Meridian Energy Limited - Appendix 1

Again, these provisions should be set out in the regulations rather than as rules.

The use of system agreement should be a contract about delivered energy (excluding common quality). The quality aspects of delivered energy are covered by Part C and do not need to be repeated in agreements that result from Part F.

Publication of determination should occur under 2.1.1.3 also.

Amend accordingly.

Contracted arrangements should establish a level playing field, and should not discriminate between participants in the same class;

Ensure a balance of efficiency and complexity. For example, some parties might argue that retailers would be a suitable counterparty, but the complexities that might result from excessive customer churn and the data/load information required to calculate monthly invoices might make this impracticable;

Risk should be allocated to parties best able to manage it.

There should be a provision stating that the Board has the primary responsibility to determine the designated transmission customers. We suggest that rule 2.2.1.3 and 2.2.2 should be amended to include such a provision.

We think that the rules need to be redrafted so that:

the Board determines the designated transmission customers;

in doing so, the Board will have regard to the criteria in 2.2.2.4 (the Board should also have regard to its principal objectives and specific outcomes);

the outcomes of Transpower's consultation round in rule 2.2.1 should be a factor but not the only factor which the Board should consider in making its determination.

This is consistent with the GPS (see para 7).

this mechanism is flexible and should therefore encourage efficiency (see para 65 of the draft GPS).

it allows for customer choice to be reflected in contracts (see para 66 of the draft GPS).

it also allows the parties to have some influence over the outcomes and have some confidence that the outcomes would be fair. Thus, it encourages investment (see para 65 of the draft GPS).

In order to meet the goals in the Bill, there must be genuine negotiation. Without the appropriate regulatory incentives, Transpower is likely to be risk adverse and would dictate the terms and conditions for connection and use (as it currently does). Meridian's experience indicates that Transpower's customers have no leverage to negotiate a more balanced contract.

Currently, Transpower's posted terms are substantially similar to its standard terms. This means that Transpower has little incentive to date to enter into negotiated agreements with its customers because it is able to impose posted terms. Given that there are no acceptable alternative to Transpower, customers are forced to accept Transpower's terms of connection.

Given that the parties are compelled to contract under the rules or risk being in breach of the rules, the only way to make this regime work is to ensure that:

the default agreement provides the right incentives for Transpower to engage in genuine negotiations (see below); and

there are effective independent dispute resolution/arbitration procedures.

It is imperative that the benchmark agreements do not simply reflect Transpower's current terms for connection and use. The Board should, independently of Transpower, be accountable for determining the terms and conditions of the benchmark agreement and not simply engage or delegate the task to Transpower.

Meridian considers that rule 5 could go further to provide that failing agreement on all or part of the terms and conditions, the parties will be able to submit the matters in question to an expert panel of arbitrators to determine in an expedited arbitration process. The rules should spell out the process involved.

We note that section III makes no reference to incorporating the benchmark agreements.

If the parties' respective bargaining positions were equal, Transpower as grid owner, on the one hand, may be required to meet certain performance standards and its failure to deliver would lead to appropriate penalties being paid to its customers. Customers' primary obligations, on the other hand, are to meet its payment obligations.

Currently, there are no performance levels defined in Transpower's terms and conditions for connection (with the exception of the Tiwai Point Connection Contract). The risk of Transpower's non-performance or deficient performance is borne by customers with no compensation being paid by Transpower if it fails to perform. Additionally, the level of any liability Transpower may be exposed to is limited. Transpower's customer must pay connection charges regardless of non-performance or deficient performance by Transpower or risk being disconnected by Transpower (as it is entitled to do under its connection contract).

Against this background, Meridian considers that the rules should redress the imbalance in negotiating position to allow for a level playing field.

an allocation of risk which allows risk to be borne by parties best placed to manage those risks;

a limitation of liability for each party which reflects the risk allocation;

terms which are mutually applicable to each (to the extent practicable) and not one sided in favour of Transpower;

services provided must be defined with appropriate penalties for non-performance;

a requirement to pay "undisputed invoices" only;

the principle that the EGRs should not be reflected in contracts, e.g. System Operator requirements are a Part C matter and should not "creep" into these agreements; and

an obligation on parties to cooperate to coordinate operational and technical matters (e.g. transmission outages affecting the operation of plant must be agreed between parties, rather than Transpower unilaterally taking plant out with no consultation).

