29 OCTOBER 2004 NEW ZEALAND GAZETTE, No. 139 3457

and as a measure to temporarily reduce demand in events such as major and unexpected plant
or transmission line outages. The Commission should recommend regulations and rules if
required. (The use of ripple control for these purposes should not preclude its use for other
purposes outside of security of supply situations).

Co-ordination of outages during security of supply situations

74 The Commission is also expected to put in place contingency arrangements to provide for the
scheduling of rolling outages in the extreme event that blackouts are required to ensure a
balance between supply and demand. The Commission should recommend regulations and
rules if required.

System operation and wholesale and related markets

75 The Electricity Commission should take primary responsibility for achieving the Government’s
policy objectives for electricity in relation to:

• common quality and real time security
• dispatch and pool rules
• reconciliation and settlement
• information disclosure to improve market efficiency, including:
  • aggregate hedge and contract prices and volumes
  • offers by generators
• minimum prudential standards.

Hedge market transparency and liquidity

76 A transparent and liquid hedge market is a critical component of an efficient wholesale market. It
enables market participants to manage their risks and facilitates retail competition. Concerns are
regularly expressed that the current hedge market does not operate particularly well.

77 The Government has amended the Electricity Act 1992 to provide regulation-making powers to
establish and promote hedge markets. As with other regulation-making powers, the Commission
may only recommend regulations if it has first established that there are significant problems that
are not resolvable through voluntary arrangements and co-operation. The regulation-making
powers cover:

• disclosure of information on hedge and contract volumes and prices
• requiring generators to offer by tender a minimum volume of contracts that enable the price
  risks associated with the spot market to be managed, including the terms and conditions of
  those contracts (excluding prices and reserve prices)
• requiring generators to post buy and sell prices for hedge (including futures) contracts; and
• requiring buyers of electricity from the wholesale market to maintain minimum levels of
  hedge and contract cover with electricity generators.

Financial transmission rights

78 Under marginal cost nodal energy pricing, different locations experience different prices caused
by transmission losses and constraints. The Electricity Commission should oversee the
development of financial transmission rights (FTR) to enable market participants to manage risk
in respect of transmission losses and constraints. A statement of policy concerning financial
transmission rights is attached as Appendix One.

Transmission

Background

79 The way in which transmission services are provided and priced impacts directly and indirectly on
all parts of the electricity industry, the economy and the environment. Transmission has strong
natural monopoly characteristics, which makes it important that the Government sets out its
policy expectations as to how transmission services should be provided and priced and how
Transpower should operate. Poorly designed policies may, for example, encourage inefficient