TransmissionPricing

Summaryof
Submissions
TPAGdiscussionpaper(SRConly)
25July2011

Note:Thisisasummaryofsubmitterviewsonthestaticreactivecompensation(SRC)analysisintheTPAGdiscussionpaper,and
isbeingconsideredbytheTPAGSRCsubcommittee.

Note:ThispaperhasbeenpreparedforreviewbyTPAG.Contentshould
notbeinterpretedasrepresentingtheviewsorpolicyoftheElectricity
AuthorityorofTPAG.
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TransmissionPricing

Contents
1 Introductionandpurposeofthisreport 1
1.2 OverviewofsubmitterpositionsonSRC 1
2 Assessingoptionsforstaticreactivecompensation 2
2.1 Introduction 2
2.2 Submittersviewsofbackgroundandproblemdefinition 3
2.3 Submittersviewsofoptionsassessed 3
2.4 Submittersviewsonretentionofaminimumpowerfactorasabackstopmeasure 3
2.5 Submittersviewsonassessmentoftheassessedoptionsagainsttheefficiency
considerations 4
2.6 Submittersviewsonassessmentofcostsandbenefits 4
2.7 Submittersviewsonconsistencyofapproachacrossallgridregions 5
2.8 SubmittersviewsonotherissuesarisingfromminimumpowerfactorsetfortheLSIand
LNIregions 5
2.9 Submittersviewsontherecommendedapproach 5
2.10 Otherpointsraisedbysubmitters

6

Tables
Table1 OverviewofsubmitterviewsonSRCproposalsintheTPAGDiscussionPaper 1

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1 Introductionandpurposeofthisreport
1.1.1 Thisreportsummarisesthesubmitterviewsonthestaticreactivecompensation(SRC)analysisin
theTPAGDiscussionPaperonly.
1.2 OverviewofsubmitterpositionsonSRC

Table1 OverviewofsubmitterviewsonSRCproposalsintheTPAGDiscussionPaper

Submitter HVDCoptionpreferred PositiononDeeper SRC

orshallower
connection
CarterHolt
Harvey

Contact kVAchargingforSRC

DEUN

ENA Amendedkvarchargingwith
furtherworktorefine

Fonterra Amendedkvar

Genesis

Greypower

Mainpower Doesnotsupportamended
kvar

Meridian amendedkvar

MEUG

MRP Agreeswithproposal

NorskeSkog
Tasman

NZSteel amendedkvar

NZWEA

OrionNew Amendedkvarchargingwith
Zealand furtherworktorefine

PanPac

Powerco Supportsconnectionasset
definition,kvaroramended

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kvar,butthereareother
options.

Powershop

RTANZ Supportsproposal,but
shouldalsolookatMVA

charging

TheLines Concernsaboutamended
Company kvar

TheNew
Zealand
Refining
Company

Transpower Amendedkvarwith
refinement

Trustpower Amendedkvar

Vector Movefromunitypower
factor,butnotsureabout

kvarcharging

Vestas

WEL Amendedkvar
Networks

Notes: 1. Thisisasnapshotsummaryoftheviewsofsubmitters,forfullviewsseetheremainderofthis
summaryorthesubmissionsthemselves.

2 Assessingoptionsforstaticreactivecompensation
2.1 Introduction
2.1.1 Submissionsonthestaticreactivecompensation(SRC)sectionofthediscussionpaperwere
receivedfromthe16parties.
2.1.2 Atahighlevel,responsestotheSRCissuesindicategeneralacceptancethataproblemexistsand,
withafewexceptions,supportforthesolutionproposedoranearvariantofthatsolution.
SubmittersalsoprovidedvaluableinputforTPAGsfurtherconsiderationofspecificquestions
posed.

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2.2 Submittersviewsofbackgroundandproblemdefinition

Relevantquestion
2.2.1 Q17.DoyouagreewiththeTPAGsoverviewofthebackgroundonSRCandtheidentificationof
theregulatoryfailuredescribedinthissection?Ifnot,whynot?
2.2.2 SubmissionssupportabroadacceptancethataproblemexistsandagreewithTPAGs
considerationofrelevantbackgroundanddefinitionoftheproblemasaregulatoryfailure.
2.2.3 TheonlyviewagainstthisconsensuswasfromRTANZ,whichconsideredthatTPAGhadnotstated
whyitcametoadifferentconclusiontotheformerElectricityCommissiononthequestionof
whethertherequirementsforaunitypowerfactorwerepracticallyachievable.RTANZdid,
however,acknowledgethatstatusquoarrangementshavenotfoundfavourwithdistributorsand
Transpowerandforthisreasonareunlikelytoworkinpractice.
2.2.4 VectortookissuewithsomeofTPAGssummaryoftherelevanthistorytotheissue,whichitfelt
wasanattempttorewritehistory,butdidsupporttheviewthattheproblemasdefined
representsaregulatoryfailure.
2.3 Submittersviewsofoptionsassessed