Meridian considers that the service definitions etc referred to in this rule should reflect the nature of the transmission services concerned ie connection or use.

A requirement of this process should be that service definitions reflect the services in question (connection and usage).

If a set of service definitions and service measures are created, and Transpower agrees that this set is a practical set, why must there be agreement of both Transpower and the customer? Surely, the customer should be able to chose the services it wishes to receive, with any disagreements (on practical issues only) resolved with the assistance of the Board.

Note the government's policy objectives for transmission which states that services should be provided at standards of quality and security required by grid users (see para 66 of the draft GPS).

"Where agreement can not be reached, the Board under rule 5 will provide assistance to facilitate commercial resolution of outstanding issues."

"... described in a benchmark agreement or agreements entered into under rule 3.1.1 for a particular grid ..."

Is the agreement of all designated transmission customers (as a block) at the particular GXP/GIP necessary to vary the services at any one point of connection? What about customers at other GXP/GIP that are also affected? Ideally, only the agreement of "affected designated transmission customers" should be sought.

However, how will the Board determine who are "affected end use customers"? Will this be based on a change in price paid, actual service received or another measure?

What process will be used to identify affected customers, will they be notified? What happens if a customer thinks it is affected but is not "identified" by Transpower or the designated transmission customer? Will appeals be heard, if so by whom? How much notice will parties have to work out whether they are affected?

Amend 4.1.1 to read (replacing "end use"):

"... consulted with affected designated transmission customers in relation to ... "

Suggest amend the rules to include a process to ensure affected customers will be appropriately identified. See for example the EGEC rulebook Part F Section II rule 2.1.3 (identifies customers), rule 3.3 (specifies how parties can vote on whether they are happy or not with the proposed change) and rule 3.5 (appeals).

One way of reading the rules is that as soon as the benchmark agreement is determined by the Board it immediately replaces any existing agreement between Transpower and its customers before any negotiation can be commenced. This could mean that 3 contracts govern the relationship between Transpower and its customer in very close succession - existing, benchmark, negotiated. Suggest that some timeframe is provided for negotiation before the default is imposed - perhaps two months. This assumes that the existing agreement is not one that has been notified to the Board under rule 7.

Meridian considers that the default agreement should not be too prescriptive so as to become unreasonable. As mentioned earlier, the default agreement should provide the right environment for the parties to negotiate and should therefore be sufficiently general, flexible and carefully balanced.

"The benchmark agreement should include the following:

an obligation on parties to maintain and operate all equipment that is part of their facilities in accordance with: relevant laws

the requirements of these rules (including obligations on designated transmission customers to provide information to facilitate system planning, as set out in rule 3.3 of section IV);

good electricity industry practice and applicable New Zealand standards;

prices consistent with the price methodology approved by the Board under section V, unless the parties agree otherwise; and

a dispute resolution process."

that risk should be allocated to parties best able to manage it;

terms which are sufficiently general and flexible to encourage parties to negotiate.

It is critical that the terms of the benchmark agreement encourage the parties to engage. While the terms should be balanced and reasonable, it should not be so prescriptive so as to be unreasonable.

New "6.3.1.5 risk should be allocated to parties best able to manage it;"

New "6.3.1.6 terms which are sufficiently general and flexible to encourage parties to negotiate."

"grid reliability standards or rules contained elsewhere in the Electricity Governance Regulations and Rules."

Grid reliability standards should be regionally agreed by connected/affected parties.

Publication of all contracts is likely to lead to increased standardisation of contracts, may raise commercial sensitivity issues and may result in contracts which don't reflect customer preferences.

Meridian's experience in negotiating with Transpower provides an indication of Transpower's unwillingness to deviate from standard terms (which are weighted in favour of Transpower) on the grounds that it would be required to disclose such contracts under the information disclosure rules.

Concern that Transpower may elect to contract away from "standard" could be mitigated with a requirement that all contracts must be disclosed to the Board, with terms other than "prescribed terms" being able to be withheld on the grounds of commercial confidence.

promote the statutory objectives of the Board

promote informed decisions [by whom?] in relation to common grid services

"...investment decisions by generators, transmission providers, distribution companies and end use customers".

This consultation would not remove the obligation of the Electricity Commission to consult.

