5. Efficiency and Effectiveness of the Transmission Activities NES

5.1    Overview

Effectiveness considers whether the policy option will actually be effective in achieving its aims and objectives. In this case, the setting of NES provides firm regulation for achieving the stated aims and objectives. It is, therefore, the most direct and effective option.

Efficiency considers the benefits and costs of any policy interventions. If the benefits outweigh the costs over time then the policy is deemed to be “efficient”. This, however, assumes that benefits and costs can be quantified in monetary terms. In this case there are a number of intangible considerations, outlined later, that cannot be assigned monetary values. These are identified and included in the broader consideration of the efficiency and effectiveness of this NES.

Within this framework the measure of efficiency will generally consider the NES package as a whole rather than breaking it down into its constituent parts.

5.2 Costs and benefits of adopting the NES

Cost−benefit analysis is a long-established technique intended to identify the economic efficiency of a proposed project or policy change (see section 5.4). Efficiency is broadly about maximising the outputs obtained from the available inputs. From an economic point of view there are different kinds of efficiency (NZIER, 2007):

• technical (productive) efficiency, which describes the most effective way of providing a given service (eg, reducing or eliminating unnecessary regulatory costs)
• allocative (matching) efficiency, which refers to the ease of moving resources to their most productive uses
• dynamic (innovation) efficiency, which refers to the optimisation of innovation and the rate of change to new activities over time.

If the NES can reduce the community-wide costs of sustainable management of the grid, it will improve the technical efficiency of how resources are used in the grid. To the extent that it reduces delays or restrictions in electricity network improvements it will also improve the allocative efficiency of resource use (which, in turn, will benefit the nationwide community of electricity users). Dynamic efficiency, in terms of more timely provision of upgraded electricity, is also improved over time.

The specific benefits of the NES arise from lower RMA costs associated with transmission activities. The reduction in costs is expected to result from:

• a reduction in expenditure by Transpower on plan advocacy (making submissions on plan changes), and a small reduction in expenditure for councils in assessing and hearing submissions
• a reduction in Transpower and council costs of assessing consent requirements for a project
• avoiding the need to obtain existing-use certificates, because the NES will encompass the activities for which Transpower previously relied on existing-use rights
• a reduction in costs for Transpower in obtaining resource consents (fewer consents will be required, at a lower cost per consent), and a corresponding reduction in council non-recoverable costs for consent processing
• an intangible benefit to the community from greater certainty about which activities are permitted and which require consent.

The costs identified for the NES will occur within the first three years.

• Councils will incur implementation costs from the need to become familiar with the NES provisions, along with a small additional cost for notifying a plan change that includes the NES (if necessary).
• Transpower will incur implementation costs from providing assistance to councils to understand transmission activities; this will be a small cost in addition to the cost of assisting councils as part of the NPS implementation.
• Government will incur costs from providing guidance on the NES and assisting councils with implementation.
• Councils and the community will incur intangible costs through loss of local control.

5.2.1 Assumptions

The cost−benefit analysis was based on a number of assumptions, as outlined in Table 3. The focus was on the proposed standards (consents, certificates of compliance and existing-use certificates), plan advocacy and the non-recoverable costs associated with these activities (NZIER, 2007).

Table 3: Assumptions for the cost−benefit analysis

5.3    Overall impact of the NES

In the absence of an NES, the new rules for transmission activities in each plan would take account of the NPS but would also be subject to submissions on proposed rules. There would be no national consistency in rules, and no guarantee that the new rules would be any easier to follow than existing rules. For example, the rules may still be zone based. It is assumed that while the new rules would take better account of the operational requirements and the need to provide for transmission, they might still be different in different districts and regions, and so would not contribute to achieving national consistency throughout New Zealand.

Table 4 sets out the anticipated effects of the NES, compared to the effects of no NES being in place.

Table 4: Anticipated impacts of the NES versus no NES

5.4 The cost−benefit model

Cost−benefit analysis estimates the economic efficiency of a proposed policy. It compares the effects and outcomes of a proposed policy with what would have occurred under a counterfactual (without the proposed policy). The counterfactual can be described as a projection of the status quo arrangement into the future as supply and demand conditions change. If the policy proposal reduces costs to the community and economy as a whole, then it will improve economic efficiency.

