The following statement has been transmitted to the Commerce Commission by the Minister of Commerce as
a statement of the economic policy of the Government pursuant to section 26 of the Commerce Act 1986.
Government Policy Statement on Electricity Financial Transmission Rights
This Government Policy Statement on Electricity Financial Transmission Rights has been issued following a review
of financial transmission rights and the allocation of transmission rentals arising from electricity losses and constraints in the wholesale electricity market.
It supplements the existing Government Policy Statement: Further Development of New Zealand's Electricity Market, issued in February 2002.
Introduction
1. Financial transmission rights (FTRs) should be introduced to assist in the management of locational
price risk resulting from transmission losses and constraints and to improve economic signalling (including the signals for new transmission investment). The loss and constraint rentals arising out of the spot market provide the appropriate underpinning for FTRs.
2. The Government's expectations in relation to FTRs are specified below.
Guiding Principles for an FTR Market
3. Realistic long term risk management mechanisms must be made available to end users and to competing retailers.
4. Economic efficiency is a critical goal that should be pursued in a robust but realistic fashion. The concept of economic efficiency includes the integrity of nodal price signals for price-sensitive generation, consumption and investment decisions.
5. FTR design and allocation should give priority to ensuring consumers have access to competitive markets, particularly in regions subject to transmission constraints, but otherwise have due regard to preserving continuity with established price relativities and commercial arrangements.
6. Pragmatic solutions must be developed which are implementable and endurable.
7. Transpower should not be required to take on commercial risk as a result of FTR arrangements without the agreement of Transpower's board.
8. The design of FTR arrangements should mitigate and manage risk to distribution companies.
FTR Policy Framework
9. Transpower should continue to receive loss and constraint rentals, and should use the rentals to fund an FTR product.
10. A market for short to medium term FTRs should be introduced covering the interconnected grid (with or without spur lines).
11. Some or all of Transpower's off-take customers (including distribution companies and direct connect customers) should be offered a long term allocation of FTRs.1 If a distribution company prefers that its allocation be given to an agent appointed by the distribution company and approved by the FTR group, Transpower should allocate the relevant FTRs to the agent.2 FTR recipients should be able to refuse an allocation.
1 This focus on off-take customers does not preclude other customers from receiving a similar long term allocation.
2 Subsequent references in this policy statement to distribution companies should be read as applying also to an agent appointed by a distribution company to manage the distribution company's role under this policy statement.
12. Recipients of allocated FTRs should be able to put their FTRs into an auction and assign reserve prices in accordance with the process developed by the FTR group under paragraph 19. In this case, they should receive the value assigned to those FTRs by the auction (subject to
the price exceeding the reserve). If the value assigned by the auction does not exceed the reserve price, the original recipient should retain the FTR.
13. Transpower should pass any excess FTR auction income (auction income not paid to those who put allocated FTRs back into the auction), residual rentals (rentals not utilised in the FTR market) and any income received as payment for an FTR allocation, less appropriate expenses, to its customers.
14. A distribution company should pass through rental-related or FTR-related cash flows to the distribution company's customers, retailers, and/or end users. The pass through should be transparent, should not discriminate between parties in a like position, and should as far as possible be non-distortionary. It should be consistent with the guiding principles for an FTR market, and in particular have due regard to promoting competition between retailers.
15. Distribution companies should be able to recover reasonable costs relating to their role under this policy statement.
Governance
16. Prior to the establishment of the Electricity Governance Board (EGB), the industry should establish an FTR group. The FTR group should have an independent chair and should be broadly representative of the wide range of interests affected by FTRs and rental allocations, including consumers (both large and small), distribution companies and Transpower. Neither generators and retailers, nor Transpower and distribution companies should collectively control more than 50% of the voting rights in the FTR group. The FTR group should make decisions by consensus wherever possible, but if necessary, it should make decisions by a two-thirds majority of votes cast. Government officials should attend meetings of the FTR group as observers.
17. The FTR group will not have standing with respect to Government policy until its constitution (including membership and voting rights) has been confirmed by the Minister of Energy.
18. After receiving advice from Transpower, the FTR group should decide on:
(i) design options and issues that must be resolved within the FTR policy framework before the FTR market begins;
(ii) a programme and timetable to investigate the options, resolve issues, and make decisions; and
(iii) allocation of tasks to achieve the programme.
19. Design options should specify (inter alia):
(i) the nodes to which FTRs should be allocated;
(ii) the methodology for allocating FTRs to distribution companies and Transpower's direct connect off-take customers;
(iii) whether particular customers who pay for the sunk costs of specific assets should also be offered an allocation of FTRs relating to that asset;
(iv) the price, if any, to be paid for an FTR allocation;
(v) the hub or hubs (or a methodology for determining the hub or hubs) from which allocated FTRs will be defined;
(vi) a mechanism for approving the appointment of an agent by a distribution company;
(vii) model approaches for passing through rental-related and FTR-related cash flows from distribution companies to the distribution companies' customers, retailers, and/or end users;
(viii) a process for deciding which FTRs allocated to distribution companies may or should be offered into the FTR auction, and a process for setting reserve prices. These processes should be consistent with the guiding principles for an FTR market, and in particular they should have due regard to promoting competition between retailers, and
to ensuring an efficient FTR auction;
(ix) the role, if any, of FTRs defined from generation nodes to a hub;
(x) a mechanism by which allocations may be adjusted in response to changing circumstances, such as new network investment;
(xi) the timing of the initial FTR allocation and auction; and
(xii) the way in which FTRs are used to facilitate new transmission investment.
20. After receiving advice from Transpower, including on whether an option or options are practicable, the FTR group should decide on an option that best meets the FTR policy framework and the guiding principles for the FTR market.
21. Transpower's existing design work on auction rules and contractual arrangements should be used unless the benefits from adopting an amended design outweigh the additional cost of developing that design.
22. The decision-making processes of the FTR group should be fully transparent to all interested parties.
23. The chairs of the FTR group and Transpower (or their representatives) should report to the Minister of Energy by 28 February 2003 on an agreed programme and timetable for the establishment of the FTR market. They should subsequently report to the Minister monthly on progress in achieving the programme and timetable, and on whether outcomes are consistent with the guiding principles for FTRs and the FTR policy framework.
24. The EGB, once established, should take over governance of rules covering FTR matters subject to the guiding principles and the FTR policy framework. If the governance arrangement provides for voting rights to be held by stakeholders, then those voting rights should be held by all interested parties including generators, retailers, distribution companies, Transpower, and large and small consumers. Neither generators and retailers, nor Transpower and distribution companies should collectively control more than 50% of the voting rights under any such governance arrangement.
25. In developing governance arrangements, the EGB should have due regard to the desirability of consistency between arrangements, including governance arrangements for FTRs and transmission pricing and investment.
26. In the period after the establishment of the FTR market, but before the EGB has taken over governance of FTR rules, bilateral participation contracts (which contain FTR market rules) between Transpower and market participants should provide for the FTR group to approve rule change proposals subject to the guiding principles for the FTR market and the FTR policy framework.
27. Transpower should be the arbiter of whether the terms and conditions of contracts, or any proposed rule changes are consistent with the guiding principle relating to Transpower's commercial risk (paragraph 7 above).
Signed at Wellington this 21st day of January 2003.
LIANNE DALZIEL, Minister of Commerce.