3. Specific Certification Issues
ERTU's Interim Certification Report, the Terms of Reference, discussions with Treasury and Waikato IDG's own work identified a number of tasks and issues to be addressed by Waikato IDG.
3.1 Key Tasks
The Terms of Reference for Waikato IDG specified key tasks to be carried out in the development phase. These fall into four categories:
- The Certification Report;
- Establishment of the new SOE and preparation for operations on 1 April 1999;
- Completion of the split and assumption of assets and liabilities; and
- Waikato SOE's relationships with other SOEs and third parties.
The current position on each of these categories of activity is as follows:
3.1.1 Certification Reports
Waikato IDG has prepared an Assessment of Environmental Effects, a Business Plan, an Operations Plan and an Organisational Development Plan. These documents are described later in this Certification Report.
Following any approval by the Government of this phase of the Reform Package on or about 15 December 1999 these documents will be used to steer the development of Waikato SOE to 1 April 1999 and beyond. No issues have arisen in preparing these documents that will materially affect the commercial viability or competitive position of Waikato SOE.
3.1.2 Establishment of the New SOE and Preparation for Operations
Waikato IDG has appointed appropriate advisors - financial, legal, information technology, human resources and corporate communications to assist with preparing for full operation. Preparations are continuing to plan and to timetable.
The initial name of the company will be Waikato SOE Limited. This name may be changed in due course. The principal operating activities of Waikato SOE will continue to be managed from the existing office of Northern Generation in Hamilton. In addition, Waikato SOE will establish a corporate support office in Auckland.
Waikato IDG has established an information technology transition project team. The team is responsible for planning for and managing transition and implementation of required information technology systems. The team is on target and no operational issues have been identified which could affect operational capability on 1 April 1999.
3.1.3Completion of the Split and Assumption of Assets and Liabilities
Split Agreements
Several agreements will need to be signed which will take effect on 1 April 1999. These include the Agreement for Sale and Purchase with ECNZ, an Intellectual Property Agreement with ECNZ, an Offset Agreement relating to ECNZ hedge contracts (referred to in section 1.6 of this Certification Report) with ECNZ, Huntly SOE and South Island SOE, a Loan Agreement with ECNZ and a Transmission Services Agreement with Transpower. The form of each agreement has been substantially agreed with the relevant parties and each agreement will settle simultaneously on 1 April 1999.
Transfer of Existing Staff
Waikato IDG is working with ECNZ to achieve the transfer of Northern Generation staff onto new contracts of employment with substantially similar terms and conditions to existing contracts. A programme has been established to consult with staff to ensure that they are informed of the effect of the split on each person.
Material Contracts
One of Waikato IDG's key tasks is assisting ECNZ in obtaining any necessary counterparty consents to the transfer of material contracts and assets. The material contracts and assets identified are:
- Contracts concerning the Wayang Windu geothermal project in Indonesia;
- Contracts concerning the Tuaropaki Trust's Mokai geothermal project;
- The Tongariro Offset Works Agreement;
- The agreement between ECNZ and Contact Energy Limited regarding Wairakei Power Station; and
- The sponsorship agreement with the New Zealand Rowing Association.
The Tongariro Offset Works Agreement, the Wairakei Agreement and the Sponsorship Agreement are being novated to Waikato SOE. The form of the novations is currently being agreed with the Waikato Councils, Contact Energy Limited and the New Zealand Rowing Association respectively.
The contracts concerning Wayang Windu and Mokai involve the granting of consents by certain international banking syndicates and other counterparties and can only be granted when the banks have considered full financial information on Waikato SOE. This information will be finalised post 15 December 1998 and discussions and new relationship building will then start. Waikato IDG does not expect the process of achieving these consents to affect commercial viability or operational capacity.
3.1.4 Relationships with Other SOEs and Third Parties
Waikato IDG recognises the importance of establishing good working relationships now and in the future with other SOEs. Where necessary, Waikato IDG will enter into arrangements with other SOEs in a constructive manner. At all times Waikato SOE will have proper regard to its competitive position and to compliance with the Commerce Act. Waikato SOE's relationships with other third parties will continue to be fostered and developed.
ERTU has identified a number of key relationships for Waikato IDG to establish and maintain:
Tuwharetoa
The ECNZ/Tuwharetoa Heads of Agreement was signed in December 1997 to record the intention and commitment to establish an interactive, positive and balanced working relationship between the parties. In addition to addressing matters of mutual interest and an acknowledgment of and respect for the principles of the Treaty of Waitangi and te tino rangatiratanga of Ngati Tuwharetoa, the parties agreed to work together to consider the resource management consents being sought for the Tongariro Power Development (TPD) (Huntly SOE) and the Taupo Waikato project (Waikato SOE).
