Statement to the Commerce Commission of the Economic Policy of the Government: Electricity Transmission To the Commerce Commission Pursuant to section 26 of the Commerce Act 1986, I hereby transmit to the Commerce Commission a statement of the economic policy of the Government in relation to markets for the transmission of electricity. Overall Energy Policy Objective The Government's energy policy objective is to ensure the continuing availability of energy services, at the lowest cost to the economy as a whole, consistent with sustainable development. Objective for Trans Power The Government's objective for Trans Power (as a company independent of ECNZ) is as follows: Trans Power and its subsidiaries shall operate as a sustainable business while: [sp 'ii']i Providing an efficient, reliable and secure national grid at least costs; [sp 'i']ii Providing access on a transparent non-discriminatory basis to the national grid to all existing and potential customers; iii Pricing and contracting for transmission services in a way which best promotes efficient use of energy and economic resources by Trans Power and by users of the national grid; iv Providing information which facilitates efficient and co-ordinated investment decisions by Trans Power and by users of the national grid; [sp 'i']v Earning a commercially appropriate return having regard to the risk of the business. Particular Policies with respect to Transmission Contracts The method adopted for pricing and contracting for transmission will be an important factor in influencing the efficiency of resource use in the energy sector. In particular, the Government wishes to avoid pricing methodologies that create incentives to invest in generation facilities that avoid transmission charges without reducing transmission costs. The Government considers that the following principles are important in ensuring efficient use of the national transmission grid: Transmission Pricing That the sunk costs of the transmission grid be allocated in a way that minimises distortions to decision making by grid users. The Government is concerned to avoid incentives for investing in new embedded generation facilities which avoid transmission charges but provide no saving in transmission costs to the national grid. That the variable costs incurred in the transmission of electricity (including costs that arise when parts of the transmission grid are constrained) be reflected in prices to grid users, thus providing incentives for users to minimise those costs. That the pricing of new and replacement investments in the grid provide grid users with strong incentives to identify least cost investment options, including energy efficiency and demand management options. That the pricing for new entrants provide clear signals on the relative costs of locating in different areas. Access That the prices, terms and conditions for access to the grid reflect costs and are transparent and do not involve economically inefficient discrimination between users. Grid reliability That the target level of reliability reflects the value to electricity users of a reliable system, taking into account the costs involved. Allocation of risk That the technical and commercial risks inherent in operating the transmission system are allocated where they are most efficiently and effectively managed. The Government considers that these principles will promote efficient use of resources and contribute to efficient markets for the generation of electricity. Signed at Wellington this 6th day of October 1993. PHILIP BURDON, Minister of Commerce.