526 NEW ZEALAND GAZETTE No. 16

MEMORANDUM OF UNDERSTANDING

entered into on 8 June 1995 by

THE GOVERNMENT OF NEW ZEALAND

and

ELECTRICITY CORPORATION OF NEW ZEALAND

Background

A. The way in which electricity is produced and consumed over time has a material impact on the economy and the environment.

B. The Government’s overall energy policy objective is to ensure the continuing availability of energy services at least cost to the economy as a whole, consistent with sustainable development.

C. To achieve this overall objective in the wholesale electricity sector, the Government considers that the following outcomes are necessary—

• pricing of electricity in a manner that signals the full cost of producing each extra unit of electricity, so that investors and consumers can make decisions which seek to get the most value from each extra unit of electricity purchased; and

• strong pressure on electricity costs and prices, especially in the areas of new investment, over the next 10 years and beyond so that electricity producers are forced to find innovative, least-cost solutions.

D. After careful consideration of a range of options, the Government has concluded that these outcomes are likely to be best achieved by a process of sustained and robust rivalry, and in particular by—

• vigorous competition among electricity producers, including new private sector generators; and

• contestability from energy efficiency options as an alternative to buying more power; and

• providing buyers with a diversity of prices and other conditions for purchasing electricity on contract; and

• competitive disciplines on prices for electricity in the spot market.

E. The principal barriers to sustained and robust rivalry are—

• the high level of dominance in the spot, contracts, and new investments markets by ECNZ, which presently generates approximately 96% of all electricity produced in New Zealand; and

• uncertainty as to the role that governments will play over the next ten years and beyond in relation to ECNZ’s pricing and new investment decisions; and

• the absence of effective market mechanisms which buyers and sellers of electricity can use to forecast future prices.

F. The Government and ECNZ have agreed that—

• subject to appropriate consultation by the Government with Maori as to any Treaty of Waitangi issues, the measures set out in this Memorandum should be implemented; and

• implementation of these measures will be a significant step in overcoming the barriers referred to above.

G. It is important for New Zealand’s economy and environment that these barriers are overcome in a manner and at a rate that—

• recognises the particular characteristics of the New Zealand electricity system; and

• maintains security of supply; and

• enables producers, distributors, retailers, and consumers to develop the systems, skills, and experience necessary to operate effectively in a competitive environment.

H. A market with stronger competitive disciplines will emerge over time. During the transitional period—

• a set of special regulatory restraints, which are set out in this Memorandum, will apply to ECNZ. ECNZ’s commitment to work within the spirit and intent of these restraints will strengthen the effectiveness of the restraints in addressing ECNZ’s dominance; and

• industry participants are to be encouraged to rely on commercial mechanisms, rather than seeking Government involvement, in the pricing and contracting of electricity. ECNZ has an important role in ensuring this by operating in a manner which promotes genuinely competitive processes.

I. The Government will—

• closely monitor the results achieved from implementing the measures set out in this Memorandum against the outcomes referred to in paragraphs B and C above; and

• in particular, expect to see a continuing reduction over time in ECNZ’s level of dominance in the spot, contracts, and new investments markets.

Further evolutionary steps towards a fully competitive wholesale electricity market may need to be considered by the Government after allowing for an appropriate evaluation of the outcomes achieved from the measures set out in this Memorandum.

J. The Government has ruled out privatisation, and any restructuring that has as its aim the sale of any major component of ECNZ.

K. This Memorandum is not intended to create legal rights for either ECNZ or the Government, and nothing in it limits in any way the rights and responsibilities of the Government.

The explanatory notes in italics in this Memorandum are included only for the purpose of giving the backgrounds and/or explanations of the clauses to which they relate, and are not to be taken as part of this Memorandum.

PART 1

Measures to Achieve Objectives

1.1 New SOE based on the Taranaki thermals, Clutha, and geothermals

A new State-owned enterprise is to be established as a commercially viable entity and as an effective competitor to ECNZ. The new SOE will acquire from ECNZ, in accordance with the provisions of Appendix 1, the New Plymouth, Stratford, Whirinaki, Otahuhu, Wairakei, Ohaaki, Clyde, and Roxburgh power stations, the Clutha and geothermal development sites, and an appropriate share of ECNZ’s rights under the Maui gas contracts.

Explanatory note:

This will—

• establish a significant and effective competitor to ECNZ, starting with about 28% of the market in MW terms and 22% in energy (GWh) terms;

• ensure that the new SOE will hold key development sites for possible new generation, and accordingly be well placed to further reduce ECNZ’s share of the market.