It is unclear from the drafting if customers' preferred cost and reliability trade-offs are required to be reflected in the establishment of the initial reliability standards. The need to reflect customer preferences appears to only allow customer preferences to be considered in any rule changes after the standards have been established.

If so, this is inconsistent with the existing section 172E(2)(c)(v) of the Act. Note that the requirement that rules must reflect customer preferences has been deleted from the Electricity and Gas Industries Bill. While the draft GPS appears to preserve the need for services to reflect customer preferences "as determined by" the Board and reflects cost-quality tradeoffs (see para 66), rule 5.2 only requires the standards to be consistent with the GPS "to the extent practicable".

Meridian considers that the reliability standards should take account of economic considerations and customer preferences. An n-1 type investment confers a wide discretion on Transpower and risk over investment. As an aside, a nationwide application of (n-1) is unlikely to be practicable, let alone economic. Different security standards may currently apply in different regions, and for larger cities security levels greater than n-1 might be considered appropriate.

At the recent Transpower Forum, Transpower indicated that there would be $1.5billion of investments to be made on the grid until 2010 and that these were all reliability investments.

Rule 5.1 could be redrafted to subject the standards developed by Transpower to economic considerations and to clarify that the Board should ensure that the standards reflect customer preferences.

The need for economic consideration to come into play in determining reliability investments is illustrated in our cover letter to this submission.

In the first example, there are 3 possible options to solve the Thames Valley problem. Transpower's solution is to invest in a 45-53 MW line to meet an n-1 standard (referred to in the Transpower Forum). However, as an example, Meridian proposes three alternative options to this reliability investment, which may be more economic and which may sufficiently address the overload problem.

The second example is an illustration of a current "n" security. An economic test should apply before making an "n-1" investment, otherwise what would the residents of Kaitaia in this example be prepared or required to pay for a higher level of reliability?

In the third example, adequate security could be provided by a local generation station without the need to make a reliability investment.

Principles should include "reflect interests of connected parties" including generators, and distributors and not solely end use customers.

The reference to "costs" in 5.2.1 is vague. It should include both the cost of investment to provide reliability, and the costs of unreliability.

The flexibility provided by 5.2.5 is desirable, but should refer to variations in circumstances, as well as to changes over time.

Also, reference should be to good industry practice rather than industry best practice.

Substitute "good industry practice" for "industry best practice".

Transpower must be encouraged to become more flexible on the line ratings used on their circuits. Currently, they use a winter rating for 5 months of the year and summer nights, and they use a summer rating during the days for 7 months. Significant capacity could be unlocked for both reliability and economic enhancements by moving to monthly, weekly or even dynamic line ratings. The current ratings tend to be around the worst case limits for each of these periods. Transpower tend to operate religiously to these limits even though they are only a guess and the worse cast limit over such a large timeframe. By moving to more variable line ratings is considered relatively easy and quick win that will assist in grid capacity in the short to medium term. The commission should require Transpower to implement such changes.

What would happen if Transpower and the customer disagree as to what standards would apply to a customer? The rules should be clear that any failure to agree would led into the dispute resolution process referred to in section II.

Amend to ensure dispute resolution process outlined in Section II applies to the process outlined in 5.4.

This provision is good but seems to apply only to the revision of "standards", rather than to their application in specific cases. But the boundary is unclear. If the consumers of Westport, say, wish to receive lower reliability at a lower cost, they could apply for a review of some "standard for moderate sized towns in relatively remote locations". But what they probably want is a variation in their particular circumstance, and it is not clear that they have right to apply for this.

The Board should (at least) be able to decline to review on the grounds that such a review would be trivial, vexatious. Also, need to manage the frequency of such reviews. If the reviews become too frequent it will remove any investment certainty provided by this process.

Please clarify.

Amend accordingly to

give the Board the option to decline a review on the grounds a review would be trivial or vexatious;

enable the Board to manage the frequency of these reviews

This section seems to relate to a whole process, rather than just a "test". More importantly we believe that 6.1 is wrong to suggest that this test should only be applied to "investments that are not justified by applying the grid reliability standards", because:

First, consideration of quite small examples suggests that the distinction will be quite unworkable in practice,

Second, the distinction, even if workable, is inherently undesirable, and.

Third, it would appear from the recent Transpower Forum that Transpower considers that 100% of the $1.5bn investment they state is required by 2010 would be categorised as reliability investments. This assertion must be tested by the Board.

