29 OCTOBER 2004

NEW ZEALAND GAZETTE, No. 139

account transmission alternatives. The Electricity Commission should ensure that affected
parties are fully consulted.

88

Where the Electricity Commission approves investment by Transpower, the cost of that
investment should be recoverable by Transpower in accordance with the pricing methodology
determined by the Electricity Commission.

Transmission alternatives

89

As part of its consideration of transmission investments, the Commission should ensure that
transmission alternatives are properly considered to the extent practicable.

90

As part of its consideration of transmission pricing, the Commission should consider whether
there would be net benefits in providing for a mechanism whereby investments in transmission
alternatives receive payments reflecting some or all of the value of avoided transmission
investment. This is a complex subject, and the Commission will need to take into account,
among other things, practicalities, effects on incentives to invest in alternatives, and the extent of
assurance that grid reliability standards will be met.

Pricing for connection to and use of the national grid

91

Transpower should determine its total revenue requirement (covering both sunk and new
investments) subject to the constraints of Part 4A of the Commerce Act 1986. A transmission
pricing methodology should determine how this total revenue is recovered from parties under the
agreements for connection to and use of the grid. The transmission pricing methodology should
include the allocation of any net FTR auction income, rentals and FTR-related payments.

92

The Electricity Commission should prepare and consult on a paper on pricing issues. The
Commission should determine the pricing methodology after consideration of proposals from
Transpower and consultation with affected parties.

93

Prior to the determination of a new pricing methodology by the Commission, the Act requires
connected parties to continue to pay Transpower for connection and access to the national grid
on the basis of Transpower’s current pricing methodology.

Cost recovery and pricing principles

94

The Government expects transmission services to be priced as efficiently as possible and,
subject to Part 4A of the Commerce Act 1986, Transpower’s charges to recover the full economic
costs of its services.

95

The principles to be applied by Transpower in developing the transmission pricing methodology,
and the Electricity Commission in approving it are:

• the costs of connection should as far as possible be allocated on a user pays basis
• the pricing of new and replacement investments in the grid should provide beneficiaries with
  strong incentives to identify least cost investment options, including energy efficiency and
  demand management options
• pricing for new generation and load should provide clear locational signals
• sunk costs should be allocated in a way that minimises distortions to
  production/consumption and investment decisions by grid users and consumers
• the overall pricing structure should include a variable element that reflects the marginal
  costs of supply in order to provide an incentive to minimise grid constraints, and
• transmission pricing for investments in the grid should recognise the linkages with other
  elements of market pricing (including the design of FTRs).

Timetable

96

The Government recognises that implementation of new transmission arrangements will be very
demanding on the Electricity Commission, Transpower and affected parties. Nonetheless, it is
clear that important decisions on transmission are becoming urgent. Accordingly, the
Government wants the Commission to meet the following timetable:

3459