Relevantquestion
2.3.1 Q18.DoyouagreewiththeselectionofSRCoptionsselectedforassessment?Ifnot,whynot?
2.3.2 SubmittersbroadlysupportedTPAGsselectionofoptionsforassessment.Twootheroptions
weresuggestedforconsideration.
2.3.3 Contact,RTANZ,VectorandTheLinesCompanysuggestedconsiderationisgiventoanoptionthat
basesthewholeoftheinterconnectionchargeona$/kVArate,asopposedtothecurrent
methodologywhichisbasedon$/kW.Therationalegivenisthatsuchamethodologywould
providethepricesignallingbenefitssoughtinrespectofSRCinvestmentswhilebeingsimplerto
implementthantheotheroptions.
2.3.4 Powercosuggestedthatpoorpowerfactorissubjecttoapenaltychargeandthattherevenue
obtainedfromthischargeisgiventodistributorsthathavepoorpowerfactortoenablethemto
investinpowerfactorcorrectionequipmentthattheywouldlocateclosetoloads.
2.4 Submittersviewsonretentionofaminimumpowerfactorasabackstopmeasure

Relevantquestion
2.4.1 Q19.Foroption4,theamendedkvarcharge,doyousupporttheapproachofretaininga
minimumpointofservicepowerfactorfortheUNIandUSIregionsasabackstopmeasure?Ifso,
doyousupporttherecommendedapproachofprovidingapenaltyratefordemandinexcessof
theminimum?
2.4.2 Mostsubmittersthatrespondedtothisquestionindicatedsupportforretentionofaminimum
powerfactorof0.95laggingasabackstopmeasure,withapenaltyrateof$15/kvarappliedtothe
componentofreactivepowerconsumedatpowerfactorsbetween0and0.95lagging.Those
supportingthisviewwereContact,Fonterra,MRP,WELNetworks,NZSteel(thoughthey
suggestedthe$15/kvarrateshouldbereducedto$11/kvar),RTANZandTrustPower.

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2.4.3 Submittersopposedtotheproposalofapplyingapenaltykvarchargeratebelow0.95lagging
wereMeridian,TranspowerandVector.Thekeyreasontheyprovidedinsupportofthisviewis
thataminimumpowerfactorlevelshouldnotbenecessarywhereanefficientpricesignalisin
place.
2.4.4 Vectorsummarisedthisviewasfollows:Anefficientpriceforkvarswilldeliverapowerfactorat
anefficientlevelconsideringthecostsofoptionstobringthepowerfactorclosertounity.Any
minimumpowerfactorbelowwhichapenaltychargeapplieswouldbeunnecessaryandwould
implythatthekvarpricingregimeisnotexpectedtowork.VectoralsofeltthatTPAGhadnot
supportedbyanalysisorevidenceitsstatementsthatthereisacasetospecifyaminimumlevel
asanadditionalbackstopmeasureandit[is]prudentforofftaketransmissioncustomersto
retainafocusonaminimumlevelofpowerfactor.However,VectordidconcedethatIfa
minimumpowerfactorlevelwithpenaltychargesisintroduced,Vectoragreesitshouldbesetat
0.95lagging.
2.4.5 OrionexpressedaviewthatshouldtheAuthorityproceedwiththisapproachthenalevelof0.95
laggingwouldbeappropriate.However,thepapersconclusionsaboutthelackofenforceability
ofasetlevelforpowerfactorandthehistoryofthedifficultiescreatedbysettingthepower
factoratunityarepersuasive.
2.5 Submittersviewsonassessmentoftheassessedoptionsagainsttheefficiency
considerations

Relevantquestion
2.5.1 Q20.TheTPAGhasassessedtheamendedstatusquoandtheamendedkvarchargeoptions
againsttheefficiencyconsiderations16.Arethereaspectsofthisassessmentthatyoudisagree
withorcouldprovidemoreinformationon?Pleaseprovidedetails.
2.5.2 Submittersidentifiednoaspectsoftheassessmentoftheassessedoptionsagainsttheefficiency
considerationsthattheydisagreedwithorwereabletoprovidefurtherinformationinrespectof.
2.5.3 Meridianpointedoutthattheonlydownsidetotherecommendedapproachistheriskof
strandedandduplicateinvestments.Howevertheydidacknowledgethatthisriskdoesnot
appeartobematerialcomparedtotheoverallbenefitsoftheproposal.
2.6 Submittersviewsonassessmentofcostsandbenefits