Cost−benefit analysis takes into account the time value of costs and benefits, so that benefits achieved in the future are less certain and are given a lower value than benefits achieved now. The proposal has been assessed using a discount rate of 8 per cent (and 5 per cent for sensitivity analysis), in line with Treasury guidelines (Treasury, 2008). All costs and values are real resource costs, excluding all taxes, subsidies and other intra-community transfer payments.

The analysis has been undertaken over a 10-year timeframe. During the first five years of the analysis costs and benefits vary because of the plan changes required by the NPS. Once new operative plans are in place the situation will be relatively static for the 10-year life of the plan. Using a 10-year timeframe is a conservative assumption because the costs associated with the NES are incurred in the first three years, while the benefits increase during the 10-year period and would continue into the future, depending on the expected expenditure on transmission activities in the 10-year period.

This analysis of the costs and benefits of the proposed NES compares the situation without the NES (the counterfactual) with the situation with the NES and predicts the increase or decrease in costs or benefits in the foreseeable future. The information used to assess the changes in costs and benefits includes:

• an evaluation and economic appraisal of the proposed NES for electricity transmission prepared for the Ministry for the Environment by the NZIER in August 2007
• a review of district plan provisions for electricity transmission prepared for Transpower by Burtons (2006)
• a review of regional plans and selected district plans undertaken by the Ministry for the Environment
• information provided by Transpower and local authorities on the costs associated with RMA processes related to transmission activities.

Costs are assessed where they originally fall, not where they are finally borne. For example, additional costs for Transpower will either be passed on to consumers in service prices or taken out of Transpower’s profitability, reducing returns to government that will in turn have an impact on taxpayers. Local authority costs that can be directly recovered from Transpower as consent application charges are assessed as costs to Transpower. Local authority costs that cannot be recovered (such as non-recoverable costs incurred in processing resource consents and the costs of implementing the NES) will ultimately be borne by ratepayers.

In this analysis, the key quantifiable benefits arise from a reduction in RMA costs to councils and Transpower. Quantifiable costs relate to expenditure by the government, councils and Transpower associated with implementation of the NES. Intangible costs and benefits may arise as a result of implementing the NES but it has not been possible to quantify these. Intangible costs and benefits are associated with potential environmental costs and benefits, and the loss of community involvement in proposals for transmission upgrades. The NZIER report contains further discussion on intangible costs and benefits (NZIER, 2007).

A fully quantified model (if possible) would compare the “with” and “without” NES situation over a period of years. This would mean developing scenarios for “with” and “without” NES situations over a foreseeable future and comparing the differences between them. This requires, for each scenario:

• a projection of likely investment in transmission in successive years over the analysis period, taking account of any changes in the rate of investment attributable to the costs or uncertainty around consents
• the proportion of that investment that is likely to be affected by the proposed NES
• the compliance cost of obtaining consent for activities that would be subject to the NES, arising from application and processing costs and any additional costs from meeting non-standard requirements
• an estimate of how additional costs without an NES translate into higher prices, and the likely price responsiveness of customers as a result.

The potential for loss of life resulting from disruption in electricity supply and the potential for lack of maintenance to disrupt supply have not been factored into the cost−benefit model. The model structure is based on the premise that the NES is likely to reduce the cost of compliance for the consents process for both Transpower and councils. The result is a measurable benefit of the NES, against which to compare the dis-benefit of losing local control and potential localised amenity effects.

5.5 Review of plans

A key driver of the changes in council and Transpower costs arising from the NES is an anticipated reduction in the number and complexity of resource consents relating to the operation, maintenance and minor upgrading of existing transmission lines. The Ministry for the Environment has reviewed regional plans and selected district plans to assess the magnitude of change in consent requirements. Based on a review of plan requirements undertaken by Burtons (2006), plans were divided into 13 groups based on whether the plan had a permissive, partly permissive or relatively restrictive approach to minor upgrading and to more than minor upgrading. One plan was selected from each group for review and a national estimate derived from this analysis. The results of the plan review were used to inform the development of the NES and the cost−benefit appraisal.

