk Management Committee and the implementation of the 1995 Risk
Assessment Report by PA Consulting. These issues are pursued in the chapter on risk
management and contingency planning (see Section 9.4).
While the Inquiry notes that a board need not carry out the detailed risk management activities
itself, it must decide what process the company should adopt and to ensure that it is
implemented properly. Some evidence at the Public Sittings raised questions about whether the
Mercury implementation processes have been adequate in respect of network risk management.
7.3.3 The Role of the Trust and the Trust-Appointed Directors

The Trust currently appoints four out of nine directors on the Mercury Energy Board. The Trust
may if it chooses appoint two Trustees as Directors. While the duty of a Director is to current
and future shareholders, the AECT mission statement indicates that Trustees have a wider role
in terms of consumer advocacy. Should the role of Trustee and Director be combined, there is,
at least, a risk that the Trust/Director will be subject to conflicting duties.
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7.4 Findings of the Inquiry

The findings of the Inquiry on corporate governance as it relates to the failure of power supply
to the Auckland CBD are:
1. The corporate 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;
2. The corporate governance structure of Mercury Energy does not provide for clear lines
of accountability or strong shareholder instigated disciplines between the Trust and
Mercury Energy. These clear lines of objectives, accountability, reporting and discipline
are important if not vital to create an environment conducive to strong company
performance;
3. The practice of AECT Trustees being appointed as Directors to the Board has, at least,
the potential to create conflicting duties for these AECT/Board members and therefore
diminish Board effectiveness;
4. Neither the Board nor AEPB made serious attempts to institute alternative accountability
processes, such as a Memorandum of Understanding or Statement of Corporate Intent, to
address the corporate governance weaknesses of the Mercury Energy structure;
5. The Board and the Shareholder have moved in May and June to address a range of
governance issues. It is unproven whether these initiatives will result in improved Board-
Trust accountability and/or performance, but there is an evident improvement in
relationship and function which is commendable and must be developed further; and
6. Network risks and other risk management procedures differed and accountability and the
performance and implementation of both was not clear.
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8 OPERATIONS AND MAINTENANCE:
FINDINGS
8.1 Industry Practice

While a number of factors are critical to the performance and life of 110 kV cables, installation,
maintenance and operation according to design limits and specifications are especially
important.
Prudent network operational practices vary significantly due to differences in geographic and
climatic conditions of the supply area, the size and significance of the load supplied and for a
range of additional factors. However, there is a number of operational processes that support
effective and reliable electricity networks. The Integral Energy Planning Report suggests the
following grouping of these processes:
¥ documented procedures for the physical operation of network equipment;
¥ documented procedures for isolation and access to network equipment;
¥ provision of communication protocols; and
¥ regular review and reporting on network performance.
8.1.1 Operational Practice: Mercury Energy

Mercury EnergyÕs approach to operational practices is documented through a number of
sources. The document Operational Control of the Mercury Energy Network covers the
following areas:
¥ the network equipment under the management of the System Control Group and specific
procedures for access to this equipment;
¥ the definition of equipment and identification of the state of that equipment;
¥ the delegation of operational control, and emergency operating procedures;
¥ specific Mercury Energy network equipment and operating procedures for that equipment;
and
¥ communication protocols.
In addition, the Mercury Energy System Control Operational Procedures Manual compiled
instructions on how to deal with previously experienced difficulties. It covered specific
network locations, network equipment policies and general management issues.
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The System Control Monthly Reports presents the number, duration and cause of Mercury
Energy supply disruptions. The System Control Group identified low reliability Òhot spotsÓ,
which were then notified to the Planning Group for further analysis.
Finally, outcome-based performance indicators were collated that allowed monitoring of the
ongoing performance of the network. These measures included the following indices:
¥ SAIDI: System Average Interruption Duration Index, which measures the average duration
of supply interruptions per customer per year;
¥ CAIDI: Customer Average Interruption Duration Index, which measures the average
number of supply interruptions per customer per year; and
¥ SAIFI: System Average Interruption Frequency Index, which measures the average duration
of each supply interruption per customer who experienced an interruption.
Achieving optimum performance of an underground cable is dependent on the quality of the

routine maintenance policy. Integral Energy indicate that, ideally, a maintenance programme
should include the following:
¥ visual checks, including checking for corrosion;
¥ oil and gas pressure monitoring;
¥ monitoring of alarm initiating equipment;
¥ cable covering insulation resistance (IR) testing;
¥ cable temperature monitoring;
¥ ambient and soil temperature monitoring; and
¥ regular review of network capability (i.e. reassessment of asset component ratings

over time).

Mercury stated that all of the 110 kV cables have been operated within their rated loads.
The specifications for the 110 kV gas and oil cables were prepared by the AEPB and set out in
the general conditions of contract, technical requirements, requirements for manufacturer
assistance, testing and acceptance, the identification of relevant British Standards and quality
control. BICC cable engineers were responsible for supervising the installation of the Penrose-
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OPERATIONS AND MAINTENANCE: FINDINGS
Quay 110 kV gas cables and for ensuring that the cables would be able to perform in
accordance with the specifications.
Pirelli manufactured the Roskill-Liverpool 110 kV oil cables. The AEPB installed these cables
using similar techniques, procedures and backfill as Pirelli had used when installing the
Roskill-Kingsland 110 kV oil cables nine years earlier.
The maintenance procedures for the 110 kV cables of the AEPB and Mercury are, and have
been, consistent with industry practice. They have also been responsive to the way in which the
cables supplying the CBD were operating.
Maintenance of gas and oil cables is primarily aimed at maintaining the gas and oil pressures
in the cables and locating and repairing the leaks that occur. Mercury and the AEPB before it
have dealt with these issues for as long as the cables have been installed. In particular, gas leaks
have occurred on the Penrose-Quay 110 kV gas cables since they were first installed in 1959.
Both the AEPB and Mercury Energy have placed and continue to place particular emphasis on
ensuring that gas and oil pressure is not lost as a consequence and have progressively
implemented a series of modifications to better achieve this objective.
In the event of a gas leak, Mercury has adopted measures to locate gas leaks more quickly,
physically modified the cables to speed repairs and, by working with BICC and Energy
Australia, ensured the availability of parts.
It is important to distinguish between gas or oil leaks, which are mechanical faults, and
electrical faults. Gas leaks in particular are expected. Few gas or oil leaks require the cable to
be taken out of service immediately, rather the repair can be scheduled to be effected when
loads on the system are at low levels.
There were no electrical faults on the Penrose-Quay gas cables until 1995, despite the history
of gas leaks in these cables. Neither were there any electrical faults on the Roskill-Liverpool
110 kV oil cables until the 1998 CBD crisis.
Prior to 1995, the AEPB and Mercury carried out all the maintenance on the transmission
system themselves. The main exception is that Mercury has relied on Australian jointers to
carry out jointing work on the 110 kV cables. The AEPB did have its own experienced
supertension jointers when the cables were installed, but it was not possible to maintain the
skill-base because there was insufficient volume of 110 kV cable work in New Zealand.
The AEPB and Mercury have actively sought to ensure that their cable maintenance practices
are consistent with World Best Practice by working closely with overseas utilities,
manufacturers and consultants, and benchmarking against international utilities through
Utility Monitoring Services (UMS) based in the United States.
Mercury has implemented two maintenance philosophies identified through UMS as

