3. Submissions
Introduction
3.1 Genesis makes the following submissions in relation to the proposed draft Part F Rules and the particular issues which comments have been sought on in the Discussion Paper. In addition, we set out in Annexure A particular drafting changes proposed for the draft Part F Rules.
Balance of Input into Rule Making Process and Review of Rules
3.2 The current proposed draft Part F Rules do not provide for adequate industry consultation in all areas. In particular, the provisions of Section II in relation to the form of and counterparties to agreements with Transpower merely state that Transpower "may" consult with other participants in relation to the structure of these agreements, and even where there is such consultation there is no requirement for the Board to consider the result of this consultation. There are other specific areas where industry consultation should be required as noted in our comments on the particular matters which input has been sought on.
3.3 In addition, even where the draft Part F Rules require that the Board consult with industry participants, the test of who the Board should consult with is subjective with the Board only being required to consult those persons "that the Board thinks are representative of the interests of persons likely to be substantially affected". There should be a more substantive objective test imposed on the Board to determine who in fact are the appropriate people to consult with on these matters.
3.4 No provision is made to allow affected parties to request a review of benchmark agreements or transmission pricing methodology. Genesis submits that affected industry participants should be entitled to request a review of these factors where appropriate in light of the design principles behind the form of the agreements and/or methodology as is provided in relation to review of grid reliability standards and the grid economic test.
3.5 Genesis submits that adequate consultation with and empowerment of industry participants is fundamental to achieving the principles stated to be behind the design of the Part F Rules, particularly the principles that decisions should focus on the long term interests of the ultimate users and beneficiaries of the transmission system and that the provisions should encourage regulatory certainty to support stable commercial decision making. This consultation and empowerment will substantially assist with the Board making informed decisions, determinations and reviews of appropriate rules.
3.6 In order to enhance the outcomes of the Part F Rules, further input from industry participants should be sought to better complete the information upon which decisions are made, particularly in determining the incentives and likely behaviour of those industry participants. To achieve this, and the stated design principles of the Part F Rules, Genesis suggests that consultation with affected industry participants be mandatory and all appropriate areas of Part F and that the Board be required to consider the results and reasoning of such consultation. In addition, the question of who should be consulted should have an objective focus to ensure the relevant parties are sought out for consultation. Industry participants should also have the right to request reviews of determined principles where circumstances relevant to the design principles change.
Comment on Whether the Distinction between Reliability and Economic Investment is Appropriate
3.7 Genesis considers the distinction between reliability and economic investments is appropriate and believes it will allow the establishment of a workable and practical starting point for investment in the grid. Once the first statement of opportunities for transmission and transmission alternatives ("SOO") and grid augmentation plan have been established and the industry has had the opportunity to review the outcomes from this process, then the distinction between reliability and economic investment may require revisiting.
Comment on the Proposals for Grid Reliability Standards
3.8 Workable reliability standards need to reflect an acceptable level of spare capacity on transmission assets after demand growth has occurred over time. A clearly identifiable point must be established to determine where limited capacity is required to be redressed by grid investment.
3.9 Genesis does not believe that the N-k measure on its own will achieve the appropriate investment signals intended to be provided by the reliability standards. We note that Transpower outlined in its earlier submission on Part F provisions that an N-k method would only drive investment in spur lines. The standards must clearly provide that the required level of spare capacity is to be present after the N-k contingent event has occurred.
3.10 N-k is an accepted method for operating within reliability standards given a set of transmission and generation assets and can also be used as a performance indicator to determine whether the grid operator has operated the assets within the reliability standard. However, the reliability standards also need to cover off other issues including the work from the transport working group on standards for connecting to Transpower's grid. In this context we also note that it may be more appropriate to refer to "grid capability standards" rather than the narrower term "grid reliability standards".
Comment on the Proposed Process to Enable Cost - Reliability Trade-Offs to be Considered
3.11Genesis believes that the process for cost - reliability tradeoffs is an appropriate starting point for the grid rules. It will allow end users to make a choice between the standard reliability standards or increased/reduced reliability when required while having an appropriate set of checks and balances to protect other connected parties.
Comment on the Grid Economic Test Objectives
3.12 At a high level Genesis agrees with the objectives outlined for the economic test as defined in section lll rule 6.4. However, we have concerns in relation to the likely outcomes from the economic test in respect of the benefits of transmission alternatives. While paragraph 72 of the Discussion Paper correctly outlines the concept of the transmission alternatives "national benefit" and the fact that this national benefit rather than the market benefit should be used in the economic test for transmission alternatives, no mechanism exists for the investor to capture such benefits. The failure to capture all or part of these benefits is likely to result in fewer alternatives being put forward and therefore grid investment at a higher price than could have been achieved with transmission alternatives. This could lead to gold plating of transmission investments.
