An action-based way forward Vector and MDL

Governance Developed in response to PEA request Proposal only Should be subject to full consultation Subject to positive business case Subject to relevant Board approvals

PEA: useful progress Uncertain vision of ideal NZ gas market Instead, touchstones for assessing evolutionary options: Dynamic efficiency, minimum cost, efficient use of capacity, support upstream and downstream markets, investment facilitated, independence, transparent, evolvable PEA can now deliver a framework for development by the industry

This slide expresses evolution well… But, how to converge ?

Without knowing ideal arrangements… How do we get this… Not say this ? Maui regime Maui regime Evolved Maui Evolved Maui Ideal arrangements Evolved Vector Evolved Vector Vector regime Vector regime

We need at least a mid-term vision PEA believes long-term vision inappropriate as evolution of supply and demand too uncertain We believe a mid-term vision is clear and useful, being a combination of: Long term capacity arrangements to give certainty Interruptible contracts to manage shortfall And, the best time to implement congestion management is before congestion bites

Time for industry action? The principal mechanism for improving the gas market is evolutionary change to VTC and MPOC To ensure evolutionary alignment, Vector and Maui must work together PEA work to date provides the framework for this

Incentives are aligned GIC / PEA Vector / MDL Efficient capacity allocation  Allocative efficiency Dynamic efficiency Efficient new investment Efficient capacity allocation  Allocative efficiency Dynamic efficiency No unnecessary investment

Long-term capacity allocations Are financial, not physical But inform SO’s real-time operations Allocation is an issue of equity not efficiency If tradable at the margin to reach highest value use And no incentives for strategic withholding by incumbents Priority on enabling trading of allocated contracts Over all time scales And removing any incentives for withholding Initial auction of contracts desirable (for fairness) but not essential (for efficiency)

Introducing degrees of firmness

Suggested way forward (1 of 2) Industry has mandate, understanding and incentives Maui introduces AQ allocation regime Consider variable-firmness non-AQs (Two zones in the AQ system) Vector expands IA regime Consider variable-firmness IAs Consider number of zones

Suggested way forward (2 of 2) Industry introduces market for trading capacity contracts Long and short term Maui and Vector tariff structures evolved: Allocate costs to capacity contract holders Integrate market rentals Vector introduces short term allocation regime Vector addresses grand-parenting Phase-out over transition period

GIC / PEA to initiate and facilitate Wind up PEA with recommendation to GIC: GIC issue notice of expectation to industry to evolve in accordance with PEA’s touchstones GIC support industry self-evolution MPOC and VTC change requests Supporting regulation if and as necessary Backstop threat of full regulation if industry does not deliver