representing World Best Practice:
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• Mercury has moved towards contracting out maintenance services rather than carrying out
the services itself, and
• Mercury has moved towards a “condition monitoring” basis for determining maintenance
needs, rather than operating off time-based schedules.
The objective of contracting out maintenance services is to increase the availability and skill-
base of the field staff required to meet the maintenance needs of Mercury. It also exposes
Mercury to the best industry practices and innovation in the market.
Mercury’s initial contracting-out policy was to transfer its field staff to a contracting unit
within the company which was required to tender for Mercury work. External firms with
sufficient skills and experience were also permitted to tender for the work. The contracting out
related to new development work and Mercury’s overhead/underground conversion project, as
well as to maintenance work.
By 1997 Mercury’s contracting out policy had developed to the point where 40% of its
contracted work was being done externally and 60% by Mercury’s own contracting group.
Mercury’s Board, on advice from senior management, then decided to take the contracting out
policy further by transferring its own contracting group into a separate joint venture
contracting company. Mercury entered into negotiations with Australian company Transfield
Pty Limited and in August 1997 the 50-50 joint venture company Transfield Utility Services
Limited commenced operations.
The joint venture company employs Mercury’s experienced field staff and Mercury will
continue to contract with its joint venture company.
Delmech Engineering
Note: During its concluding submissions, Mercury tendered a report obtained by it from
Delmech Engineering. This report had been prepared over the previous three or
four days to counter issues raised in submissions and at the Public Sittings in
respect of MercuryÕs maintenance standards and procedures. Despite the report
being provided late, not validated, and without the opportunity to discuss it with its
author or have it reviewed by the InquiryÕs advisors, the Inquiry agreed to accept
it. A reservation was placed on the weight to be accorded to the report.
Subsequently Mercury was advised that the report would be treated by the Inquiry
as a submission from an experienced electrical engineer, but not as an expertÕs
report. Mercury considers the statements made to have expert status. They are
summarised below, and have been taken into account by the Inquiry in reaching its
conclusions.
Delmech Engineering of Australia considered that Mercury’s actions relating to the gas pressure
alarm system and its responses were consistent with general industry practice. Mercury Energy
experience regarding the “unreliability”/lack of availability with gas pressure cables is not
unique and measures have been taken to reduce the gassing and degassing problems.
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Mercury’s alarm checks with pressure gauge and transducer calibration on all pressure cable
assets every six months is consistent with industry practice.
The decision to carry out cable route patrols should be based on risk management
methodologies by the individual electrical supply companies.
Delmech submitted that it was not general industry practice to monitor soil thermal resistivity
as a routine maintenance activity. Further testing would only be considered if there were known
changes to the installation conditions or occurrences that would cause doubt as to the cable’s
operating environment.
Unless there were some mitigating circumstances that alerted planning or operations staff of
the need, thermocouples would not generally be retrofitted to existing cable assets.
Provided suitable pressure can be economically maintained for operational reasons, it is

general industry practice to keep leaking feeders in service.
For impregnated gas pressure cables, tracer gases can be safely injected for leak location
whilst still in service. For fluid-filled cables, premature off-loading on a leaking cable could
cause atmospheric air or other substances to enter the cable as it is cooling.
Single nominal ratings based on the most arduous seasonal conditions do not increase the risk
of overload, Delmech submitted. Specifying the maximum summer and winter ratings allows
better utilisation of the asset’s capabilities in the different seasons.
Serving tests should be included as a routine maintenance activity and a period of five years
between testing is not considered unreasonable.
John Collinge
AEPB chairman from 1980–1992 John Collinge referred to the AEPB’s maintenance policies
in his submission. He stated that the members of the AEPB understood that, broadly, if any two
cables failed there would still be uninterrupted supply. If three cables failed then it was
understood that supply could be reconfigured to cope.
The members of the AEPB understood on advice that the repairs to the gas cables were normal
for that type of cable and no suggestion was ever made that the cables were unreliable or that
they were inadequately maintained.
The AEPB executive during this period were primarily engineers and the Board understood
that there were personnel experienced and expert in all facets of the business, including cables
and the operation and maintenance of cables, and that they attended to such matters including
testing, the observance of the ratings and assessment of the appropriate rating to be applied.
John Collinge submitted that the AEPB monitored the maintenance of the gas cables. Further
cables were budgeted for 1994 in the five-year capital review from 1989–1994. Their
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replacement or reinforcement was planned for in the normal course of work. There was no
alarm sounded, in relation to the cables.
8.3 Operation and Maintenance Issues

This section explores operation and maintenance issues that arose during the InquiryÕs
investigations into why the power supply failed. Issues of particular relevance to the InquiryÕs
findings are addressed.
8.3.1 Benchmarking and Performance

Mercury Energy in their submissions and in the Public Sittings indicated that they had
participated in benchmarking exercises under the auspices of the UMS Group, Inc., a US based
international consultancy group to the electrical supply industry. The objective of these
benchmarking studies is to facilitate the identification of opportunities for process and
productivity improvements over time.
The Inquiry requested and received the UMS reports prepared for Mercury Energy. The UMS
benchmarking reports are principally focused on distribution and subtransmission assets and do
not specifically review transmission assets at 110 kV level as a special category. The UMS
benchmarking is therefore largely silent with regard to offering guidance on Mercury EnergyÕs
operational and maintenance practice for 110 kV transmission assets. UMS does report
Mercury Energy as a competent distribution and subtransmission operator and maintainer at
the lower levels of transmission voltage.
A further discussion of Mercury EnergyÕs network practice compared with international best
practice appears in the Mercury Energy 1997 Annual Report, Chief ExecutiveÕs Review and
reads as follows:
Ò. . . The most significant event organisationally and structurally, however, was the
decision to move all network construction and maintenance operations into a new
joint venture with the Australian-based contracting Company Transfield. While the
companyÕs own network group had operated as a stand alone business unit for
almost two years, the company decided that the best way to further improve its
performance would be to involve the skills of a quality joint venture partner. Despite
the best efforts of many people, our performance was not up to world best practice,
which as a company we always strive for. We will not lower our standards. We
believe that this move will not only have a positive effect for our customers, but will
also result in the Transfield joint venture becoming a major force in the electrical
contracting industry.Ó
The company in 1997 identified that its network construction and maintenance operations were
not up to international best practice and took steps to address this through its joint venture
initiative. The Inquiry accepts that this is consistent with industry practice. However, for such
initiatives to yield improved performance additional emphasis on the specification,
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management and monitoring of contractual relationships is required. This in turn is reliant on

clearly defined operation and maintenance policies and sufficient in-house expertise. These
issues are addressed further below.
8.3.2 110 kV Cable Maintenance Policy
Mercury Energy does not distinguish clearly between the subtransmission activities up to 33
kV and their transmission activities at 110 kV. There appears to be little differentiation between
the two activities although the management of 110 kV cables has unique and specialist needs
and these are different from subtransmission distribution assets.
While Mercury had defined maintenance policies for subtransmission cables up to 33 kV, a
specific maintenance policy for 110 kV cables could not be identified in MercuryÕs procedures.
The 110 kV cables were included in the subtransmission business plan only. This suggests that
Mercury Energy did not distinguish the specialist nature of their 110 kV cables, or understand
the need for a special maintenance policy to cover them. Mercury relied on the manufacturerÕs
maintenance procedures. While it is reasonable practice to rely on manufacturerÕs manuals
initially, over time a company should develop a company specific manual that takes account of
the ageing condition of its assets, as well as new developments in knowledge pertaining to
those assets that have developed since the date of manufacture and installation.
8.3.3 Expertise
After interviews with Mercury Energy, and on completion of their investigations, Integral
Energy concluded that Mercury Energy did not have adequate internal expertise on high
voltage cable technology. Mercury Energy did not establish widespread external contacts,
especially in relation to expertise on 110 kV cables.
While contact with Energy Australia provided some information, and experience of Mercury
staff provided some background information internally, participation in international forums
such as CIGRE would have kept Mercury Energy up to date with modern cable operating and
maintenance practice. CIGRE is the International Conference on Large High-Voltage Electrical
Systems and participation in CIGRE and other technical forums is a desirable practice.
8.3.4 Contractual Relationships

Mercury Energy provided information about its contractual relationship with Energy Australia.
Mercury Energy had sought their support in relation to 110 kV gas cable repairs, spare parts
and advice. In describing the relationship, Mercury Energy stated:
ÒBasically, the relationship with Energy Australia commenced after the first
electrical fault in the gas cables. ItÕs been on an as required basisÉÓ
Mercury Energy went on to say:
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ÒThere was exchange of views and exchange of letters that cover some of the
arrangements. There isnÕt a formal multi page contract covering it, as such. But, for
example, it does cover such things as the common holding of spares.Ó
Mercury Energy stated that the relationship arose with the predecessor to Energy Australia,
Sydney Council, at an informal level, and continued at an informal level once Energy Australia
was established. This was confirmed in a subsequent correspondence from Mercury Energy in
which it was also noted that more recently Energy Australia has worked as a subcontractor to
Mercury EnergyÕs maintenance joint venture company, Transfield Utility Services Ltd, under
Mercury EnergyÕs standard general conditions of contract.
The Inquiry was provided with a copy of this standard contract between Mercury Energy and
Energy Australia, which provides for Energy Australia to undertake contract work when
requested to do so by Mercury Energy. The contract is an independent contractor agreement,
which sets out the terms of contract under which any work would be undertaken. The
agreement has a drafting date of November 1996, and other portions dating from May 1997,
and was not executed until 1998. Although the document was not expressly applied to any
aspect of the cable repairs, Mercury Energy indicate that there was a general understanding that
the work would be undertaken on that basis.
Mercury has not produced any documented arrangements as to spares, and the agreement does
not relate to spares.
The agreement does not bind Energy Australia to undertake any work for Mercury Energy at
any time, but simply states the terms upon which work will be done if Mercury requests work
and Energy Australia agrees to provide it. If Energy Australia had need of their own staff,
Mercury would be without the necessary skills.
There is no agreement in relation to engineering or other expertise, and under the terms of the
contract Òdesign and construction standardsÓ and Òquality performance standardsÓ are specified
by Mercury Energy, not Energy Australia. Accordingly the expertise aspect of the work
remains with Mercury Energy.
In this regard, Mercury Energy stated at the Public Sittings:
ÒThe company still recognised that it had to have knowledge and expertise in-house
and a body of knowledge sits in-house.
. . . Mercury kept within its organisation, as a deliberate policy, expertise to manage

contractors across all the types of work we contracted out.Ó
The Inquiry has concluded that Mercury EnergyÕs contractual arrangements were insufficiently
specified given the CompanyÕs reliance on them.
8.3.5 Maintenance Contracts