Comment on Grid Economic Test as Proposed in Appendix 2 of the Discussion Paper and Part F section III Rule 6.4.2
3.13 Genesis has some concerns with the use of net present value in the objectives for developing the economic test as it does not consider the uncertainty of the grid outcomes. For example it would not capture the real effects of constraints or outages. Which means the grid economic test could undervalue the market benefits. One alternative approach the EC could consider is the use of a real option valuation. This approach was used for the Bass Link in Australia.
Comment on the Proposed Role for Contracted Investments
3.14 The contracted grid investment rules may be appropriate as initial rules in this area. However, care must be taken to ensure that end user concerns on price and reliability are met by the rules in relation to increased/reduced reliability standards.
3.15 Comment on the proposed criteria for determining contract structures and counter parties, and the suggested process for the Electricity Commission to resolve this issue if industry cannot
3.16 It is Genesis' opinion that there should be separate Connections and Use of System agreements. This will allow all participants (lines companies, generators, direct connected load and retailers) to be contracted counterparties of Transpower and the beneficiaries of the grid reliability rules. This separation of contracts also has the benefit of leading to the separation of the contestable System Operator role from the monopoly Asset owner role. We note that this approach impacts on the pricing methodology that would be required and we comment on this issue in paragraph 3.34.
3.17 Genesis believes it is appropriate for the industry to be given the opportunity to resolve the issue of contract structure and that the process detailed in rule 2.1.2 section ll is appropriate should an industry resolution not be obtained.
Comment on the Proposed Principles to be Considered by the Electricity Commission in Approving Benchmark Agreements
3.18 The principles outlined in paragraph 100 of the Discussion Paper are generally appropriate. Genesis notes that the EC should be careful to consider the interests of end use customers and appropriate outcomes to alleviate the effect of the negotiation power Transpower holds through its monopoly market position.
Comment on the Proposal there be no Distinction between Core and Peripheral Assets in the Part F Rules
3.19 Genesis supports the concept that there is no distinction between core and peripheral transmission assets. This conceptually spreads the burden of cost recovery for investment in more peripheral assets across all users and is practically achieved through the utilisation of separate use of system agreements and connection agreements. Paragraph 3.34 details this matter further.
Comment on the Matters that should be Subject to Dispute Resolution; whether the Rulings Panel Established Under the Electricity Governance Regulations Could be Expanded to Include Matters Arising Under Part F
3.20 Genesis would support the utilisation of the Rulings Panel body to determine disputes between Transpower and its potential counterparties prior to and/or during the negotiation of the terms of the contract between these parties. However, once a contract has been entered into between the relevant parties the disputes resolution provisions within the relevant contract should be employed in the same manner as any other commercial contract.
3.21 We note that the current wording of section II rule 5 of the draft Part F Rules refers to the parties consulting with the Board and it is not clear whether such consultation is intended to be a less formal facilitation mechanism separate to invoking any specific dispute resolution mechanism generally provided for under the regulations or whether the Board may only be involved in such matters through the invoking of the formal dispute resolution provisions to be provided for in the regulations.
Comment on the Proposal for Publication of Contracts
3.22 Genesis supports the proposal to publish all contracts entered into with Transpower. This will assist to ensure that innovations developed in particular areas flow through to future contracts and aid the negotiation position of Transpower's counterparties which is appropriate and desirable given its monopoly market position.
Comment on the Proposal for a Statement of Opportunities for Transmission and Transmission Alternatives
3.23 The SOO is a fundamental cornerstone of Part F and Genesis supports this proposal. It will provide for a long term forecast of investment signals in relation to the grid reliability standards which is available to all participants. In addition it will provide Transpower with sufficient lead time to plan investments and obtain, or enter into, necessary statutory consents and contractual arrangements. We note that it is appropriate that industry participants are consulted during the preparation of the supply forecast prior to the publication of the first SOO and Genesis would like to be involved in such consultation.
Comment on the Interaction of the System Security Forecast and the Statement of Opportunities
3.24 Genesis sees the system security forecast ("SSF") and the SOO as performing different but equally important roles. The SSF is more focused on how Transpower will meet its principal performance obligation utilising a given set of Transmission and Generation assets while the SOO is focused on long term reliability.
