Appendices

Electricity Commission: Contracting with service providers.

Appendix 1 - Original terms of reference

Audit and inquiry into awarding of certain service provider contracts by the Electricity Commission

The Auditor-General has decided to audit and inquire into the actions of the Electricity Commission (the Commission) and the Ministry of Economic Development (the Ministry) in relation to the Commission’s awarding of certain service provider contracts in December 2003.

The Auditor-General is the auditor of both the Commission and the Ministry, with powers to independently audit, inquire and report.

Scope of the Audit and Inquiry

The work will be conducted under sections 16(1) and section 18 of the Public Audit Act 2001, and will involve an examination of the procurement process followed and actions of the Commission and the Ministry that lead to the Commission’s decision, in December 2003, to award the following service provider contracts:

Market Administrator Service Provider Agreement;
Pricing Manager Service Provider Agreement;
Clearing Manager Service Provider Agreement; and
Information System Service Provider Agreement.

The audit and inquiry will examine the actions and behaviour of the Commission or any of its Members or any Ministry employee or representative that assisted in the establishment of the Commission to determine whether any act or omission has occurred that shows, or appears to show:

That the Ministry or the Commission has not complied with its statutory obligations;
A lack of probity or financial prudence by the Ministry or the Commission.

The audit and inquiry will take into account recognised good public sector procurement practice with regard to the making of appropriate procurement decisions.

Limitation of Scope

The audit and inquiry will not examine or report on the merits or otherwise of the service providers who were awarded the above-mentioned contracts.

Report on Audit and Inquiry

The Auditor-General will report the results of the audit and inquiry, and any other matter arising out of it that the Auditor-General considers it desirable to report on, under sections 20 to 22 of the Public Audit Act 2001.

In accordance with usual practice and the requirements of natural justice, all affected parties will be given an opportunity to comment on the report in draft.

Timeframe

It is likely that the audit and inquiry will have been completed and its report finalised by the end of July 2004.

Approved:

Kevin Brady

Controller and Auditor-General

4 June 2004

Appendix 2 - Final terms of reference

Audit and inquiry into awarding of certain service provider contracts by the Electricity Commission

The Auditor-General is the auditor of both the Commission and the Ministry, with powers to independently audit, inquire and report.

Scope of the Audit and Inquiry

Reconciliation Manager Service Provider Agreement;
Registry Service Provider Agreement;
Market Administrator Service Provider Agreement;
Pricing Manager Service Provider Agreement;
Clearing Manager Service Provider Agreement; and
Information System Service Provider Agreement.

That the Ministry or the Commission has not complied with its statutory obligations;
A lack of probity or financial prudence by the Ministry or the Commission.

The audit and inquiry will take into account recognised good public sector procurement practice with regard to the making of appropriate procurement decisions.

Limitation of Scope

The audit and inquiry will not examine or report on the merits or otherwise of the service providers who were awarded the above-mentioned contracts.

Report on Audit and Inquiry

In accordance with usual practice and the requirements of natural justice, all affected parties will be given an opportunity to comment on the report in draft.

Approved:

Kevin Brady

Controller and Auditor-General

31 August 2004

Appendix 3 - Chronology of events

1-2 May 2003

Senior members of the Electricity Commission Establishment Unit (ECEU) are appointed under contract by the Ministry of Economic Development (the Ministry).

13 May 2003

Cabinet paper [EDC (03) 86], Proposal to Establish Electricity Commission. The paper states that new contracts (or extensions to existing contracts) need to be negotiated. It refers to possible risks that may cause a delay to the 1 August 2003 establishment of the Electricity Commission, one of which is delays in service contract negotiations. The paper notes that provision for service contract negotiations has been included in the budget proposal, but there is a risk that negotiations could become more complex and expensive than budgeted for.

20 May 2003

The Minister of Finance and the Minister of Energy publicly announce that the Government will form the Electricity Commission.

23 May 2003

First meeting of the ECEU Steering Group.

May-August 2003

Negotiations with existing service providers begin and continue throughout this period. Progress on service provider contracts is on the agenda at most meetings of the ECEU Steering Group.

22 August 2003

Tenth meeting of the ECEU Steering Group. (The last meeting of the group for which minutes were kept. The group continued to meet about every 2 weeks through to 28 November 2003, but the Ministry told us that these meetings were mainly to update the Deputy Secretary of the Resources and Networks Branch.)

8 September 2003

MED Cabinet paper [EDC (03) 186] notes that:

It is anticipated that the initial service providers will be those currently providing services under MARIA and NZEM, and those who would have continued if the EGEC proposals had been implemented. Given the timetable for implementing the EGRs, this is the only practical approach available. It is anticipated, however, that the Commission will undertake a phased approach to tendering service provider contracts over the next 5 years.

14 September 2003

Media statement from the Minister of Energy announces the formation of the Commission, and its membership.

15 September 2003

Commission formally established by Order in Council.

29 September 2003

Paper to the Electricity Commission prepared by the ECEU (Service Provider Contract Negotiation Update) updates Commission on contract negotiations with incumbent service providers.

3 October 2003

Paper to the Electricity Commission prepared by the ECEU (Service Provider Contract Recommendations) recommends that the Commission approve the main terms of the service provider contracts, and the negotiation limits as set out in the paper.

7 October 2003

First meeting of Electricity Commission Board held.

17 October 2003

Paper to the Electricity Commission by the ECEU (Service Provider Contract Negotiation Update) updates the Commission on contract negotiations with incumbent service providers.

22-24 October 2003

Commission Board meets.

15 December 2003

ECEU recommends to the Commission that it proceed with contracts and a non-contestable regime.

18 December 2003

Electricity Governance Regulations 2003 gazetted with Rules to come into force 1 March 2004, and a requirement to appoint certain service providers.

Appendix 4 - Extract from Procurement – A Statement of Good Practice

The following text is from the Office of the Auditor-General’s publication Procurement – A Statement of Good Practice.

3.2 Selective Procurement

Principles

Procurement from a selected supplier, without inviting competing tenders from any other suppliers, should be the exception rather than the rule, and should be justified only in certain limited circumstances.

Selective procurement may be justified where:

tendering is not practicable – for example, in an emergency;
the required goods or services are available from only one source, or only one supplier has the capacity to deliver at the time required, and this can be adequately attested;
standardisation or compatibility with existing equipment or services is essential, and can only be achieved through one supplier;
there is a legal requirement or directive to use one supplier*; or
the cost of any other form of procurement would be out of proportion to the value of the procurement or the benefits likely to be gained.

Detailed guidance in your own manual may cover:

Procedures for a selective procurement

Each decision to make a selective procurement should be:

taken systematically, by staff who have the necessary knowledge and experience of the procurement environment – assisted, as required, by external expert advice; and
fully documented, reviewed, and endorsed by a more senior person in the entity before being implemented.

The procedures required to identify a supplier

A public entity should identify a supplier using information about all known possible alternative suppliers.

The procedures required to confirm the supplier’s capability to deliver the goods or services

Before deciding to make a selective purchase, a public entity should take adequate steps to ensure the supplier’s suitability, and to document what information was obtained in this check.

Steps might include obtaining references (with the supplier’s consent) that attest to the standards of the supplier’s past performance.

Assessing the supplier’s performance

A public entity should regularly assess the performance of a selective supplier against established criteria.

Market testing

A public entity should satisfy itself from time to time that a selective supply is still justified. This might include advertising to seek expressions of interest from other suppliers in tendering for the goods or services.

* For example, legal services from the Crown Law Office.

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