Instead, the "economic test" should:

Include consideration of reliability benefits, at the economic values which should be implicit in the definition of reliability standards (see III-5.1 above), and

Make explicit allowance for payments received under any associated contracts, and

Be applied to all projects.

Development of such a test is discussed elsewhere.

The final phrase of 6.2 should be deleted.

A reliability standard of an appropriate form should be agreed;

A corresponding benchmark plan should be developed;

A process should be instituted to vet that plan, and to attract proposals to modify that plan based on economic and/or commercial considerations; and

An economic test should be established to facilitate the evaluation of those alternative proposals.

Conforming with the principle of non discrimination;

Maximising the total net benefits of the proposed transmission investment to all those who produce, distribute and consume electricity;

Consistency with rules relating to financial transmission rights.

It is unclear how the transmission investments generally will be contracted for. Currently, the terms of the new investments differ from the terms for connection and use, but the rules only deal with terms and conditions for the latter. At the moment New Investment Agreements mainly cover the payment of transmission charges. It may be appropriate to retain payment provisions here for contracted investments. However, the NIA should outline what Transpower is required to do with regard the investment and by when.

What is the relevance of the grid economic test to contracted investments? If a party is prepared to contract should the Board be concerned, provided grid reliability standards are being met.

Para 117 states "The Electricity Commission would be responsible for overseeing and approving preparation of the SOO."

Para 119 states "Initially it is envisaged that the Electricity Commission would contract Transpower to prepare the SOO (or most elements of the SOO) according to a methodology consulted on and approved by the Electricity Commission. This approach reflects the fact that Transpower presently has the detailed information to enable preparation of the SOO."

"The statement of opportunities should be transparent and provided in a timely manner for information only. ..."

"the statement of opportunities should aim to meet the legitimate and reasonable commercial requirements of ..."

Information provided in 6.4.2 should be subject to confidentiality provisions.

What is meant by "planned plant requirements" in 6.4.3?

Suggest 6.4.5 provides for regional demand curves.

The rules should make it clear that Transpower is also required to disclose information for the centralised data set, e.g. existing line ratings, ages etc.

This dataset should include a number of scenarios with respect to some of these items.

Amend 6.4.5 to say "regional demand curves for assessing scenarios and sensitivities"

Assume phrase "transmission investment" is being used here generically to cover replacement, expansion and so forth?

There is a grammatical problem in 7.1.2, and it is unclear which rules are being referred to. Probably not those referred to in the immediately preceding para.

7.2.1.2 see comment on 7.1.1.1

Again, we consider that the whole structure of 7.2.2 presumes an ability to make distinctions which will prove unsustainable. Partly as a result, the relationship between the sub-clauses seems unclear.

In 7.2.2.1 the Board must verify that proposed "reliability" investments are necessary to meet the standards, but oddly does not need to verify that they are sufficient to meet the standards.

Then, the intent of 7.2.2.2 seems laudable, but is it compatible with 7.2.2.1? Which clause takes preference if the customers prefer an investment that does not meet the standard, or which exceeds it?

How does consideration of customer preferences in 7.2.2.2 relate to the economic test referred to in 7.2.2.3? Should they not be integrated?

And how do contracted transmission investment elements relate to all this?

Please clarify.

If 7.3.2.2.1 is taken to refer to "investments", it compounds the problem by suggesting that they can be further classified into sub-categories. The reference is, though, to "expenditures". This is an equally undefined term but may be intended to imply that expenditure on any particular investment might be allocated between categories. In any case, while the clause should be supported, its precise purpose is unclear, given that neither the Board nor Transpower seem to have any requirement placed on them to do anything with the data it provides.

7.3.2.2.2 refers to participants proposing "economic investments", which should be supported, but other clauses (eg 7.2.2.3) refer only to economic investments which "Transpower propose". Although the process is not clear here, it later appears that that the Board may "request" Transpower to investigate (8.2.3.7), and ultimately "direct" Transpower (to "propose" 8.2.5.1?) any investments which the Board considers appropriate. The language here deserves consideration with a view to distinguishing between Transpower's initial proposals, and what it might finally agree to implement, perhaps under duress.

The GAP must take into account maintenance, operations, configuration as well as potential investments. Combinations of all these factors affect grid capacity and reliability as well as impacting the industry.