The Inquiry was provided and reviewed a copy of the maintenance contract under which
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external contract services were engaged to maintain the cables. This contract was with
Transfield Utility Services and was dated 25 August 1997. It did not provide adequate
definition of the role between the contractor and the company. The contract did not identify any
link to the manufacturerÕs maintenance specifications, job requirements, quality standards or
personnel expertise. The contract provided no link to a maintenance policy. The contract did
not define clearly accountabilities and decision-making roles. The contract assumed the
contractor had knowledge of all the maintenance requirements on the cables although Mercury
Energy argued they maintained the in-house expertise for this role.
The Inquiry has concluded that Mercury EnergyÕs maintenance contract was ineffective.
8.3.6 Condition-Based Monitoring

Mercury Energy represented that they were increasingly basing their maintenance on condition
assessment, but they could not identify any condition measurement undertaken on the cables
to determine their maintenance requirements. In a response to a question about Mercury
Energy maintenance practice at the Public Sittings, Mercury Energy indicated:
ÒIt was very much a reliability based monitoring and maintenance programme.
The company has a very extensive monitoring system of cable pressures, both gas
and oil, and utilises the information from these to identify a need for oil pumping
and gas bottle exchanges: that being the major maintenance activities.Ó
It is the InquiryÕs view that Mercury Energy clearly relied on reliability-based standards. Had
they utilised a condition-based regime, some measurement of the cable operating temperatures
may have been taken and this may have alerted Mercury Energy to the potential rating problem
of the cables. Use of a reliability-based approach meant that the high reliability of the oil cables
provided no indication of any risk on these cables.
Mercury EnergyÕs focus is an important issue as its maintenance and operations emphasis shifts
from installation of assets and development of a network to maintenance, monitoring of aged
condition and replacement of assets. How companies change operations and maintenance
practices and roles is a critical future issue for industry practice as equipment reaches the end
of its useful life. It is essential that asset management practices change and develop to meet this
need. This has implications for risk management practices and periodic asset audits. Skills in
detection of aged condition, and analysis and diagnosis of what constitutes life-limiting
condition, are required.
8.3.7 Repetitive Failure Modes

Mercury Energy experienced repeated gas leaks from the gas cables with a common failure
mode. These specifically occurred adjacent to the cleat of joint bays and in one case at least
three failures in one particular joint bay. While the matter was investigated, no immediate
action was taken to reduce the failure incidents at these points. There are signs that Mercury
Energy accepted the repeated gas leaks and difficulties with the gas cables as a standard
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procedure and gave little emphasis or urgency to finding a solution. When the 1995/96
electrical faults arose on the gas cables, it did not adequately investigate or identify
preventative actions. At the Public Sittings the Inquiry was advised:
Ò. . . There was considered to be no need for an extensive programme to try and

detail the exact cause of the faults.
The process chosen was to work out a way for dealing with the possibility of more
faults, i.e. one cable failing, what would we do? And then from that, if we have one
cable out of service, what would we do if the second one went?
So rather than trying to put a great deal of effort into finding out to the nth degree
exactly what may have happened with the gas cables, it was recognised they were
at the end of their useful life, the project was underway to replace them with cables
in the tunnel, so the process was put into place to deal with the effects of the failure.Ó
Finally, Mercury Energy was unaware of the quarter and three-quarter intermediate
measurement points installed in 1959, that could have been used for gas pressure monitoring,
alerting and regassing prior to its refit of intermediate gassing points. The intermediate
measuring points were installed by the cable manufacturer at the time of laying.
8.3.8 Spare Parts Policy

Repair times seemed to be significantly longer than would be normally expected. These repair
times did not improve significantly after the installation of the intermediate gassing points in
1995/96. See section 9.4 for further discussion.
Mercury Energy relied on the availability of spares from Energy Australia. However, when
spares were required from Energy Australia in 1995/96 and again in 1998 they were not
available from that source. Mercury Energy provided no evidence that an adequate contract
structure for spares pooling was in place with Energy Australia (see section 8.3.4).
8.3.9 Asset Audits

It is considered prudent industry practice to undertake independent technical audit of critical
equipment. Mercury Energy, however, did not undertake comprehensive asset audits on a
periodical basis to confirm capability and ongoing reliability. This practice is common in
Transpower, but is still not common in New Zealand distribution networks.
8.3.10 Protection of Assets

The Inquiry arranged a cable route patrol that was carried out on 28 May 1998 by one of the
InquiryÕs consultants, Henry Kent of Integral Energy. The area covered was Penrose-Quay
substation, and a short length of the Roskill-Liverpool oil cables.
Mr Kent noted that no cable markers were observed and that the Mercury Energy cable route
126
checker was provided with only rudimentary cable route plans. As a result he was on many
occasions unsure of which side of the street the cables were actually located. He also observed
that in many locations along footpaths and on private property there are trees and shrubs
planted directly over cables and in a small number of instances in residential areas it was not
clear where the cable route was.
No written instructions were given to the cable route checker as to precisely what to look for
during his patrols nor what to report. Many companies have written procedures for staff for
underground power and pilot cable route patrols and maintenance. Mr Kent also identified
concerns about providing greater security for gas charging cubicles at the substations and on
the route and for parts of the overhead 110 kV temporary line.
Furthermore Connell Wagner principal, Mr Engelbrecht, commented in his submission that at

the sites where the first four faults were being repaired, the landscape around the cables had
been changed since their installation. He expected that Mercury Energy would have been aware
of the problems that trees and extra power cables would cause to its high voltage cables and
submitted that the fact that these were clearly visible at the faulty sites indicated a lack of care
in the management of its underground cables.
In conclusion the Inquiry notes that Mercury Energy did not mark or patrol its cables. The
company had allowed its routes to be compromised by buildings, traffic, trees, other cables and
other threats to security.
8.4 Findings of the Inquiry: Operations and

Maintenance
The InquiryÕs findings on operations and maintenance are:
1. While Mercury Energy is a well-run distribution company, it did not have the appropriate
expertise, operations and management procedures for the 110 kV cables;
2. The cause of repetitive type faults on the gas cables should have been resolved by
systematic investigation;
3. There was inadequate internal expertise on 110 kV cables and insufficient participation
in external forums to keep up to date with cable operating and maintenance policies;
4. Mercury EnergyÕs maintenance contracts for the 110 kV cables were deficient in terms
of specification, management monitoring, procedure and quality standards;
5. Mercury Energy did not have a well-developed asset management programme. It did not
regularly review its assets, or check and analyse gas failures. No asset audits for 110 kV
cables were conducted;
127
6. Reliance on pooling of spares with inadequately specified contracts represented a risky

practice;
7. Mercury Energy actions were based on a reliability-based approach to asset management,

although a condition-based approach was claimed. Had a condition-based assessment
been undertaken of its assets, the company may have been alerted to the underlying state
of the 110 kV cables;
8. Mercury Energy did not take adequate measures to protect the integrity of its assets. It
had allowed routes to be compromised by buildings, traffic, trees, other cables, and other
threats to security; and
9. Overall, operations and maintenance practices were a significant contributing factor to

the failure of power supply.
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9 RISK MANAGEMENT AND CONTINGENCY
PLANNING: FINDINGS
9.1 Industry Practice: Risk Management and

Contingency Planning
The approach to risk management and contingency planning taken by different electricity
supply companies throughout the world varies considerably depending on factors such as size
and nature of the supply areas and customers, as well as the size of the supplier. The Integral
Energy Planning Report suggests that the range of industry practice covers the following:
¥ reliance on operator experience to respond to abnormal system conditions. This includes

predetermined responses to particular network element failures which have occurred in the
past (which may or may not be documented), and reliance on the operatorsÕ knowledge of
the supply network and its limits to respond effectively to unforeseen network element
failures;
¥ documented operational response plans to particular network element failures which have
occurred in the past and for the failure of critical network elements; and
¥ detailed, systematic operational contingency planning for the entire network and operational
contingency plans for all potential network element failures.
9.2 Contingency Planning: AEPB and Mercury Energy