The review assumes that all plans in a group have similar terms and conditions for permitted activities and similar consent requirements. This was complicated by the fact that many plans, even if there is a utilities chapter, defer to zone rules, and the rules for activities in urban zones may be more restrictive than the rules for rural zones. In some plans it was not possible to determine the status of an activity listed in the NES.

Table 5: Actions in the absence of a transmission activities NES

Table 6: Anticipated plan changes with the NES in place

Notes: EMF = electromagnetic fields ; CMA = coastal marine area.

5.6 Impact on consent requirements

The plan review undertaken by the Ministry revealed that the NES would remove consent requirements, as follows.

• Increasing the current and/or voltages (provided ICNIRP guidelines for EMF are met) was discretionary in nine plans, and would now be permitted. If ICNIRP guidelines are not met (although this is unlikely to occur), the activity was discretionary in 26 plans but would become non-complying.
• In six plans, upgrading of transmission support structures with associated height increase, or moving support structures, was a discretionary activity but would now be permitted.

5.6.1 District consents

The NES would result in a relaxation in consent requirements, as follows.

• For the addition of conductors, earth wires, etc in excess of permitted limits, and adding circuits, the activity would be restricted discretionary rather than discretionary in most plans.
• Plans are generally more restrictive than the NES for height increases. In around 50 plans, moving beyond distance thresholds, height increases beyond permitted thresholds and removing structures where permitted conditions are not met were discretionary but would become controlled or restricted discretionary.
• Temporary structures exceeding the permitted timeframes would change from restricted discretionary to controlled in 44 plans.
• In 27 councils, trimming of generally protected trees would change from discretionary to controlled, and in three from restricted discretionary. Trimming of individually protected trees would change from discretionary to restricted discretionary in 50 plans.
• Earthworks that do not meet permitted criteria would change from discretionary to controlled in 22 plans.
• Addition of telecommunications equipment above the size limits would change from discretionary to restricted discretionary in 44 plans.

The following NES provisions would generate additional consents.

• New access tracks not in areas of special landscape, ecological or cultural value would change from permitted to controlled in 47 plans.
• Placing transmission lines underground would change from permitted to controlled in 57 plans, in nine plans from restricted discretionary, and one from discretionary to controlled.
• Trimming and removal of generally protected trees would change from permitted to controlled in five plans.

5.6.2 Regional consents

Regional plans were analysed with regard to rules governing discharges to air, water and the coastal marine areas, works in beds of lakes and rivers, and works in the coastal marine areas. The assessment of regional plans showed that the activity status of:

• the application of surface coatings that does not meet permitted criteria would be relaxed in 11 regions (change from discretionary to controlled in 10 regions and from restricted discretionary to controlled in one region)
• non-abrasive blasting that does not meet permitted criteria would generate additional consents in 11 regions (change from permitted to controlled)
• non-abrasive blasting over coastal marine areas would change from permitted to restricted discretionary in nine regions, and from discretionary to restricted discretionary in two regions
• wet abrasive blasting that does not meet permitted criteria (but is not undertaken over water in coastal marine areas) and application of surface coatings would change from permitted to controlled in 11 regions and from discretionary to controlled in one region
• wet abrasive blasting in the coastal marine areas would change from permitted to restricted discretionary in nine regions, from discretionary to restricted discretionary in three regions and from controlled to restricted discretionary in one region
• dry abrasive blasting would be relaxed in nine regions (change from restricted discretionary to permitted in one region, from discretionary to permitted in five regions and from controlled to permitted in three regions)
• dry abrasive blasting that does not meet permitted criteria would change from permitted to controlled in four regions, from restricted discretionary to controlled in one region, and from discretionary to controlled in six regions)
• dry abrasive blasting in the coastal marine areas would change in 10 regions from discretionary to restricted discretionary and in one region from controlled to restricted discretionary
• transmission activities over surface water or over coastal marine areas (no discharge, no ground-level activities) would change in three regions from discretionary to permitted
• minor discharges to water and the coastal marine areas would change in seven regions from permitted to controlled, in six regions from discretionary to controlled and in one region from restricted discretionary to controlled.

