Transmission Access Workshop 8 March 2012

Workshop agenda 1.Introduction 2.Allocative Efficiency - initial allocation ● Is the length of property right appropriate? ● Are there any other concerns with the definition of capacity rights? ● How could the capacity request process be improved? ● Could the posted prices somehow be a bit more dynamic? ● Is there any issue with the price structure (e.g., CRF versus TPF)? ● Are there any concerns with the definition of capacity rights? ● What would happen if the grandfathering rights were taken away, e.g., if the capacity rights were just for one year? ● What are Vector’s incentives when it comes to setting capacity?

Workshop agenda 3.Allocative Efficiency - secondary allocation ● What are the impediments to trading? ● Would an ability to subdivide capacity rights (e.g., by time) assist in facilitating trading? ● Do shippers have incentives to strategically hoard? ● What are Vector’s incentives regarding secondary trading? 4.Allocative Efficiency - interruptibility ● What proportion of contracts are currently interruptible? ● How is the price for an interruptible contract determined?

Workshop agenda 5.Dynamic Efficiency – assuming away price control ● How are the existing prices determined? ● Other than regulation, are there impediments to putting in place some sort of mechanism that would allow price to rise as capacity is reached? ● Is a long-term contract with a shipper a necessary condition to investing in new capacity? ● How likely is it that an investor other than Vector would build a pipeline?

Workshop agenda 6.Dynamic Efficiency – impact of regulation ● Price control would skew the price profile expected in a competitive market. While the constraint on rents in the pre-investment phase would discourage investment, could the “above-market” prices in the post-investment phase encourage investment? ● Does the Commerce Commission correctly account for risk in its cost of capital methodology?

ADDITIONAL SLIDES THAT MAY BE HELPFUL DURING WORKSHOP

Basic forms of access Type of access arrangement Main points of note entry-exitAllocates capacity at entry and exit points selected (independently) Point specific tariffs Mandated for Europe point to pointAllocates capacity for transportation route selected Distance related tariffs Applies in US postage stampAllocates capacity within a zone Single tariff per zone Rumania, Hungary, Ghana

Prospects for capacity trading (devil’s advocate view) Capacity (as currently defined) may not trade because: 1.The maximum liquidity of the market is small: ● Capacity is a daily point to point product (dPtoP), so the market is limited to shippers using that route i.e. 6 or 7 in Auckland, 3 or 4 in Whangarei 2.Liquidity when capacity is scarce is much smaller: ● Retailers will wish to serve their own market, not help competitors 3.Liquidity for term capacity will be smaller still: ● Retailers wish to obtain capacity to match the term of their customer contracts. These will be at least a year, so will traverse periods when capacity is scarce

Prospects for capacity trading (devil’s advocate view)… continued Capacity (as currently defined) may not trade because: 4.Retailers holding scarce capacity can more easily extract rent from their customers in the retail market, rather than from their competitors in the capacity market…. So why bother to trade? 5.If capacity trading is not a frequent event, the unit costs will be high… So why bother to trade? Conclusion: The concept of secondary market trading is flawed… better to concentrate on improving the primary market

Primary market prices Pricing efficiency (s 3.5, 2009 Research Paper): Capacity prices will promote allocative efficiency… if they reflect the marginal cost of capacity provision. The marginal cost has two components: the marginal cost of expansion (MCE) the variable cost of employing existing capacity (compressor fuel, odorant etc.) So efficient prices should be structured by applying: the MCE at times of peak pipeline demand the variable cost at all times

Primary market prices… continued PipelineDelivery PointDescription of Expansion Cost ($m) Inc TJ MCE 1 CRF ($/GJ/yr) North WestfieldPap East to Smales Rd loop WhangareiPap East to Smales Rd loop Central NorthMorrinsvilleHorotiu compression Bay of Plenty Kinleithupgrade Pokuru compressor Gisborneupgrade Pokuru compressor South Tawaupgrade Kaitoke, loop to Hima Hastingsupgrade Kaitoke, loop to Hima Table 7 of 2009 Research Paper - using Vector’s capacity disclosure information to estimate Marginal Costs of Expansion (MCE) and comparing this to current Capacity Reservation Fees (CRF) 1.

Gas Industry Co Transmission market trends ● Open access ● Structural separation of transmission ● Transparency ● Private ownership ● Regulatory objective: efficiency/competition ● Clear definition/allocation of regulatory roles