Attachment 1: Objectives and Principles for the Provision of Transmission Services
Background
1. The way in which transmission services are provided and priced impacts directly and indirectly on all parts of the electricity industry, the economy and the environment, including:
- the welfare of domestic consumers and the commercial viability and competitiveness of businesses;
- competition among and investment by suppliers of electricity services, including traditional suppliers such as electricity generators and alternative suppliers such as demand-side management including energy efficiency and load management, co-generation, and distributed generation; and
- the quality and sustainability of the environment.
2. Transmission has strong natural monopoly characteristics, which makes it important that the Government set out its policy expectations as to how transmission services should be provided and priced and how Transpower should operate. For example, poorly designed policies may encourage inefficient investment in generation, which would waste scarce capital resources and harm the environment.
3. The Government's expectations in this regard are specified in the objectives and principles for the provision and pricing of transmission services set out in this Policy Statement.
Objectives for the Provision of Transmission Services
4. The Government's objectives for the provision of transmission services are that:
- the services are provided in a manner consistent with the Government's policy objective - to ensure that electricity is delivered in an efficient, fair, reliable and environmentally sustainable manner to all classes of consumer;
- the services should be provided at the standards of quality and security required by grid users through a process of agreement with those users, or the Electricity Governance Board ("the Governance Board") on behalf of users;
- the efficiency of transmission services should be continuously improved so as to produce the services users want at least cost; and
- the services are priced in a manner that:
- is transparent;
- fully reflects their costs including risk;
- facilitates nationally efficient supply, delivery and use of electricity;
- promotes efficient use of Transpower's resources; and
- promotes nationally efficient use of transmission services by grid users and so facilitates efficient resource use.
Responsibilities of Transpower
5. Transpower's Board is responsible for determining Transpower's Statement of Corporate Intent (SCI) in consultation with shareholding Ministers on behalf of the Government as owner. The Government expects that the SCI will be consistent with the Government's objectives (see above) for the provision of transmission services.
6. Transpower's SCI will also set the key determinants of the overall revenue requirements for Transpower. As owner of Transpower, the Government expects Transpower to recover the full economic costs of its services, including a fair return to shareholders based on commercially acceptable principles for their investment in the transmission system.
7. Transpower's overall revenue requirements, in common with those for the distribution sector, should be achieved within the constraints of the Government's regulatory framework for lines.
8. Transpower will be responsible for developing the transmission pricing methodology consistent with the objectives and principles for the provision of transmission services outlined in this document. The Governance Board should ensure that consistency with the objectives and principles has been achieved.
Responsibilities of the Governance Board
9. The Governance Board will have a number of responsibilities in relation to Transpower and all users of the grid. These include:
- ensuring that Transpower's pricing methodology conforms to the objectives and principles for the provision of transmission services, and that Transpower and Transpower's customers comply with that pricing methodology;
- ensuring that transmission charges established consistent with the methodology are enforceable on the same basis as other rules set by the Electricity Governance Board;
- determining the standards of common quality and minimum real-time security required from the grid through a process of agreement between grid users and Transpower;
- ensuring that Transpower and all users of the grid comply with those standards; and
- ensuring that Transpower complies with the Government's principles for system expansion and replacement (see below).
10. The Governance Board may also make recommendations from time to time to the Government (as Transpower's owner) on any services provided by Transpower that could be made contestable in the interests of efficiency.
11. The Government expects that the Governance Board will undertake these responsibilities in a manner that is consistent with the Government's objectives for the provision of transmission services (see above).
12. The Government also expects that the Governance Board, as part of its annual report to the Government, will report on the extent to which those objectives are being complied with, and on how (if at all) those objectives could be better met.
13. As a safeguard in case the Governance Board and Transpower are unable to agree on a satisfactory transmission pricing methodology, the Government proposes that a provision be included in legislation to ensure that the Government can empower the Commerce Commission to determine the transmission methodology. If the transmission methodology is established by the Commission, Transpower's charges would be recoverable as a debt.
Principles for the Provision of Transmission Services
Cost Recovery and Pricing Principles
14. The Government expects transmission services to be priced efficiently, and to this end:
- Transpower should take into account the cost of transmission losses when planning maintenance;
- after allowing for financial losses and costs properly chargeable to the shareholder, Transpower's charges should recover the full economic costs of its services;
- the costs of connection should as far as possible be allocated on a user pays basis;
- the pricing of new and replacement investments in the grid should provide grid users with strong incentives to identify least cost investment options, including energy efficiency and demand management options;
- pricing for new entrants should provide clear locational signals;
- sunk costs should be allocated in a way that minimises distortions to production/consumption and investment decisions made by grid users; and
- the overall pricing structure should include a variable element that reflects the marginal costs of supply in order to provide an incentive to minimise network constraints.
System Expansion and Replacement Principles
15. To ensure investment efficiency, it should be left to industry participants, wherever possible, to make investment decisions that benefit grid users (in terms of increased security and reliability and/or lower costs from losses and constraints). The industry should be encouraged to evaluate alternatives to grid expansion and replacement, such as distributed generation and demand-side solutions.
16. To assist in the application of this principle, Transpower should produce annually a rolling five-year Statement of Investment Opportunities in relation to forecasts of medium term system adequacy. The Statement of Investment Opportunities will assist grid users to identify opportunities for generation (including distributed generation) and demand-side management (including energy efficiency and load management), and to determine whether these are more appropriate than further investment in the grid by Transpower.
17. In addition to those circumstances where Transpower and grid users have voluntarily agreed, grid expansion and replacement should take place where the Governance Board is satisfied that:
- the costs arising from (a) grid constraints and (b) risks relating to security exceed the costs of relieving those constraints and risks through investment in the grid; and
- alternative responses by industry participants and/or grid users (such as distributed generation and demand-side management) are not and are unlikely to be adequate to resolve the issue.
18. Where the Governance Board concludes that investment by Transpower is necessary, the cost of that investment should be recoverable by Transpower in accordance with the pricing methodology determined by Transpower and agreed with the Governance Board.
Implementation Guidelines
19. The following guidelines are to be considered when applying the above principles:
- where the principles conflict, those conflicts should be resolved in a manner that is most consistent with the Government's energy policy objectives; and
- the application of the principles should take into account practical considerations, transaction costs and the desirability of consistency and certainty.
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