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AUCKLAND, New Zealand -- Better management and systematic risk assessment could have prevented the power failure earlier this year that shut down central Auckland for at least two months, a government report says.
A New Zealand government inquiry released late last month blamed the management of power provider Mercury Energy Ltd. for the power failure in Auckland's central business district. The report criticized Mercury Energy's risk management and contingency planning, operations and maintenance practices.
Mercury Energy's acting chief executive, Patrick Strange, said some of the report was "absolutely fair," but Mercury is still investigating the cause of the power failure.
The government launched the inquiry March 12 to determine what happened, why and what lessons could be learned. However, the report did not explore Mercury's liability for the outage or the customer compensation the utility had offered.
The report said operations and power line maintenance by Mercury Energy and its predecessor, the Auckland Electric Power Board, were below industry standards and contributed to the outage.
According to the report, the Auckland outage provided a lesson: Other utilities should systematically evaluate risks facing physical assets, such as power lines.
Furthermore, customer contracts should define performance standards for the utility and outline the power provider's obligations, the report said.
Power to Auckland's central business district was limited for at least two months after Mercury Energy's four power cables failed in February (BI, March 2; March 23). The failure forced many businesses to activate contingency plans, including using backup generators.
A total insured loss figure was not available as not all insurers have reported claims payouts related to the outage, said Chris Ryan, chief executive officer of the Insurance Council of New Zealand Inc.
The outage began in unseasonably hot weather in February. Initially, two cables failed. A third line subsequently failed and, on Feb. 20, the fourth line collapsed, leaving the 1-square-mile business district with only 10% of its usual power supply. The power lines were installed in 1959.
Mercury Energy's used an emergency line and generators provided a limited power supply to the city.
The inquiry report said Mercury Energy was a competent power distributor but lacked procedures to manage its power lines or resolve problems. Mercury Energy did not regularly conduct audits of the 110kV power lines.
"Overall, operations and maintenance practices were a significant contributing factor to the failure of the power supply," the report said.
Mercury's risk management committee did not oversee the "mechanisms for accountability and monitoring network risk management," according to the report.
Instead, those areas were overseen by the board. "Network risks and other risk management procedures differed, and accountability and the performance and implementation of both was not clear," the report said.
Also, Mercury did not attend power industry conferences and other forums to learn about trends and management techniques.
The inquiry recommended that Mercury establish a management plan for its transmission lines to the central business district, independent of management of distribution assets.
Further, the report recommended the New Zealand government require network operators to disclose risk management plans and security standards.
Max Bradford, New Zealand energy minister, said Mercury Energy had guaranteed it would comply with the government's recommendations.
In a joint statement, Mercury and the Auckland Energy Consumer Trust, which is a majority shareholder in Mercury on behalf of power consumers, said many inquiry recommendations had been implemented or were in progress.
Jim Macaulay, Mercury Energy board chairman, said the report recommended that Mercury have its cable management plan reviewed by independent experts in 110kV cables of a similar design and age, and said that was implemented in April.
He said other initiatives already implemented included plans for a new underground cable to the central business district to diversify supply, and fast-tracking tunnel equipment installation to increase security of supply.
The statement said the report reflected Mercury Energy and the trust's view that the failure was "many years in the making."
Mr. Strange, Mercury's acting chief executive, said some of the report was "absolutely fair." "While it is not a pleasant pill to swallow, we accept it and will learn from it," he said. Mr. Strange succeeded former Mercury CEO Wayne Gilbert, who died last month.
Mr. Strange said Mercury would look urgently at other issues raised so they could be incorporated immediately into planning.
Mr. Bradford, the energy minister, said Mercury Energy's corporate governance structure meant it missed the chance to prevent the disaster, and the inquiry recommended Mercury strengthen its corporate governance procedures.
The report said Mercury's board lacked clear lines of accountability and had no clearly defined statement of corporate intent defining common shareholder and board objectives, especially regarding security of power supply.
New Zealand does not have a utility regulator that oversees Mercury Energy. However, a reform law enacted by New Zealand's Parliament July 23 requires Mercury Energy and other power providers to keep their technical and sales operations as separate entities, with separate boards.
The inquiry also said the practice of appointing Auckland Energy Consumer Trust trustees as Mercury directors had the potential to create conflicting duties for those board members and diminish the board's effectiveness.
Stanley Lawson, trust chairman, said most issues raised by the inquiry were operational. Mercury intends to "ensure the company's governance and structure fits the modern commercial environment," he said.