Mercury Energy documented operational contingency plans in a report, Switching Sequence
and Load Diversion Plan. This report identified load transfer arrangements and network-
switching procedures in the event of limited power supply failures. By way of example, the
scenarios presented covered procedures for both pre-empting and responding to a single and
double outage of the Penrose-Quay gas cables, as well as the loss of more than one transformer
at the Liverpool substation. On the other hand, the plan did not anticipate or provide a response
to the potential failure of three, or all four 110 kV cables into the CBD or for both of the
Roskill-Liverpool oil cables.
This approach is supported by and is consistent with the strategies presented in other
documents, such as the CBD Risk Management Plan, which focuses on potential failure of the
110 kV Penrose-Quay gas cables.
Furthermore, the Firm Capacity Check Sheets, which were held at all substations, supported
the identified load transfer arrangements. These Check Sheets had an update record attached to
them, which dates back to 1983. The Firm Capacity Check Sheets, however, did not specify
what emergency ratings could be applied to specific network elements. While emergency
ratings were occasionally utilised, the Mercury Energy documentation reviewed does not
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indicate that emergency ratings were assigned to network equipment or that emergency ratings
formed part of contingency planning or network planning.
However, a 1991 AEPB document, Review of Firm Capacity Criteria and Reliability
Standards, describes the broad approach taken by AEPB in assigning emergency overload
ratings to network elements, including transformers, cables and switchgear. An emergency
overload rating of 10Ð25% above the maximum continuous rating, subject to environmental
factors, such as ground thermal conditions, is indicated.
While the Mercury Energy contingency planning was based on specific contingencies, rather
than systematic review of all possible contingencies under its own security standard, Mercury
Energy indicated that it did have Emergency Response Plans, which considered an n-4 scenario
from a civic duty perspective.
Finally, Mercury Energy had in place a ÒGenerator PayÓ programme and a ÒPower SaveÓ
programme, prior to the 1998 failures. These customer-owned generation and demand
management strategies were factored in to Mercury EnergyÕs Risk Management Plan.

A number of developments created new, non-network-specific exposure for Mercury around the
time of its formation. These exposures were not faced by the AEPB and they included the
transition from power board to energy company, the enactment of legislation such as the
Resource Management Act 1991, and the creation of the Wholesale Electricity Market.
Mercury developed integrated risk management practices in response to these new risks.
In June 1993 the AEPB engaged consultants, Sedgwick, to identify the risks which could affect the
organisation. Risks were categorised under the general headings of property, security, liability,
environmental and key personnel. The consultants’ risk analysis report provided the basis for
further work undertaken in 1995, by PA Consulting, for Mercury. The PA Report identified a
specific risk management task relating to shortages of distribution capacity arising from equipment
failure. The report went on to define a policies and procedures manual which included this
particular risk. Accountability for risk monitoring and management was explicitly identified in
each area. A major recommendation of the report was to establish a Risk Management Committee
to oversee the development of any risk management plans and the implementation of those plans.
The Risk Management Committee was established in June 1995 and was to report to the Audit
Committee. The Committee has met regularly since its inception (about four times a year). The
Chief Executive reports regularly to the Board on risk management issues. Risk management
at Mercury is continually being improved and the company is developing an integrated
systematic risk management framework. All of the risk management activities undertaken in
Network are now being incorporated under the direction of the Risk Management Committee.
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RISK MANAGEMENT AND CONTINGENCY PLANNING: FINDINGS
Mercury and the AEPB also developed disaster recovery plans and insured against
catastrophic events. The insurance programme covered fire and earthquake damage and the
disaster recovery programme provided for a range of events that may impact on the system
control and information technology areas. Mercury and its predecessor have been closely
involved with Civil Defence and the Auckland Engineering Lifelines Project and have assisted
in the development of procedures to ensure that the city is able to cope in the event of a civil
emergency in the Auckland area.
Specific disaster recovery plans such as the Network Control Centre Disaster Recovery Plan
have been prepared. This defines the resources required to resume control centre functions
within acceptable timeframes and sets out the procedures for such a recovery. There are
separate procedures in the System Control Centre Standing Instructions for operators to follow
in the event of major damage to the network.
In late 1997 Mercury commenced the development of a Crisis Management Plan to integrate
the various disaster recovery plans which exist. Mercury’s risk management advisers are
leading this work. Once finalised it will be an important adjunct to Mercury’s participation in
Civil Defence planning and will assist Civil Defence to identify the appropriate resource
requirement to be allocated to Mercury for the recovery of electricity supplies to important
services within the Auckland region.
The Auckland Regional Council

The Auckland Regional Council submitted that Mercury, as with any other major utility, should
be required to report the outcome on an annual basis of its risk assessments. Any assessment
should consider future demand and supply so that interested parties can assess the likely future
impact of proposed strategies. This risk assessment should be peer-reviewed as has occurred
to an extent in the technical reports commissioned by this Inquiry. This process will enable
customers and public interest organisations to assess their own risks to a utility failure or other
threat and to advocate changes to the utility’s risk management strategy. The requirement to
assess, review and report in a transparent manner should be a function of an overview agency,
the regional council submitted.
Mr John Gardenier
Engineer and risk assessment consultant John Gardenier submitted that the perceived
remoteness of all four cables failing together created a false sense of security. Even if Mercury’s
perception of the degree of remoteness had been correct, a proper risk assessment, including an
evaluation of its physical impact on the CBD (societal risk assessment as opposed to a technical
reliability analysis) might have raised sufficient alarm to check original assumptions.
9.4 Risk Assessment and Contingency Planning

Issues
This section introduces some of the issues of importance to the InquiryÕs findings. These issues
are discussed in detail below.
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9.4.1 Risk Assessment Report, 1995

PA Consulting Group prepared a report for Mercury Energy concerning risk management in
June 1995. PA Consulting were asked to review the categories of risk (including
network/equipment risk) faced by Mercury with particular emphasis on wholesale energy
supply. For the purposes of the report, risk was defined as the possibility of occurrence of an
event that might adversely affect shareholder value, customers, employees or other persons. PA
Consulting compiled a risk register and risk profile as part of the report. The recommendations
of the report included the formation of a Risk Management Committee to implement and
oversee the Risk Management Plan.
The Inquiry was advised that the risk management plan was implemented, but there are no
signs of the appropriate senior management monitoring of implementation or auditing of
procedures and practices within the company to achieve the risk management plan.
There appears to be a gap as to where network asset risk was being considered, whether in the
PA Consulting risk assessment implementation work or through the network planning process.
The evidence at the Public Sittings suggested that it was handled through the planning process
and therefore not dealt with in the PA Consulting implementation process. As a consequence
the Risk Management Committee did not cover network asset risks and there was no auditing
of network risk procedures to systematically identify critical risks. There was no obvious
definition as to which risk management method was to be used in planning. It appears to have
relied on Òreporting upÓ of risk from the Network Branch.
In mid 1997 when the level of risk was partially perceived, it was not reported up. When the 1998
cable failures began to occur, reporting up did not assume significance and active management
of risk by senior executives above Network did not occur until after the third failure.
9.4.2 CBD Risk Management Report, 1997