Comment on the Proposed Principles for Statement of Opportunities Demand and Supply Forecasts
3.25 Genesis considers that the order of section IV of the draft Part F Rules for establishing SOO, a centralised data set and grid augmentation plan is out of sequence and rather disjointed. It is more appropriate to provide for establishment and consultation on a centralised data set first to establish supply and demand forecasts (rule 5.) Section IV rule 5 should therefore be amended so that it forms a subset of the centralised data set rules. Once a centralised data set is agreed this can then be utilised to determine the SOO and then flow through to the grid augmentation plan. The drafting order of section IV rule 3.1 may also need to be amended to account for this more natural order of events.
Comment on the Proposed Obligations on the Electricity Commission to Ensure Establishment of a Central Data Set
3.26 Genesis considers the establishment of a publicly available centralised data set appropriate. For the centralised data set to support the SOO the data set must be accurate, complete and list all underlying assumptions in detail. Genesis would like clarification as to whether this data set would sit alongside or be included as part of the "Energy Data File" (while being more forward looking).
Comment on the Purpose, and Processes for Consideration, Verification or Approval by the Electricity Commission of the Proposed Grid Augmentation Plan
3.27 In light of the high level of the Discussion Paper, the proposed process will be appropriate provided that an industry consultation step is included.
Comment on the Scope of the Grid Augmentation Plan
3.28 To assist the EC and end users to understand the proposed transmission investment, the grid augmentation plan should also include details of the benefits of the proposed investment. This should be to a level of detail which illustrates the spare capacity gained and the effect of demand eroding this capacity over time.
Comment on the Proposals for Verification and Amendment of Reliability Investments
3.29 Consultation with customers should occur at the outset where reliability standards are initially set and agreed in order to reduce the need for verification and amendment to reliability investments. However, even where provision is made for such initial consultation, it is likely that verification and amendment to reliability investments will be necessary to meet customers' preferred cost - reliability tradeoffs and these may change overtime. Accordingly it is prudent to provide for a process that allows such alterations.
Comment on the Proposals for Applying the Economic Test
3.30 Genesis submits that the proposals for applying the economic test seem appropriate once the process for formulating the economic test has been completed.
Comment on the Proposal that the Electricity Commission should be Responsible for Overseeing the Process of Application of the Economic Test
3.31 In principle Genesis believes that the EC should be responsible for overseeing the process of application of the economic test as very few customers would have the necessary skills or resources to consider these matters (as noted in the Discussion Paper). However, the rules should make provision to allow the customer to input to the application of the test should they wish to invest in resources to input on this matter (either internally or through external/professional advisors). For transparency of the process and determinations and to assist in any comparisons and audit processes, full details of the economic test and the results should be published.
Comment on the Proposal that Transpower Customers or Transpower May Call for a Public Conference. Is this Necessary? Are there Alternatives?
3.32 Genesis considers that a public conference should be a last resort mechanism. It is appropriate to provide an additional step in this process allowing for consultation with affected parties prior to any such public conference. We note that this consultation should not be at the EC's discretion if requested by Transpower or a Transpower customer.
Comment on the Proposed Rules for Determining Transpower's Pricing Methodology
3.33 Genesis considers it appropriate that a rule is inserted after Part F section V rule 1.2 which allows for a round of public consultation prior to the Board considering the proposed pricing methodology for approval.
3.34 Genesis' preference is that two types of benchmark agreements with Transpower are provided for under Part F section II rule 6, being agreements with Transpower for connection ("connection agreements") and agreements for the use of system ("use of system agreements"). Based on this contractual structure Genesis considers that the Board should include the following in its guidelines to be used by Transpower in preparing a methodology for allocating Transpower's allowed revenues to designated transmission customers (Part F section V rule 1.1):
- Charges associated with connection contracts are to be based on the assets at the point of connection and the ODV of these assets;
- Assets other than those at the point of connection are to be considered core grid assets; and
- Charges associated with a use of system agreement are to be a pro-rata share based on the user's share of total consumption.
3.35 Genesis believes that it is appropriate for the industry to be consulted further in relation to the Board's proposals in this area prior to those proposals taking effect.
Comment on the Approach to Rules Enabling FTRs
3.36 As noted in previous submissions in relation to the EGRs and the GPS, Genesis does not support the development or implementation of FTRs in the current New Zealand electricity market. As we have stated in our previous submissions, loss and constraint rentals are created through inefficiencies in the transmission system and mismatches between generation and transmission capacity and demand at particular points on the grid. Therefore, loss and constraint rentals are most appropriately invested in the grid where they are created, or in another manner which most efficiently reduces the amount of these rentals or transmission inefficiencies.
