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

1. 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

2. 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

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

4. 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

5. 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

6. 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

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

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

9. 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)

10. 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

11. 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

12. Contact Us James Mellsop Director NERA—Auckland +64 9 928 3290
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