Mercury Energy experienced its first electrical failure in one of the Penrose-Quay 110 kV gas
cables in 1995, and the other cable failed electrically for the first time in 1996. For a part of the
repair period, further gas leakage meant that both cables were unavailable.
Mercury Energy did not identify the underlying causes of failure, but it did proceed to review
the security of CBD supply at this time. This review arose from the planning for the long-term
tunnel link from Penrose to Quay, and the need to consider security of supply until that tunnel
was completed.
Principal assumptions in this planning were that there might be further gas cable failures; and
that supply would be maintained through the Roskill-Liverpool oil cables, which were taken to
be fully reliable.
The review was available for internal use in early 1997, but Mercury Energy did not complete
a full analysis until July 1997. This final version of the review was set out in a report titled
CBD Risk Management. The report analysed the security risk, considered the options available
to Mercury Energy, and identified some interim measures. These included the upgrading of
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supply from other substations to areas around the perimeter of the CBD, and planning for
switching of some CBD supply in the event of outages.
In the InquiryÕs view, the delay from the first electrical failure to July 1997 was too long for a
response to what was a significant change in the performance of key assets. This delay in itself
limited the options for enhancing security, because it delayed the timing of any response.
The report became the basis on which Mercury managed the CBD network planning and risk
management. It was also the basis for statements and assurances to the Mercury Energy Board
that the CBD supply had been reviewed and was secure.
Mercury Energy produced the report to the Inquiry, terming it Òone of the better planning
reports undertaken by Mercury Energy on security of supplyÓ. The 1997 report was considered
in detail at the InquiryÕs Public Sittings.
In exchanges with Mercury Energy at the Public Sittings, the Inquiry questioned whether the
reportÕs assessment of a risk of a double gas cable failure was correct. The report calculated
that the risk of a double cable outage occurring was of the order of one double outage in 13
years. This risk was considered slight, and one which the CBD tunnel project (due to be
completed within two years to 30 months of the report) would resolve.
The report, on the face of the information provided to the Inquiry of previous outages, under-
assessed this risk.
The outage periods for each cable between 1 January 1995 (just before the first electrical
failure) and the report date of July 1997, for all causes of outage, showed substantial periods
of unavailability and a strong pattern of unreliability. For this period, Penrose-Quay No. 1 was
out for 138 days (17%) and Penrose-Quay No. 2 was out for 570 days (70%).
The Inquiry suggested to Mercury Energy that this showed a much higher probability of
outage, with a strong likelihood that in each year until the CBD tunnel project was completed
that both gas cables would be unavailable for days or weeks.
This contention was rejected by Mercury Energy, which continued to support the July 1997
report. That report assessed outage risk on the basis of a 22 year history, and based its
calculations on the fault history over that period.
In the InquiryÕs view, it was wrong to consider the likelihood of electrical failure on the basis
of combining the 19 years when there had been only gas leaks and contractor outages with the
two and half years in which there had been the only electrical failures (three in all).
In addition, the Inquiry considered that there were further reasons for using the post-1995
period. The outage data showed that the unreliability of the two gas cables had risen
considerably in the recent period. One possible reason was an increase in contractor outages
after 1990. The Inquiry understands that the cable markers at kerbside were removed in 1990
due to security concerns during the Commonwealth games and were not replaced. In the
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subsequent seven years, there were three contractor outages compared with three over the
previous 33 years.
Second, each electrical failure (and contractor outage) created much longer downtimes than
those arising from gas leaks, so that the probability calculation needed to use those longer time
periods for an accurate calculation to be made.
This acceleration in the unreliability of the gas cables, coupled with a change in the failure
mode, in the InquiryÕs view required a reassessment of the likely frequency and duration of
outages over the period in which the change in reliability has occurred.
Therefore after the Public Sittings the Inquiry conducted its own analysis of the cable fault
history of the Penrose-Quay gas cables using the data set out in the Mercury Energy CBD Risk
Management Report and more detailed cable outage information contained in MercuryÕs
submissions to the Inquiry. The analysis was completed for two alternative periods, the 2.5
years before the July 1997 planning report, and the 22 years before that report.
Mercury pointed out that four recent outages had been planned maintenance shutdowns, at
times chosen by Mercury Energy, when efforts were made to find and locate gas leaks. It
argued that such times should be ignored in the calculation.
Accordingly, probability calculations were made including and omitting scheduled shutdowns.
In the analysis some data of particular failures in the earlier years were incomplete and could
not be used, but this is likely to have understated outage times and probabilities. The Inquiry
submitted its analysis and data to an independent actuary (Eriksen & Associates) for
calculation. The figures derived are presented in Figures 9.1Ð9.4 overleaf.
Accordingly, the Mercury Energy 1997 calculation of a once-in-13-years double outage

calculation is considered to be incorrect. Based on the electrical failure experiences of
1995/1996 and 1997, there were between one in two and two in three chances that a double
cable outage would occur in 1998. Thus the likelihood of a double fault was 10 to 12 times
higher than that assessed in the Mercury Energy report. The likely duration of a double outage
was three to four weeks.
These calculations were made available to Mercury Energy. In addition to contesting the use
of the 1995Ð97 period for such calculations, Mercury Energy argued that it was wrong to derive
outage times from the repair history. It drew attention to steps it had taken to improve access
to spares, and to shorten repair times by the installation of bleed valves to speed regassing of
the cables.
As it was the aim of the Inquiry to review the actual decisions made in 1997, and as MercuryÕs
arguments emphasised only those factors which would reduce the probabilities, the Inquiry
preferred its historical analysis. Indeed, despite the introduction of additional bleed valves,
repair times by mid 1997 had not greatly improved, and the availability of spares was
dependent on external sources and was potentially still the primary determinant of outage
duration. (Spares policy is discussed in Section 8.3.)
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Figure 9.1 Analysis of Incidents on Penrose-Quay 110 kV Cables

All Incidents
22 Years to 1 July 1997
Double Fault
No. of Incidents Mths Between Ave. Outage Probability Probable
Incidents pa Faults (Weeks) over 12 Mths Outage (Weeks)
Contractors 4 0.18 66 6 0.000 0
Cable Faults 3 0.14 88 22 0.003 10
Gas Leaks 24 1.09 11 3 0.028 2
All Faults 31 1.41 9 5 0.067 3

All Incidents
2.5 Years to 1 July 1997
Double Fault
Contractors 1 0.4 30 18 0.000 0
Cable Faults 3 1.2 10 22 0.170 10
Gas Leaks 9 3.6 3 2 0.135 1
All Faults 13 5.2 2 8 0.820 3

All Incidents Except Scheduled Shutdowns
Double Fault
Contractors 4 0.18 66 6 0.000 0
Cable Faults 3 0.14 88 22 0.003 10
Gas Leaks 20 0.91 13 3 0.023 2
All faults 27 1.23 10 6 0.057 3

Double Fault
Contractors 1 0.4 30 18 0.00 0
Cable Faults 3 1.2 10 22 0.17 10
Gas Leaks 5 2.0 8 3 0.06 1
All faults 9 3.6 3 11 0.59 4
Source: Inquiry Members, Eriksen & Associates, 1998.
However, the Inquiry decided to seek a second set of calculations based on outage times of two
months (nine weeks) for repairs to contractor damage and electrical failures. Figures 9.5Ð9.8 set
out the same probability calculations as in Figures 9.1Ð9.4, but with the reduced outage times.
135

All Incidents
Reduced Outage Repair Times
Double Fault
Contractors 4 0.18 66 9 0.000 0
Cable Faults 3 0.14 88 9 0.001 4
Gas Leaks 24 1.09 11 3 0.028 2
All faults 31 1.41 9 4 0.051 2

All Incidents
Double Fault
Contractors 1 0.4 30 9 0.000 0
Cable Faults 3 1.2 10 9 0.090 4
Gas Leaks 9 3.6 3 2 0.135 1
All faults 13 5.2 2 4 0.550 2

Double Fault
Contractors 4 0.18 66 9 0.000 0
Cable Faults 3 0.14 88 9 0.001 4
Gas Leaks 20 0.91 13 3 0.023 2
All faults 27 1.23 10 5 0.057 3

Double Fault
Contractors 1 0.4 30 9 0.000 0

Cable Faults 3 1.2 10 9 0.09 4
Gas Leaks 5 2.0 6 3 0.08 1
All faults 9 3.6 3 5 0.34 2
Source: Inquiry Members, Eriksen & Associates, 1998.
136
It can be seen that the probability of a double cable outage occurring in 1998, based on these
figures, is between one in three and one in two, and the likely duration is two weeks.
In the InquiryÕs view, whether the likelihood of outage was two in three, one in two, one in
three, or even somewhat less is of little relevance to the judgement that has to be made on
security risk. Where, over 30 months, one cable has been unusable for 17% of its time and the
other for 70%, a planning, risk management, and operational response was required which
assumed that such an event would arise, and which recognised the potential for other threats to
the security of supply to arise during the double outage.
9.4.3 Contingency Planning

Mercury Energy had good contingency plans for the failure of one or two gas cables. For
example, they understood the amount of in-house generation within the CBD, and they had
sufficient flexibility to switch some 27 MVA of CBD load to adjacent 11 kV systems. However,
their contingency plans relied on the implicit reliability of the oil cables and therefore the
retention of full capacity at the Liverpool substation. The Inquiry was provided with no
evidence that Mercury analysis considered the possibility of a third failure, other than an
assurance at the Public Sittings that Mercury engineers would have thought about it.
After the failure of the second gas cable, Mercury Energy undertook some contingency
planning for extra generation, the location of generators overseas and the strengthening of the
inter-tie between Liverpool and Quay. However, it was their view that there was no need to
build the 110 kV line from Penrose at this time given their total trust in the oil cables.
Mercury Energy did not contemplate oil cable failures in its risk assessment. The historical
reliability of the oil cables gave it no cause for concern on oil cable failure. However, the oil
cables had not been tested at their full ratings for extended periods of time.
9.4.4 Contractor Damages