3.37 Genesis submits that loss and constraint rentals should be used to help fund new investment in the grid, reducing the source of the risk rather than providing an incomplete tool such as FTRs to mitigate or reallocate the risk. The access to these rentals for such investment should be controlled and administered by the EC, with opportunity for funding being available to generators and/or transmission service providers on a competitive basis. The EC should evaluate applications for access to these funds for new investment on their merits in light of the finalised reliability standards or the economic test as appropriate. In order to ensure the benefits of new investment are realised by end users, a condition could be imposed on any funding contribution for qualifying new generation investment that the generator must offer a specified volume of hedge cover at specified prices for a minimum period from bringing the new generation online.
3.38 If, despite the above concerns, the concept of FTRs is to continue Genesis makes the following comments on the current proposals and suggestions for a more desirable approach:
- The current FTR market design is unnecessarily complex, and the resulting products less useful, because of the approach Transpower has taken as market operator;
- By adopting a zero-risk policy, Transpower has constrained the market to operate in a more complex manner than is necessary;
- A far more effective, simple, and useful market could be developed with relative ease, where Transpower transfers the operation of transmission markets to an independent market-maker;
- If the loss and constraint rentals were transferred to the independent authority for settlement of FTRs, it would be up to the market maker to determine available volumes for each product along with the prices;
- An attractive approach would utilise FTR options, as this removes the two-sided characteristic of the current product. Participants would be able to manage their basis risk explicitly, for a known cost;
- This approach could give rise to situations where the loss and constraint rental is insufficient to cover the FTR settlement;
- By taking on some risk in exchange for the FTR option fees, the market-maker is compensated and can adjust their financial exposure via the posted option fees and spreads;
- This approach has additional liquidity benefits, as the market maker can set a buy price as well as a sell price, thus allowing the trade of a greater volume of FTRs than otherwise possible, and permitting participants to more accurately manage their exposure;
- The use of options is particularly attractive as it is relatively easy to construct complex hedge structures that represent optimal risk management for minimal cost;
- Some regulation would be necessary, in terms of market performance and sufficient distribution of loss and constraint rentals;
- A suitable market maker would be a bank with experience in commodity derivatives and operating exchanges, or an exchange operator with sufficient financial backing to support the operation;
- The exchange should be fully novated and anonymous, to remove counterparty risk and market dominance issues. Pricing and depth information should be readily available to participants, with trading preferably conducted on an electronic platform, in line with the rest of the industry.
Comments on the Proposals for Development and Implementation of the Draft Rules in the Immediate Term, and the Issues Proposed for Consideration in the Medium Term
3.39 Genesis believes the order of the proposed milestones outlined in Appendix 3 of the Discussion Paper is appropriate. We note however that the timeline is very tight and does not appear to allow for significant industry consultation. Genesis does support and acknowledge the need to address these issues in a timely manner to provide certainty for transmission and generation investment. We suggest that it would be appropriate to form industry working groups to address these issues and report to the EC in order to draw on existing expertise and ensure all appropriate information is considered in a timely manner.
Comments on whether there Are Merits in Considering a Probabilistic Approach to Determining Reliability Standards
3.40 Genesis does not support the use of a probabilistic approach to determining the reliability standards in the initial Part F Rules. Genesis believes that Transpower should be required to maintain its assets to the same standard as any other prudent asset owner. The reliability standards should concentrate on maintaining spare capacity and signals from lack of capacity to drive investment. These standards should not be based of the probability of assets failure. However, it may be appropriate to revisit this approach through industry consultation once the first SOO and grid augmentation plan have been approved and the industry better understands the outcomes of that approach.
Comment on the Proposals Regarding Prudent Discounts, and whether there Should be Express Provision for them in the Pricing Principles
3.41 The Discussion paper suggests (paras 211, 212) that if any part of the grid is clearly over-priced (i.e. over-invested), or under threat of bypass, Transpower should be able to make a (so-called) prudent discount to reflect the fact that the sunk investment must be discounted in the face of competition from an alternative. However, the Discussion paper also suggests (para 213) that the revenue forgone by Transpower through this discount should be recoverable from all other grid users. This latter concept is deeply offensive to the contestable/competitive market philosophy that has underpinned industry reform for more than a decade and is entirely inappropriate.
3.42 The aim of the regulatory framework is to replicate the outcomes of a competitive market albeit in a natural monopoly market. The competitive outcome where assets become redundant is to abandon those assets and suffer the economic consequences. In a competitive market there is no opportunity to then recover the cost from existing customers, and none should be offered in the regulated electricity industry.
3.43 If Transpower (or any network) is permitted to discount in one area and recover the revenue elsewhere, then it will be impossible for any alternative to be viable, thus suppressing the competitive outcome the EC is attempting to replicate. The recovery of revenue elsewhere is only possible because of the monopoly position of the network, and to do so is abuse of that monopoly position.
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