The analysis showed that most of the activities permitted by the NES will not be affected. Most changes will be in categories that already require resource consents.

Overall, it has been assumed that the work for which additional consents will be required will be offset by work for which consent will no longer be required. The benefit of the NES is clarity of requirements and a reduction in the stringency of consent requirements for many activities beyond permitted thresholds: primarily restricted discretionary rather than discretionary.

Transpower report that they obtain a range of resource consents throughout the country in any year, ranging from minor activities to relatively major work.

5.7 Identification of costs and benefits

5.7.1 Local authorities

Benefits

Councils will need to notify plan changes to give effect to the NPS by 2012. In the absence of an NES, each council would need to formulate appropriate rules. The NES would result in a cost saving because councils would not need to formulate rules for transmission activities. A conservative estimate of the cost saving per council is $3150 per council (30 hours of officer time). It is likely that councils would receive fewer and less complex submissions on rules based on the NES, particularly from Transpower, and therefore spend less time assessing and hearing submissions and responding to appeals. This is estimated as an average of $4666 per council, calculated as:

• 10 per cent of Transpower’s cost saving in advocacy on plan changes relating to transmission activity rules for half of district plans that incorporate the NES
• 30 per cent of Transpower’s cost saving in advocacy on plan changes that incorporate the NES (because there will be no opportunity for submissions).

It is assumed there will be no change for regional councils because the majority of Transpower’s plan advocacy has been related to district plans, and this is unlikely to change under the NPS.

Costs

Councils will need to review their plans to determine whether they meet the requirements of the NPS, and this will involve becoming familiar with the NES and setting up systems for implementing it. The analysis assumes that on average each council will utilise 25 hours of officer time each year for the first two years (a total of $352,800), and half this amount in the third year. These costs apply to both regional and district councils. Note that this cost is in addition to time spent on implementing the NPS or on plan reviews and changes.

There is no legal requirement to incorporate NES into plans because they are stand-alone regulations. Councils indicated in consultation that they would wish to avoid confusion between plans and the NES so may choose to annotate plans to indicate which rules no longer apply to electricity transmission and reference the NES rather than incorporating regulations into their plans. This could still generate additional costs associated with notifying plan changes.

It has been assumed that:

• regional councils and half of the district councils (with relatively lenient and self-contained rules) will simply annotate plans to indicate dormant rules (which have been replaced by the NES) as part of the process of implementing the NPS, at a cost of $500 per plan
• half of district councils will include the NES in their plan change notification, at a marginal cost of $3000 per plan.

5.7.2   Transpower

Benefits

Transpower estimates that the NES (in the absence of an NPS) would save approximately 70 per cent of advocacy costs related to plan changes proposing transmission activity rules. It is assumed that this would not change now that the NPS requires plan changes: Transpower would still need to monitor and make submissions on plan changes, but in a condensed timeframe rather than a few per year. With an NES, advocacy will be reduced because some councils will choose to simply annotate plans to note that the NES prevails over certain rules, and some will notify a plan change incorporating the NES. It is reasonable to assume that this combination will result in at least a 70 per cent saving in advocacy costs, equivalent to a $23,333 saving, on average, per district plan. The advocacy budget relates largely to monitoring district plans, and it is assumed that the cost saving will apply only to district plans.

It is still uncertain whether Transpower would need to obtain existing-use certificates in cases where the NES encapsulates activities that would have been previously considered an existing use. If such certificates are no longer required, it would save RMA costs of $15,000 per existing-use certificate: one certificate in the first year and increasing to 11 in year 10.

The review of plans shows that a reduction in the number of consents is likely to be small and offset by a small increase in the requirement for some consents. The key saving is due to the consents required being subject to a more appropriate level of scrutiny and being less likely to be publicly notified. The previous study estimated that average costs of obtaining a consent should reduce from $15,000 to $7500 due to less complex requirements and more consents being processed non-notified. The analysis assumes that in year one, seven consents are cheaper to obtain as an immediate result of the NES. This increases to 21 consents in year 10.

