Appendix One: Financial Transmission Rights
Introduction
1. Under marginal cost nodal pricing, different locations experience different prices caused by transmission losses and constraints.
2. 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.
3. The Government's expectations in relation to FTRs are specified below.
Guiding Principles for an FTR Market
4. Realistic long term risk management mechanisms must be made available to end users and to competing retailers.
5. 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.
6. 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.
7. Pragmatic solutions must be developed which are implementable and endurable.
8. Transpower should not be required to take on commercial risk as a result of FTR arrangements without the agreement of Transpower's Board.
9. The design of FTR arrangements should mitigate and manage risk to distribution companies.
FTR Policy Framework
10. Transpower should continue to receive loss and constraint rentals, and should use the rentals to fund an FTR product.
11. A market for short to medium term FTRs should be introduced covering the interconnected grid (with or without spur lines).
12. 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.12 If a distribution company prefers that its allocation be given to an agent appointed by the distribution company and approved by the Electricity Commission, Transpower should allocate the relevant FTRs to the agent.13FTR recipients should be able to refuse an allocation.
13. 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 Electricity Commission. 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.
14. 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 those that pay Transpower's charges for sunk and new investments.
15. 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.
16. Distribution companies should be able to recover reasonable costs relating to their role under this policy statement.
Design Issues
17. Design options considered by the Commission should specify (inter alia):
- The nodes to which FTRs should be allocated;
- The methodology for offering an allocation of FTRs to distribution companies and Transpower's direct connect off-take customers;
- Whether particular customers who pay for the sunk costs of specific assets should also be offered an allocation of FTRs relating to that asset;
- The price, if any, to be paid for an FTR allocation;
- The hub or hubs (or a methodology for determining the hub or hubs) from which allocated FTRs will be defined;
- A mechanism for approving the appointment of an agent by a distribution company;
- Methodologies for passing through rental-related and FTR-related cash flows from distribution companies to the distribution companies' customers, retailers, and/or end users;
- 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;
- The role, if any, of FTRs defined from generation nodes to a hub;
- A mechanism by which allocations may be adjusted in response to changing circumstances, such as new network investment;
- The timing of the initial FTR allocation and auction; and
- The way in which FTRs are used to facilitate new transmission investment.
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