Demand management options on the Vector pipeline system: details Presentation to PEA James Mellsop Director Wellington 21 February 2013

Details of demand management options Unless otherwise stated, following slides apply to both approaches: when TSO buys-back firm capacity and when TSO issues interruptible contracts

Property right definition and transparency Shippers need information to calculate probability of interruption Specified trigger for interruption, limits of interruptibility (e.g., up to five days per winter) For each relevant point, available pipeline capacity, capacity reservations, historical deliveries, aggregate nominations

End user link Interruptible contracts in particular may need to relate to specified customer(s) How to measure and monitor performance?

Cost recovery (1) Buy-back approach in particular could involve a net cost to TSO That net cost should ultimately be funded by firm shippers Higher CRF Overrun fees

Cost recovery (2) Issue is whether TSO should recover the net costs within existing revenue cap, or whether cap should be expanded Balancing and transmission alternative costs are “recoverable costs” for Transpower and Maui Netted off for revenue assessments

Incentives of TSO (1) Does TSO have incentive to implement interruptibility? Revenue cap unlikely to help Is an external directive required? E.g., quality criteria under price control Or is RPO obligation sufficient? Recoverable costs approach would improve incentive on TSO to implement But may result in inefficiency May require Commerce Commission approval

Incentives of TSO (2) Both approaches should provide stronger incentive on TSO to increase allocated (contractual) capacity But revenue cap is still a constraint

Incentives of shippers Shippers should have incentive to provide interruptibility right if they are (at least) compensated for their (or their customers’) expected VOLL

Administrative rule for actual interruption (1) If there are multiple interruptible shippers, actual interruption done on basis of pre-specified administrative rule, e.g., Curtailment on Maui pro rata by net historical usage But this is unlikely to be efficient By nominated quantity Balancing gas on Maui, and interruptible contracts on some Eastern Australian pipelines Could be subject to gaming (although mitigated to some extent by incentive mechanism for accurate nominations)

Administrative rule for actual interruption (2) By interruptible capacity If AQ on Maui is curtailed it is pro rata by AQ holding Here pro rata would be by interruptible capacity holding Or interruption could be scheduled based on bids E.g., a shipper bidding a lower price has a lower VOLL, so is interrupted before a shipper bidding a higher price

Variation of buy-back proposal Payments to buy back capacity would directly sheet home to firm shippers Peak charge E.g., shippers could bid VOLL This would determine overrun fee Would signal marginal value of capacity But would increase price uncertainty for firm shippers Would require changes to VTC

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