The Inquiry was informed that Mercury Energy had removed its kerbside markers in 1990 due
to security requirements during the Commonwealth Games. These markers have never been
replaced.
In the 32 years prior to 1990 there had been three previous outages due to contractor dig-ins.
Since the removal of the markers in 1990, there have been three further incidents. See Figures
9.1 to 9.4 above.
Despite three contractor created outages, no steps were taken to protect cables from further
damage of this nature. Mercury Energy failed to assess the rising incidents of this type of
outage and take action to reduce them.
9.4.5 Demand Side Management

Demand side management has the capacity to substantially assist in the event of major failures
137
such as that in Auckland. However, most initiatives would have to anticipate an outage in
excess of 8Ð24 hours in order to be implemented. Such outages are rare in the industry.
Advanced planning for such outages would significantly speed the demand side response and
increase the level of response available. Such contingency plans would be low cost to prepare
and could be generic.
9.5 Findings of the Inquiry: Risk Management and

Contingency Planning
The findings of the Inquiry with respect to risk management and contingency planning are:
1. While Mercury Energy did not develop contingency plans for the failure of all four 110
kV transmission cables, it would have been unusual practice to do so. However, the poor
reliability of the gas cables means that they should not have been regarded as stable or
reliable elements in the system after 1995. For this to be factored into security and
network planning it would have had to have been made known to the planners which
should have been done but was not;
2. The 1995 PA Consulting Risk Assessment provided a firm basis for Mercury Energy to
manage a wide range of risks, including network risks;
3. There was unclear accountability for risk management practice and monitoring at both
the senior management and Board level;
4. When the first electrical failures on the gas cables occurred, Mercury Energy failed to
recognise that network risk had increased and treated the failures as it had previous gas
leaks; no systematic investigation and resolution of the failure mechanism occurred;
5. The CBD Risk Assessment Report 1997 critically underestimated the failure risk of the
gas cables and, as a consequence, Mercury Energy under-planned for this risk;
6. Mercury Energy failed to assess the increased incidence and risk of outages due to
contractor caused damages and failed to take action to address the risk;
7. Overall, risk management and contingency planning practice was a major contributing
factor to the power supply failure;
8. The changing estimates for the length and severity of the 1998 outages created significant
confusion and significantly hampered contingency planning by customers; and
9. Advanced demand side management planning for major outages would significantly
speed the demand side response and increase the level of response available. Such
contingency plans would be low cost to prepare and could be generic.
138
10 NETWORK DISTRIBUTION PLANNING:
FINDINGS
10.1 Industry and AEPB/Mercury Energy Practice

The purpose of network planning is to ensure the reliability of the distribution network over
time in terms of its ability to meet customer needs. To achieve this the network planner must
find the optimal combination of three factors: level of network load capacity, the level of
supply security of the network, and the cost of electricity to the customer. Not only do the cost
of different degrees of system reliability vary significantly, but there are trade-offs between
technological and environmental constraints. Finally, the optimal balance will reflect the
specific operating environment of each network, which is likely to change over time.
10.1.1 Industry Practice

Integral Energy indicate that the electricity network planning processes followed throughout
the world include the following:
¥ forecasting of expected future loads on networks. Techniques utilised range from the
commonly used method of projecting historical trends, which have been adjusted for likely
or known developments, to more sophisticated statistical and economic modelling;
¥ regular systematic reviews of networks to verify their ability to meet the individual
electricity supply companyÕs own specified security standards and their ability to supply
existing and forecast load. Until recently, there has been near worldwide acceptance of an
Òn-1Ó criterion for supply capacity, which provides for a first contingency outage during the
expected peak load as the planned security margin; and
¥ detailed option development and evaluation to determine the best technical and commercial
solutions to identified network deficiencies. This includes options for the development of
network architecture and the implementation of technical solutions. It is considered best
practice for multi-disciplinary teams (technical and non-technical) to undertake this function
to ensure that broader community issues are taken into account.
While there is no recognised published standard which defines an appropriate level of supply
security, it is internationally accepted practice to provide a major load centre, such as the
Auckland CBD, with a sufficient range of alternative electricity supply options to ensure security.
Traditionally the aim in providing alternative options has been to enable supply to be maintained
should the cable with the largest capacity be taken out of service (the Òn-1Ó security level).
10.1.2 Network Planning: AEPB and Mercury Energy

Mercury Energy described the evolution of the AEPB/Mercury Energy network planning
approach as follows:
139
ÒHistorically, network planning revolved around an annual reporting cycle to the

AEPB Board. The five-yearly forward capital works program was revised annually
based on the detailed planning report. Further, every three years, a 15-year forecast
of future loading and capacity was undertaken, and reviewed by the Board. The last
of these AEPB reports was issued in November 1992. In 1995, Mercury Energy
introduced an annual reporting cycle with the first annual line business management
plan being issued in June 1996. The annual plan is now issued in March of each
year.Ó (Mercury Energy Planning Report, 1998)
The key components of network planning as practised by AEPB and Mercury Energy are
considered in turn below.
Load Forecasting
The forecasting process used by AEPB and Mercury Energy was based on a simple linear
regression model that allowed the historical trend load growth to be projected forward. This
trend growth was then adjusted for known future developments. The forecasts were 15-year
peak demand forecasts, covering summer and winter peak demands. The relevant material was
provided in the documents, Load Forecast Reports and System Development Plans. The
performance of the forecasts against actual loads is presented in Figure 10.1 opposite.
The 1997 load forecasts suggested that there was sufficient capacity to supply the expected
demand for electricity into the 2000s. Based on the 110 kV cable ratings, the installed capacity
of the CBD network just before the 1998 cable failures was 260 MVA, compared with an
expected demand of 171 MVA in 1998, and 184 MVA in year 2000.
In addition, in the event of a double outage of the Penrose-Quay 110 kV gas cables, there was
sufficient network capacity, 187 MVA (with lower voltage subtransmission support), to meet
expected demand up to 2000.
Systematic Reviews of the Network

The Load Forecast Reports and the System Development Plans summarise the Mercury Energy
approach to reviews of the network capacity. The load forecasts were analysed in a network
model in order to predict possible future limitations due to the loads on individual system
elements. These limitations were assessed on the basis of the degree of supply security planned
for in the network.
The predominant approach to the application of an Òn-1Ó or Òn-2Ó planning standard would
usually suggest that CBD supplies would be planned on the basis of loss of one or both of the
Roskill-Liverpool 110 kV cables. AEPB and Mercury Energy documentation, however,
suggests that the planning process factored in the simultaneous outage of the Penrose-Quay 110
kV gas cables due to the poor reliability of these cables. Consistent with this, AEPB and
Mercury Energy risk management plans were premised on failures of the same cables. For this
reason Mercury Energy pursued strategies to ensure there was enough capacity to meet any
shortfalls due to the outage of both Penrose-Quay cables.
140
Figure 10.1 Auckland CBD: Actual v Forecast Loads
141
NETWORK DISTRIBUTION PLANNING: FINDINGS
Source: Mercury Energy Ltd, 1998.

Option Evaluation
While the System Development Plans discuss solutions to identified system constraints and
include 15-year forecast summaries for all of MercuryÕs network area, there is no
documentation known to the Inquiry that specifically identifies an option evaluation process.
10.2 Joint Transmission and Distribution Planning

Processes
10.2.1 Reasonable and Prudent Joint Planning Practices

It is industry practice for electricity distribution companies and major electricity transmission
companies to undertake joint planning. They usually have in place formal and informal
processes to facilitate the resolution of technical and broader community issues that they have
in common as they plan for their respective networks. This approach can increase the likelihood
of major stakeholder commitment and help to minimise community impact, thereby potentially
reducing project implementation lead times. Most importantly, effective joint planning, where
appropriate, can lead to cost-effective and timely solutions to future network requirements.
10.2.2 NZED/ECNZ/Transpower and AEPB/Mercury Energy Joint

Planning
There is a long record of joint planning processes used by the transmission companies (NZED,
then ECNZ and later Transpower) and distribution companies (AEPB and later Mercury Energy,
as well as the other northern energy companies) with respect to two issues: reinforcement of the
northern isthmus and reinforcement of the Auckland CBD. Coordinated planning dates back to
the late 1980s and it was recognised early in the process that these issues were interrelated and
that there was the possibility of a cost-effective joint technical solution. Regular meetings to
discuss technical options, the free exchange of technical information, and a coordinated approach
to the development of a preferred option facilitated the process. The preferred option was to be
based on a shared planning philosophy of developing a lowest-community-cost network solution.
Nevertheless the parties were unable to move towards implementation of the identified joint
technical solution (ÒThe Tunnel ProjectÓ), due to their failure to agree on an acceptable commercial
arrangement for the proposal. Eventually Mercury Energy proceeded with the jointly developed
solution on its own with a Board decision in 1994 to proceed unconditionally. However, the design
of the tunnel still offers a future solution to the need for cross-isthmus supply reinforcement.