ECNZ undertook to provide financial support to the establishment and operation of a technical environment group (ESD) within the Tuwharetoa Maori Trust Board until the TPD and Taupo Waikato resource consent applications have been heard by the relevant authorities. The ESD is in its early stages of formation with one staff member having being appointed.
Waikato SOE and Huntly SOE have agreed a basis to share the costs under the Heads of Agreement and each will execute an agreement (substantially similar to the Heads of Agreement) under which it will agree to honour its own responsibilities and undertakings to the Tuwharetoa Maori Trust Board.
Tongariro Offset Works Agreement (TOWA)
The TOWA between ECNZ and the Waikato local authorities arose out of concerns about the possible adverse effects (raising water levels and lower Waikato flooding) of the extra water coming into the Waikato River from the Tongariro Power Development (TPD) (which was being proposed at the time) on the performance of the Lower Waikato Waipa Catchment Control Scheme.
The TOWA will be novated to Waikato SOE. It recognises that no ratepayer should receive fewer benefits from the control schemes than they would have received had the TPD not been established. If the TPD resulted in additional drainage and pumping costs to keep land in production, then the additional costs would be met by ECNZ. However, if it is not practicable to offset any detriment from the TPD by extra works, compensation is payable. The Agreement also aims to minimise the effects of increases in winter flows by keeping the Karapiro outflow on a more even basis.
Huntly SOE has reached an understanding with Waikato SOE that it will support the TOWA by:
- Agreeing to comply with relevant provisions of the TOWA and the Waikato Flood Rules; and
- Sharing costs under the TOWA and the Waikato Flood Rules with Waikato SOE.
Resources Shared with Other SOEs
As part of ECNZ's asset management process, technical services are provided by particular generation groups to the other generation groups. Non Destructive Testing and machine dynamics services are currently provided by Tongariro / Thermal Generation (Huntly SOE). Huntly IDG has confirmed that these services will continue to be available on an arms length basis after the split. Dam safety assurance services are currently provided by the Wellington based Generation Technical Specialists Group. A new company incorporating individuals from this group will be set up as a subsidiary of South Island SOE.
Waikato IDG proposes purchasing services from this new company and negotiations to achieve this are in progress. Other shared services, for example mechanical and electrical engineering services, are available in the open market and will be purchased on an as required basis.
A communications repeater situated between Ohaaki and Wairakei is used by both Northern Generation (Waikato SOE) and Tongariro/Thermal Generation (Huntly SOE). The cost of sharing this repeater (which is not owned by Northern Generation or Tongariro/Thermal Generation) will continue. Telemetry sites owned by NIWA around Lake Taupo are used by both Northern Generation and Tongariro/Thermal Generation. Waikato SOE will continue to use these sites on terms agreed with NIWA.
3.2 Treaty Issues
There are outstanding Treaty claims for the Waikato River and land in the vicinity of facilities at the Whakamaru Power Station. It is not expected that a settlement of these claims would have a significant effect on Waikato SOE due to the assurances of the Crown and the provisions of the SOE Act. There are a number of substantial claims over TPD assets (Huntly SOE) disputing the acquisition and use of lands, notably Lake Rotoaira, which could affect inflows to Waikato SOE if not resolved satisfactorily. However this effect will not be material to the commercial viability of Waikato SOE.
3.3 Security of Supply
Generators have commercial incentives to manage their fuel (water, gas, coal, etc) prudently and to have regard for dry year risks. As a predominantly hydro generator Waikato SOE is dependant on catchment inflows of water and will therefore need to assess and manage its revenue risks with a different perspective from ECNZ which had a more varied generation portfolio.
Selling fixed price contracts will give Waikato SOE a degree of revenue stability. However, this revenue stability will mean that if Waikato SOE is unable to generate sufficient electricity at times when spot prices are high, for example in a dry year, it could face significant financial consequences. Waikato SOE will therefore have a substantial economic incentive to manage its resources carefully to avoid such consequences.
Waikato SOE accepts responsibility for assessing and managing these risks and acknowledges that as a result of statutory changes the Government has no responsibility to provide security of supply or to give guarantees of supply to retailers or end users. Customers of Waikato SOE will also need to manage their own risks.
3.4 Year 2000 Issues
Waikato IDG has reviewed Year 2000 (Y2K) issues. Although ECNZ is providing no guarantee or warranty on Y2K compliance, Waikato IDG is satisfied that ECNZ's Y2K program is properly resourced and well run. Waikato IDG based on its own enquiries and assurances from its information technology advisors is satisfied that new IT systems will be Y2K compliant when they are commissioned by Waikato SOE and that existing systems will also be Y2K compliant.
3.5 Conclusion
It is Waikato IDG's view that all the above tasks and issues have been addressed or are in progress to the extent that none is likely to present any impediment to Certification or to achievement of the objectives of the Government's reform package.
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