The process in 8.2.3 seems broadly desirable, but it is unclear how it sits with earlier rules, e.g. III-5.4. How are variations in the investment plan which result in variations above or below reliability standards (8.2.3.7) to be assessed and compared. What value will be placed on exceeding a standard by 10%, for example, or of falling 1% below the standard. Again we stress the need for an integrated approach in which the economic trade-offs are specified in the definition of reliability standards.

8.2.3.2 should refer to designated transmission customers rather than Transpower customers.

8.2.3.4 Is it appropriate that the test is against reasonable Transpower processes rather than reasonable processes generally?

8.2.3.6 refers to a "Transpower designated transmission customer" requesting the Board to consider requesting Transpower to consider alternatives. The implication seems unlikely, and unfortunate. The word "Transpower " should probably be deleted here.

8.2.3.9.1 What is Transpower's accountability in practice? Transpower has previously been very reluctant to accept liability for failing to achieve specified service levels. What does the Board intend to do in this regard?

Apart from the grammatical glitch in the heading, 8.2.5.1 raises the issue of Transpower "proposing" again (see discussion of IV-8.2 above). Beyond that, it becomes clear that the artificial distinction between economic and reliability investment has already broken down. How does a "reliability investment" undertaken under 8.2.5.1 qualify for that title when it does not meet reliability standards, but is instead judged to better reflect the (economic/commercial) interests of participants?

8.2.5.3 talks about changes to the "standards", but surely the point is that the Board will authorise a deviation from the standard in a specific case, rather than that the whole standard should be amended. With that modification, the clause should be supported, but similar provisions seem to appear in various places, and it is not quite clear how they link together. How does this section link up with III-5.4 and II-4 for example? If regional standards are used then less parties will be affected by a change to a "regional" standard, so it will reduce the need for deviations.

Again, this relates to the issue of who is "proposing" what, since III-5.4 seems to envisage Transpower seeking Board permission for a deviation, whereas this section has the Board requiring Transpower to deviate. Are these supposed to be referring to the same situation, or to different situations? Some cross-referencing would help.

Please clarify.

Amend 8.2.3.2 accordingly.

Amend 8.2.3.4 to read "...review compliance by Transpower with reasonable Transpower processes for..."

Amend 8.2.3.6 - delete the word "Transpower" at the beginning of this rule.

Please clarify.

Please clarify.

Please clarify.

Please clarify.

the criteria to which the Board is to have particular regard are confined to the public interests in a safe, reliable system, the importance of timely decisions, and the need to avoid unnecessary delays;

although there is consultation, the role of the Board is to review compliance by Transpower with reasonable Transpower processes for application of the grid reliability standards to proposed investment. In other words, it is a review exercise, focused particularly upon process rather than substance, and not an independent decision;

it is telling that the Board has simply adopted the process that was proposed by Transpower.

This is inconsistent with the Board's current obligations under s172E(2)(c)(v). This process could be amended to give the Board and transmission customers a more substantive role in determining investments, as detailed in the hybrid proposal above. The Board is accountable to ensure that its principal objectives and specific outcomes are met. These criteria are relevant and should be included in the rules. The depth to which the Board can meet its legal obligations would largely depend on whether the rules invite meaningful and alternative transmission proposals to be made so as to compare with Transpower's proposed investments.

What are the consequences for Transpower of not meeting the grid reliability standards? Will the Board be able to determine whether or not Transpower has met the standards? What is Transpower's accountability/liability if they do not meet the standards?

Please clarify.

Insert words "of publication" between "10 business days" and "request the Board".

The Board should provide reasons when it declines a request to hold a public conference.

The requirement that pricing should be on a non-discriminatory basis should also be included in the objectives.

Insert as new rule after 3.3.7 "The overall pricing methodology should be non-discriminatory".

See 3.3.4 and 3.3.7

The GPS clearly expects the Board to determine the methodology (see para 74), not simply confirm Transpower's proposal.

The language of section 57P of the Commerce Act could be mirrored in Part F, ie the Board must make an authorisation requiring the use of a specified methodology for allocating Transpower's revenue requirement to individual designated transmission purchaser.

If this amendment is made, we query if such a statement of the Board's powers should be contained in the regulations rather than as a rule given the importance of the subject matter.

allow transmission customers to provide submissions on Transpower's pricing methodology;

call a conference;

require a review of the methodology.