Mercury submitted that its systematic review of the electricity supply network (and those by
AEPB) were representative of typical industry practice.
143
Historically network planning revolved around an annual reporting cycle to the AEPB Board.
The five-yearly capital works programme was revised annually based on the detailed planning
report. Every five years a 15-year forecast of future loading and capacity was undertaken and
reviewed by the Board. The last of these AEPB reports was issued in November 1992.
The present structure of the Network Business Unit was established in 1995. It includes the
Project Management Group to oversee the line business works programme, the Network
Customer Service Group that focuses on operations and the interface with customers, and the
Planning Group. The Planning Group is responsible for the management of all line business
assets. Its functions include:
• system planning for growth, equipment replacement and customer projects including the
establishment and monitoring of the works programme, and
• maintenance planning including the setting of performance and reliability targets and
planned maintenance of network assets.
The planning processes within Mercury are a continuation of the processes which were used by
the AEPB. The AEPB maintained an appropriate security of supply to the CBD and did not take
risks or underspend in respect of the development of the CBD. Mercury adopted important
policies of the AEPB such as those relating to the security of supply and continues to improve
these policies.
The CBD distribution network has been continuously upgraded to increase capacity as the
demand increases and to replace obsolete equipment.
The security of Mercury’s CBD network has developed from minimal back-up as late as the
1950s, through to the capability to maintain supply after one major failure, to the capability to
provide supply in the event of two concurrent failures during the 1980s and 1990s. Standards
of security to the CBD were, and are, in excess of industry standards of the day.
The AEPB and Mercury have also planned and commissioned a series of CBD reinforcement
projects starting with the King’s Wharf cables in 1930 and culminating most recently in the
tunnel project. These will provide, and have provided in the past, the CBD with a security level
more than appropriate to a load of the CBD’s importance and size. Neither Mercury nor its
predecessor underspent or took any undue risk with regard to the CBD supply.
John Collinge
AEPB Chairman from 1980–1992 John Collinge submitted that the AEPB planned for
reinforcement of the cables serving the CBD and its staff took all reasonable steps to assess the
options, to plan for the proposal and to liaise with other interested parties.
The Board of the AEPB never declined or discouraged any requests for funding for the CBD
or its system and at all times acted on the advice of its executives in this respect. Reliability of
supply was an important aspect of the Board’s culture.
144
Auckland City Council

The Auckland City Council’s submission indicated concerns about future security of supply to
the CBD. Given the findings of the technical report on the oil and gas cable failures, the
Council is extremely concerned that the repaired cables, even if downrated, are not able to
supply the CBD electricity demand in a reliable and secure manner.
The Council has concerns about over-reliance on the Penrose substation after tunnel
commissioning. It also considers that the emergency overhead lines may need to remain once
the tunnel supply system is commissioned.
Robert Western
Former AEPB Board member, Chairman of the Engineering Committee 1983–1990, and
founding Trustee of the Auckland Energy Consumer Trust Robert Western submitted that the
Committee was aware of the unreliability of the gas cables.
The Committee knew the gas cables were breaking down regularly and there was a risk of both
being out at the same time. It had faith in the executive and when the Committee was told that
the risk was being managed and was under control, this advice was accepted. It was a matter
of concern, but not of alarm.
Peter Hulme
Peter Hulme submitted that the historical relationships between the state as the generator and
transmission operator and the distribution authorities are crucial to the overall evolution of
New Zealand networks. He noted the references in Mercury’s submission to the refusal of the
then State Hydro Department to accede to the 1956 request by the AEPB for a new supply at
Quay St and similarly the NZED decline of a request for a new supply at Kingsland.
The lack of robust state points of supply closer to the downtown load centres appeared to have
a significant effect on the evolution of the present CBD network.
10.4 Planning Issues

A number of planning issues arose during the investigations that are important to the InquiryÕs
findings. These are discussed in turn below.
10.4.1 Deterministic and Probabilistic Planning Procedures

The planning procedures within AEPB, and later Mercury Energy, were standard procedures,
but were based on deterministic standards rather than probabilistic standards. The probabilistic
approach to network security has only recently been introduced into the industry and is not yet
widespread.
The deterministic method assumes the installation of a sufficient number of cables and other
145
equipment. The 1998 failure of supply demonstrated the weakness of this planning approach:
(i) if the gas cables were unreliable, they should not be counted for any purpose in deterministic
planning. In reality planners relied on them; and (ii) there was confusion as to how to assess
the CBD. In reality, Quay was one unit and Liverpool was the other. They were only connected
by one inter-tie. If Quay went out, Liverpool was marginal. If the gas cables went out, Quay
was under-supplied. Taken separately, they barely met the deterministic standard. If the true
Òworst-caseÓ cable ratings were known, they did not meet either planning standard.
While deterministic planning approaches have in reality tended to provide a greater level of
supply security to load zones than otherwise would be provided using probabilistic techniques,
the move towards probabilistic planning techniques is one means that a planner has to quantify
and factor into the planning process the issue of deteriorating network element reliability.
However, it is noteworthy that the approach used by Mercury Energy in its 1997 CBD Risk
Management Report nevertheless failed to adequately account for deteriorating network
element reliability due to the underassessment of risk made in the calculation of the relevant
probabilities (see Section 9.4 above).
10.4.2 Planned CBD Reinforcement

Network strengthening appropriate to the CBD network was in hand and a decision on this had
been made prior to the cable failures. Although the CBD strengthening project (Tunnel Project)
was an initiative taken by Mercury Energy, all affected parties (Transpower, Power NZ and the
northern power companies) derived it after substantial discussions. Mercury Energy have
clearly factored into this decision flexibility to cater for further transmission should that be
necessary at a later time and for other utility services. This allowance for future utility facilities
in the tunnel, including potential isthmus upgrade transmission, is a prudent step on Mercury
EnergyÕs part.
The Tunnel Project reflected knowledge of demand and certain reliability issues. In 1997
Mercury Energy continued to plan for additional capacity in case of a double fault on the
Penrose-Quay 110 kV gas cables and adopted a strategy to put in place the following measures:
¥ replace undersized 11 kV cable to allow a full 7 MVA transfer on all feeders;
¥ install one or more dedicated 11 kV links between Victoria and Hobson substations;
¥ install a 22 kV inter-tie between Victoria and Hobson substations;
¥ install power factor correction to reduce the maximium demand;
¥ install generation units in or around the waterfront; and
¥ uprate Freemans Bay from 6.6 kV to 11 kV.
This was a planned response. But it seems to have been an exclusive response, not an integrated
146
one. That is, these measures were taken to support the Penrose-Quay 110 kV cables in case of
a double outage. It appears that the underestimation of the probability of a double failure
resulted in an incomplete risk management response by not considering the risk of a Liverpool
supply failure.
10.4.3 An Integrated Planning Approach

Integral Energy makes the following observation in their Planning Report:
ÒAn emerging role of network planners is to refocus from a strictly load related
network capability analysis, to a more holistic view covering reliability and supply
quality. This approach may even extend to influencing strategic maintenance policy
and expenditures in order to ensure a more integrated network outcome to meet
customer and business needs.Ó
An integrated approach has particular merits for power companies such as Mercury Energy that
can be said to have mature assets or a mature network. As a utility shifts from the phase of new
equipment to managing and maintaining a mature system, issues of network reliability take on
increased significance. An integrated planning approach may support more reliable network
performance in such circumstances.
10.4.4 Consumer Contracts

Mercury EnergyÕs contracts identified the need to define the reliability standard and make
payment for not meeting that standard. The 1997 Mercury Energy Annual Report provides a
sample of the standards provided which are presented in Figure 10.2 below.
Figure 10.2 No Worries Service Guarantees* – Sample of Standards

