23 FEBRUARY NEW ZEALAND GAZETTE

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APPENDIX 5

Ring-Fencing of Additional Generating Capacity Provided by ECNZ

Objective

1. Additional generating capacity provided by ECNZ in New Zealand will be ‘ring-fenced’ in order to—

   • restrict ECNZ’s ability to cross-subsidise the additional capacity and thereby ensure that the electricity produced from the 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 demand-side management suppliers.

General Rule

2. Ring-fencing will be required for any additional generating capacity provided by ECNZ in New Zealand where the capacity is more than 10 MWs and—

   • ECNZ would have effective control over the development of the capacity; or

   • ECNZ would have effective control over the sale to any wholesale buyer (other than ECNZ) of all or any part of the electricity produced from the capacity.

3. However, any refurbishment or modification of an existing generating station which does not require ECNZ’s entitlement to be debited under the cap regime in Appendix 4 will not have to be ring-fenced.

Key elements

4. Ring-fencing of additional generating capacity will require—

   • the formation of a separate company to provide the additional capacity, which must be operating before tenders are called for the purchase of major plant or major capital works; and

   • ECNZ to charge the separate company on the basis of full costs for any capital, goods (except gas), and services it provides to the company, and on the basis of full opportunity costs for gas; and

   • where the electricity produced by the separate company is sold on contract, the contract is to be completely separate from any contract for electricity produced by ECNZ or any person associated with ECNZ; and

   • the achievement of a proper commercial return on the assets and shareholders funds in the separate company; and

   • the separate company and ECNZ to comply with the financial guidelines established under paragraph 6 below.

5. For the avoidance of doubt, a ring-fenced company would be permitted to raise debt capital backed by guarantees from ECNZ, so long as an appropriate level of equity finance was provided to the company by ECNZ.

Financial Guidelines

6. Guidelines for the financial policies necessary to implement ring-fencing would be specified in advance by ECNZ and would be subject to approval by an independent person appointed by the Secretary of Commerce. The guidelines would cover in particular—

   • depreciation rates for assets of the company;

   • cost allocation and pricing methodologies for any capital, goods and services provided by ECNZ to the company, and by the company to ECNZ;

   • determining a proper commercial rate of return for the company.

Monitoring

7. An independent auditor appointed by the Secretary of Commerce, in consultation with ECNZ, will be required to ascertain, and provide annual public certification (which would appear in ECNZ’s annual report) as to whether ECNZ is complying with these ring-fencing requirements.

Implementation

8. These ring-fencing requirements will be included in ECNZ’s Statement of Corporate Intent by direction of the shareholding Ministers under section 13 of the State-Owned Enterprises Act 1986.

9. The Secretary of Commerce will make the final decision on whether additional generating capacity is required by paragraph 2 above to be ring-fenced, having regard to the objective in paragraph 1 above.

Duration

10. These ring-fencing requirements will cease to apply when ECNZ’s share (including its interests in ring-fenced companies and in joint ventures as defined in Appendix 4) of the total New Zealand generating capacity measured in MW capacity terms is less than 45% of that total, and that share has been verified by the Secretary of Commerce.

APPENDIX 6

Contract Offer Mechanism

Objective

1. A commercial mechanism is to be established to—

   • provide market participants with a reasonable opportunity to limit possible incentives ECNZ may have over time to unduly influence the spot market;

   • give greater stability to the new market (by reducing the extent of customers’ 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.

Mechanism

2. ECNZ will offer, on at least an annual basis, sufficient contracts to ensure that customers have the opportunity to contract ECNZ up to at least the levels specified in the following table:

These figures include the amount contracted to the NZ Aluminium Smelters plant at Tiwai Point.

3. These contracts will be at prices which are not directly related to the short term (within the year) movement of spot prices.

4. In this Appendix, ‘firm capacity’ is that capacity which ECNZ could provide for sale, assuming 87% availability at Huntly power station and 80% of mean production from all hydro capacity.

5. ECNZ may choose, for commercial reasons, to offer