Part 4: Analysis and recommendation

Electricity Commission: Contracting with service providers.

In this Part, we give our view of the events that took place, and our recommendation to the Ministry and the Commission.

We found no evidence to suggest that the Ministry or the Commission had not complied with their statutory obligations, or that there was any lack of probity or financial prudence on the part of either.

However, the Ministry and the Commission did not meet our expectations of a public entity in opting for sole source procurement.

Tender or status quo?

The proposal to set up an Electricity Commission was first advanced on 13 May 2003 in a report to the Cabinet Economic Development Committee. The report was silent, however, on the issue of whether the ECEU should tender the service provider contracts or renegotiate contracts with the existing providers to the electricity industry.

The report simply noted that -

An establishment unit has now been set up. Its functions include making recommendations on Board members, developing statutory regulations or rules, negotiating service contracts, obtaining premises, appointing staff, and so on.15

The first document we saw that recorded a decision to renegotiate contracts with existing providers was the paper prepared for the ECEU Steering Group on 4 July (see paragraph 3.5). Some time before this date, therefore, the decision was first made to renegotiate contracts with the existing providers.

Decision unavoidable

The Electricity Governance Regulations provided authority for the Electricity Commission to enter into service provider contracts. The Commission had not been established at the time the ECEU began negotiations, and the ECEU had no explicit authority to negotiate on its behalf. However, we note that:

  • to meet the deadline for the regulated market to come into effect, decisions had to be made on service provider contracts; and
  • service providers were negotiating on the understanding that, once formed, the Commission might have a different view of the arrangements for providing its services.

By the time the Commission was established on 15 September 2003, a significant amount of work had been done on the contracts. The ECEU continued negotiating with the existing service providers to bring their contracts to a stage where the Commission could sign them.

By advancing so far down the negotiation path, the ECEU put the Commission in a difficult position had it wanted the contracts to be contested. Any attempt to change the contracting approach at that point would have created legal risks (because of the intellectual property and sensitive business information provided by the existing service providers).

It was difficult for the Commission to do anything other than proceed with sole source procurement, because the time taken to manage a contested approach to the contacts would have further delayed the establishment of a regulated market.

A procurement policy was lacking

An unambiguous procurement policy reduces the risk of challenges to the decisions made, and helps retain credibility with suppliers. Clear procedures can also help to ensure that the procurement process is followed consistently.

The Commission had no procurement policy, which – at the very least – leaves its procurement decisions open to challenge.

Improved procedures are needed

Part 3 of this report identified the 2 points when, in our view, the procurement approach should have been fully considered, and the final decision fully and clearly documented. Those points were the 4 July 2003 meeting of the ECEU Steering Group, and the 7 October 2003 meeting of the Commission.

In our view, a compelling argument for sole source procurement could - and should - have been advanced. Such documentation was missing:

  • when the ECEU began renegotiating with existing providers; and
  • when the Commission was formed and reconfirmed the approach adopted by the ECEU.

That lack of documentation exposes the Ministry and the Commission to the risk of having its procurement approach challenged, and is not consistent with the expectations we set out in Part 2 of this report.

As outlined in Part 3, the Ministry’s publication Policies and Procedures for Buying Goods and Services for the Ministry of Economic Development includes a guide to sole source procurement, or “selective purchasing”. These policies and procedures require various conditions to be present before sole source procurement becomes the preferred option. There was no documentary evidence that these conditions had been taken into account.

The Commission did tell us what it considered the risks of a contestable approach to be, but it did not document them. In our view, the risks should have been documented.

The proposal by NZX Limited

The NZX proposal did prompt the Commission to consider a contestable approach. After meeting NZX on 17 September to discuss its possible involvement in the electricity market, the ECEU’s project manager replied -

Given the timetable we are dealing with, our current thinking is to contract with existing Service Providers for the initial phase of the EC [Electricity Commission]. However, as the EC moves beyond the establishment phase I believe it is likely that it will favour a more contestable approach to the appointment of Service Providers.

I suggest that we leave matters on this basis for the time being.

Despite this letter, the chairperson of the Commission met an NZX representative on 4 November 2003 to discuss the NZX proposal, and consider a contested approach to the service provider contracts. On 11 November, the full Commission met, focusing, we are told, on whether it was feasible to establish such an approach, rather than on the substance of the NZX proposal. The Commission concluded that it would not be possible to conduct a robust process in the time available.

The Commission’s legal advice on its obligations in appointing service providers came from a member of the ECEU Steering Group. When we asked why it did not seek external advice, we were told this was the closest available source.

The NZX proposal was a useful lever in negotiations with the existing service providers as, without it, the issue of contestability would not have been seriously considered. The decision to opt for sole source procurement was justified in the paper prepared for the Commission meeting on 16 and 17 December 2003. In our view, this was too late.

Our recommendation

We understand that the Commission has now agreed to select its service providers through a contestable approach, when the contracts of its existing providers end. The market administrator contract was the first to be renegotiated, and the Commission invited tenders on those parts of the original contract that it has decided to outsource.

We recommend that the Commission establish a clear and unambiguous procurement policy, which can be used to guide its decisions when the remaining service provider contracts come up for renewal.

15: Report to Cabinet Economic Development Committee, Proposal to Establish an Electricity Commission, page 9.

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