Residential Business
Restoring power within 3 hours $50 $200
Keeping appointment within 10 minutes $50 $100
Main supply fuse within 2 hours $50 $100
Planned maintenance 4 days’ notice $50 $100
Reconnection within 3 hours** $50 $100
Source: Mercury Energy Ltd Annual Report 1997.
Notes: * Compensation levels if standard not met.
** Subject to safety approval.
This form of contract, however, provides a cap to liability for any long-term outage. As a result,
there is a significant asymmetry between the loss suffered by consumers and the loss suffered
by the line company supplying those customers.
In the absence of defined security standards of supply for the line service, it is difficult for
consumers to make informed choices on their own back-up requirements and insurance risks.
147
If Mercury Energy had had consumer contracts which had imposed a liability similar to that
which it now experiences from this outage, then Mercury Energy is likely to have done more
to prevent total loss of power by adopting and following the risk management processes
discussed in this Report.
10.4.5 Future Security of Supply

CBD Reinforcement
There is a number of significant concerns for the current CBD distribution network, including:
¥ the future reliability of the oil cables is uncertain. Mercury Energy is continuing to
undertake tests to determine whether the oil cables can be adequately repaired and reliably
brought back into service, or whether they will need to be fully or partially replaced. In the
meanwhile they cannot be relied on;
¥ there are significant uncertainties about the reliability of the overhead 110 kV line; there is
no history on the risks of this innovative but temporary arrangement; and
¥ the substantial de-rating of the gas and oil cables means that Mercury Energy does not have
any security margin should the overhead line fail. However, restoration of the overhead line
is likely to be much quicker than cable restoration so any outages could be expected to be
short (i.e. less than 48 hours, although a fault within the Tunnel would result in a repair time
of up to twice that).
Mercury Energy has accepted that the security of supply to the CBD is not as high as it would
like it to be. Mercury Energy has a number of initiatives underway or in place to secure the
CBD supply. However, until at least Christmas 1998 security of supply to the CBD will not be
n-2 and a failure of both circuits on the overhead line or at Penrose substation will cause
outages.
At the time of finalising this report Mercury had just announced a 100 MVA strengthening of
its Mt Roskill-Liverpool supply by a new cable. Such an initiative, which should be viewed
favourably by the Auckland City Council, should restore confidence in the CBD supply
security.
The Inquiry concluded that the current reliability of supply to the CBD is unsatisfactory. It was
informed of substantial new measures by Mercury Energy. The Mercury Energy initiatives
need to be closely monitored to ensure an appropriate CBD security standard is achieved no
later than early December 1998. Validation of the CBD security of supply by independent
external expertise is warranted.
Strategic Control of the Isthmus Transmission

While the Tunnel Project has provided for the eventual reinforcement of the northern isthmus,
an agreement by the parties involved has not been reached to proceed to a reinforcement
solution. Indeed it is unclear whether this is the preferred approach to reinforcement of the
northern isthmus. This may simply reflect prevailing commercial realities and security of
148
G. Osborne
Temporary overhead line alongside southern rail line.
149
supply assessments. However, it is critical that, should a security of supply reinforcement

become vital, a struggle for the strategic control of the isthmus transmission not become a
barrier to necessary reinforcement.
Regional Energy Planning

While some of the submissions received have argued for some form of enforced regional
planning for future security of supply, the Inquiry is of the view that approaches such as the
Auckland Engineering Lifelines Project (AELP) voluntary project provide a preferable
mechanism for coordinating the development of the electricity system where such coordination
is necessary. The AELPÕs purpose is to reduce the impact of hazards on the regionÕs
infrastructure, including electrical power. The project provides information, impact assessment
methodology, coordination and facilitates communication across the regionÕs infrastructure
providers.
Improved power supply contracts that provide greater incentives to invest in appropriate levels
of system maintenance and security of supply, based on the actual costs to all affected parties
of any outages, could support such voluntary approaches.
10.5 Findings of the Inquiry: Network Planning

The findings of the Inquiry on network planning are:
1. An appropriate level of redundancy was factored into the CBD supply network planning
Ð an n-2 contingency plan was partially adopted and this was appropriate for the CBD.
However, there is not consistent evidence that an n-2 security criterion was rigorously
applied to the CBD system as a whole, and in particular to the loss of the Roskill-
Liverpool cables;
2. AEPB network planning was consistent with industry practice and was not a direct
contributory cause of the power failure;
3. Mercury Energy network planning was consistent with industry practice and was not a
direct contributory cause of the power supply failure;
4. However, had the true ratings of the 110 kV network in the CBD been known, a different
network planning response would have been prudent industry practice;
5. Given that Mercury Energy assets can be considered to be mature, and in some cases
nearing the end of their useful lives, there is a strong case for an integrated planning
approach based on periodically reassessed assets;
6. Joint transmission-distribution network planning processes were not a contributory cause

of the power supply failure;
7. Resource Management Act procedures, while time-consuming, did not cause any
151
unexpected delays to the Tunnel Project and were not a contributory cause of the power
supply failure;
8. While the Mercury Energy customer contracts were not a contributory cause of the power
supply failures, they did affect the consequences of the failure of power supply as few
consumers understood how risk was split between consumers and Mercury Energy.
Electricity supply contracts could impose far better commercial incentives for Mercury
Energy to achieve appropriate distribution security standards than is currently the case.
Improved security standards in consumer contracts together with defined liability
provisions would provide more appropriate commercial incentives for a line company to
manage its security of supply risk directly;
9. There is a role for AECT as a facilitator of improved consumer contracts and reliability
of supply definitions for the line functions; and
10. Security of supply to the CBD currently does not provide for a double contingency
outage. A failure of the overhead line or Penrose substation will cause outages. The CBD
reinforcement initiatives currently underway need to be closely monitored to ensure an
appropriate CBD security standard is achieved no later than December 1998, and should
be independently validated by external expertise.
152

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PART THREE

Why The Power

7.1 Governance and Accountability

¥ rising standards required by the courts internationally; and

7.2 Summary of Submissions

Auckland Energy Consumer Trust

Auckland City Council

Mercury Energy Limited

Regarding communications with shareholders, Mercury submitted that, in terms of the

7.3 Corporate Governance Issues

7.3.1 Governance and Accountability Arrangements

7.3.2 Risk Management Accountability

7.3.3 The Role of the Trust and the Trust-Appointed Directors

7.4 Findings of the Inquiry

8.1 Industry Practice

¥ documented procedures for the physical operation of network equipment;

¥ documented procedures for isolation and access to network equipment;

¥ provision of communication protocols; and

¥ regular review and reporting on network performance.

8.1.1 Operational Practice: Mercury Energy

¥ the definition of equipment and identification of the state of that equipment;

¥ the delegation of operational control, and emergency operating procedures;

Achieving optimum performance of an underground cable is dependent on the quality of the

¥ visual checks, including checking for corrosion;

¥ oil and gas pressure monitoring;

¥ monitoring of alarm initiating equipment;

¥ cable covering insulation resistance (IR) testing;

¥ cable temperature monitoring;

¥ ambient and soil temperature monitoring; and

¥ regular review of network capability (i.e. reassessment of asset component ratings

8.2 Summary of Submissions

Mercury Energy Limited

Mercury has implemented two maintenance philosophies identified through UMS as

Provided suitable pressure can be economically maintained for operational reasons, it is

8.3 Operation and Maintenance Issues

8.3.1 Benchmarking and Performance

management and monitoring of contractual relationships is required. This in turn is reliant on

8.3.2 110 kV Cable Maintenance Policy

8.3.4 Contractual Relationships

Mercury Energy went on to say:

In this regard, Mercury Energy stated at the Public Sittings:

. . . Mercury kept within its organisation, as a deliberate policy, expertise to manage

8.3.5 Maintenance Contracts

8.3.6 Condition-Based Monitoring

8.3.7 Repetitive Failure Modes

Ò. . . There was considered to be no need for an extensive programme to try and

8.3.8 Spare Parts Policy

8.3.9 Asset Audits

8.3.10 Protection of Assets

Furthermore Connell Wagner principal, Mr Engelbrecht, commented in his submission that at

8.4 Findings of the Inquiry: Operations and

6. Reliance on pooling of spares with inadequately specified contracts represented a risky

7. Mercury Energy actions were based on a reliability-based approach to asset management,

9. Overall, operations and maintenance practices were a significant contributing factor to

9.1 Industry Practice: Risk Management and

¥ reliance on operator experience to respond to abnormal system conditions. This includes

9.2 Contingency Planning: AEPB and Mercury Energy

9.3 Summary of Submissions

Mercury Energy Limited

The Auckland Regional Council

9.4 Risk Assessment and Contingency Planning

9.4.1 Risk Assessment Report, 1995

9.4.2 CBD Risk Management Report, 1997

Accordingly, the Mercury Energy 1997 calculation of a once-in-13-years double outage