Transpower will also benefit from the NES being easier for a network utility operator to interpret than most plans. This is estimated at four hours of staff time for each consent or certificate of compliance that would be applied for (although it does not take account of time determining plan requirements for permitted activities).

Costs

Transpower has offered to provide assistance to councils in implementing the NES, principally providing information on transmission activities and how they are carried out. This is estimated to amount to half of the council implementation costs. Note that this is in addition to any costs associated with implementing the NPS.

5.7.3   Central government

We have estimated the Ministry for the Environment’s costs conservatively at $100,000 for the first year and $50,000 per annum for the next two years for implementation of the NES. These costs are mainly related to explanatory documents for local councils, general information, and the cost of monitoring and supporting the adoption of the NES.

5.7.4   Community and the environment

There very few tangible costs or benefits for either the community or the environment. There are, however, a number of intangible benefits resulting from introduction of the NES, such as:

• lower costs for submissions on plan changes, but less opportunity to participate in the process
• environmental benefits from more consistent controls, and balancing facilitating transmission activities with protecting the environment
• national benefits from security of supply.

5.7.5   Summary of benefits and costs

The overall benefits and costs of adopting the NES for transmission activities are presented in Table 7.

Table 7: Summary of costs and benefits

A more detailed breakdown of benefits and costs is presented in Table 9 (in section 5.9).

5.8 Sensitivity analysis

Sensitivity analysis is an economic tool used to study how the variation in the output of a model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of a model. The sensitivity analysis for the proposed transmission activities NES was designed to observe the change in the net present value (NPV) and benefits-to-costs ratio resulting from altering two input variables: the percentage of councils incorporating the proposed NES into their plans (thus bearing the costs of a public consultation process) and the level of Transpower’s activity (thus the number of projects requiring approval).

The analysis looked at four alternative scenarios. Every scenario was done for a 5 per cent discount rate and compared against the 8 per cent discount rate base case results. Table 8 briefly outlines each of the scenarios and the output obtained for both discount rates.

Table 8: Sensitivity analysis – scenarios and results

Results

The analysis showed that if 20 per cent more councils decided to incorporate the NES into plans via a public consultation process than originally assumed in the cost−benefit analysis, then the NPV would decrease by 9 per cent. Equally, if 20 per cent fewer councils wanted to go through the public consultation process to incorporate the NES, the NPV would increase by 9 per cent.

The proposed regulations were also tested for efficiency with regard to the level of Transpower’s activity (ie, the number of projects undertaken). This analysis revealed that a 20 per cent decrease (or increase) in the activity level assumed in the base case scenario resulted in a 14 per cent decrease (or increase) in the NPV. The same NPV change was obtained for a 20 per cent change in assumed benefits for the same level of activity.

The worst case scenario of 20 per cent more councils incorporating the NES into plans, 20 per cent decrease in assumed Transpower activity level and 20 per cent reduction in assumed benefits resulted in a 38 per cent reduction in NPV to approximately $2.7million.

The most beneficial scenario, with the highest NPV return, was obtained with an increased level of projects than initially predicted and 50 per cent fewer councils incorporating the NES through a public consultation process.

5.9 Summary

The evaluation of the costs and benefits was informed by two reviews of district and regional plan provisions for transmission activities and an earlier appraisal of the draft NES undertaken by the New Zealand Institute of Economic Research (NZIER). The results show that at an 8 per cent discount rate, the NPV of the proposals is $4.8 million, with a benefit-to-cost ratio of 5.6 to 1. When a lower discount rate (5 per cent) is used, the NPV of the project is $5.5 million and the benefit-to-cost ratio is 6 to 1.

The intangible costs associated with the proposed NES are likely to be small in relation to the tangible costs and benefits. It is likely that the costs associated with finding out about the proposed NES will be very small. This is because, under the status quo, most councils would notify new rules for transmission activities. The community would need to find out about the new rules, and this is likely to cost about the same as finding out about the proposed NES in general. The Ministry for the Environment can assist in reducing search costs by providing good guidance for the public on the proposed regulations.

Table 9 shows a summary of the results of an economic appraisal of the proposed NES for transmission activities.

Table 9: Summary of costs and benefits