23 FEBRUARY NEW ZEALAND GAZETTE

1.2 Proposed Taranaki combined cycle/gas sale

ECNZ is to conclude the current sales process in accordance with Appendix 2, subject to resource consents and to the objective of maximising value.

Explanatory note:
This measure will—

• reduce ECNZ’s market share by approximately 7% in energy terms and 5% in capacity terms
• introduce another independent competitor to ECNZ, which will provide competitive benchmarks in regard to performance.

1.3 Sale of small hydro-stations

ECNZ is to sell the Cobb, Coleridge, Highbank, Matahina, Mangahao, Tuai, Piripaua, and Kaitawa hydro-stations in accordance with Appendix 3, subject to appropriate consultation with Maori as to any Treaty of Waitangi issues.

Explanatory note:
The sale of these stations will be completed progressively in the ordinary course of ECNZ’s business.

In aggregate, these sales will reduce ECNZ’s share of the market by approximately 4%.

These sales should provide the opportunity for management of these stations by persons attuned to local conditions (for example, existing power companies), and for the achievement of greater operating efficiencies.

1.4 Cap on ECNZ providing additional generating capacity

ECNZ will be subject to a restriction, set out in Appendix 4, on the amount of additional generating capacity it may provide.

Explanatory note:
The cap will prevent ECNZ from providing additional generating capacity unless non-ECNZ producers have first provided at least an equal amount of additional capacity.

The cap works in tandem with the requirement in paragraph 1.5 for ECNZ to “ring-fence”; the cap governs when ECNZ can provide additional capacity, whereas “ring-fencing” governs the basis on which ECNZ may provide any additional capacity when the cap allows it to enter the market.

The cap will assist in ensuring that—

• the output prices of at least 50% of additional generating capacity reflect the true costs, thereby encouraging consumers to extract the greatest value to them from additional electricity consumption;
• ECNZ’s market dominance is reduced over time;
• vigorous competitive pressure on costs and prices, and a diversity of views on the technology, size, location, and timing of new generating capacity emerges;
• the Government’s fiscal risk is reduced.

1.5 Ring-fencing of additional generating capacity provided by ECNZ

Additional generating capacity provided by ECNZ will be “ring-fenced” in accordance with Appendix 5.

Explanatory note:
Ring-fencing will—

• restrict ECNZ’s ability to cross-subsidise any additional capacity and help ensure that the electricity produced from additional capacity is priced to reflect the full cost of producing it; and accordingly
• facilitate competitive entry into the electricity market by other generators and suppliers of demand-side management options.

1.6 Spot market dominance

ECNZ will put in place a contract offer mechanism in accordance with Appendix 6.

Explanatory note:
This will—

• provide market participants with a reasonable opportunity to insure against incentives ECNZ may have over time to unduly influence the spot market; and
• give greater stability to the new market, by reducing the extent of participants’ exposure to volatile spot prices; and
• provide greater certainty as to how the market will operate, and help address concerns in relation to spot pricing by ECNZ.

1.7 Revisions to ECNZ’s statement of corporate intent

ECNZ’s statement of corporate intent will be amended in accordance with Appendix 7.

Explanatory note:
These amendments reflect the fact that a significant competitor is to be established, and that the measures set out in this Memorandum will facilitate the introduction of competitive processes for the pricing and contracting of electricity.

1.8 Removal of retail constraints on ECNZ

ECNZ is currently prohibited by a shareholder’s directive under section 13 of the State Owned Enterprises Act 1986 which is included in its statement of corporate intent, from acquiring any electricity supply authority or any significant share in an electricity supply authority (now called an energy company). This restraint will cease to apply when ECNZ’s share (including its interest in joint ventures referred to in Appendix 4 and in companies ring-fenced under Appendix 5) of the total generating capacity measured in MW capacity terms is less than 45%, but ECNZ will remain subject to the remaining provisions of its statement of corporate intent and the then prevailing regulatory regime.

Explanatory note:
It is appropriate to maintain the current prohibition on ECNZ until its market share is further significantly reduced.

As a general policy, the Government is concerned to ensure that natural monopoly line businesses do not abuse their position and, in particular, do not cross-subsidise competitive activities such as generation and energy retailing.

PART 2

Miscellaneous

2.1 Key tasks for implementation

The key tasks for implementing the measures set out in Part 1 are as follows:

• appropriate consultation by the Government with Maori as to any Treaty of Waitangi issues;
• appointment of the SOE Development Group, negotiation of the sale and purchase agreement, and negotiation of the funding agreement;
• establishment of the new SOE, including the organisational separation from ECNZ;
• implementation of the cap on additional generating