Relevantquestion
2.6.1 Q21.DoyouagreewiththeTPAGssummaryofthecostsandbenefitsoftheoptionsassessed
anditsobservations?Ifnot,whynot?
2.6.2 SubmittersthatrespondedtothisquestiongenerallysupportedTPAGsassessmentofthecosts
andbenefits.
2.6.3 Initssupportingcomments,Vectorexpressedtheviewthattheestimationofthermalcapacity
increasebenefitsinparagraph8.4.18isimplausible.Thesupposedbenefitsrelyonthe
assumptionthatpowerfactorwillimprovefrom0.99laggingtounityinboththeUNIandUSI.
Giventhecostofmakingthenecessaryimprovementstoreachunity,thisseemsunlikely.The
potentialcapacitybenefitof$25millionshouldthereforeberemovedfromtheCBA.Ifitremains,
itshouldbeweighedagainstthelikelycostofmakingtheinvestmentstoachieveaunitypower

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factorintheUpperNorthIsland(UNI)andUpperSouthIsland(USI).Thiscosthasbeenestimated
bySKMtobeintheregionof$60million.
2.7 Submittersviewsonconsistencyofapproachacrossallgridregions

Relevantquestion
2.7.1 Q22.Doyouthinkitappropriatethatminimumpowerfactorrequirementsareretainedinthe
ConnectionCodeforpointsofserviceintheLSIandLNIregions,whenaviewhasbeentakenthat
sucharrangementsareunenforceableintheUNIandUSIregionsandtherebyamounttoa
regulatoryfailure?
2.7.2 Submittersviewsonthisquestiongenerallyfellwithintwoschoolsofthought.Firstly,agroupof
submitters(Contact,Fonterra,NZSteelandTrustPower)supportedretentionofminimumpower
factorlevelintheconnectioncode,perthestatusquo.Commentsmadeinsupportofthisview
includedtheobservationthateveniftheminimumpowerfactorlevelprovedtobeunenforceable
asapracticalmatter,ataminimumitprovidedaclearsignalofaregulatoryexpectationand,as
such,therewasabenefitinitsretention.
2.7.3 Thealternativeview(Meridian,RTANZ,TranspowerandVector)wasthatregimeconsistency
acrossallregionsshouldbetheprimarygoalandthatthesolutionadoptedfortheUNIandUSI
regionsshouldapplyequallytotheLNIandLSIregions.
2.7.4 MRPfeltthatthepenaltychargewasappropriateacrossallregionsforpowerfactorbelowaset
minimumbutthatthekvarchargemechanismwasnotappropriatefortheLNIandLSIregions.
2.8 SubmittersviewsonotherissuesarisingfromminimumpowerfactorsetfortheLSI
andLNIregions

Relevantquestion
2.8.1 Q23.Inyourexperiencearethereanyotherissuesthatarisefromthecurrentprescriptionwithin
theConnectionCodeofminimumpowerfactorforpointsofserviceintheLSIorLNIregions?
Pleaseprovidebackgroundrelevanttoanyissuesyouidentify.
2.8.2 Q24.Ifyouhaveidentifiedissuesinthepreviousquestion,doyouthinkanapproachsimilartothe
amendedkvarchargeoption,possiblyincorporatingapenaltychargeforreactivepowerdemand
inexcessofasetminimumpowerfactor,wouldprovideabetterapproachtoaddresstheissues
youhaveidentified?Arethereotheroptionsthatshouldbeconsidered?
2.8.3 NootherissuesorpotentialoptionsforconsiderationwithrespecttotheLSIandLNIregionswere
raisedbysubmitters.
2.8.4 Transpowerpointedoutthatalthoughparticularproblemshavenotyetemerged,itisunlikely
thatspecifyingaminimumpowerfactorfortheLNIandLSIregionswillincentiviseappropriate
investmentinstaticreactiveassetsinthoseregionsforthesamereasonsthatithasfailedtodo
sofortheUNIandUSIregions.
2.9 Submittersviewsontherecommendedapproach

Relevantquestion
2.9.1 Q25.Doyousupporttherecommendedintroductionofanamendedkvarcharge(option4)into
theTPM?Pleaseprovidereasons.

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2.9.2 Therewasnearunanimoussupportexpressedfortheproposedapproachoftheamendedkvar
charge,withafewcaveats,minorrefinementssuggestedandquestionsposedforTPAGs
consideration.
2.9.3 Againstthenearunanimoussupport,Mainpowerexpressedconcernsovertheproposal,believing
theretobelittlejustificationtoproposeapricingstructureimplyingadifferent,inthiscase
Transpower,ownershipstructurefortheequipment.
2.9.4 Transpower,whilesupportinginprincipletheamendedkvarchargeoption,suggesteda
refinementtothemethodologyusedtodeterminethekvarchargerate.Itsobjectiveinproposing
thisrefinementistoleveltheplayingfieldbetweengridanddistributionnetworkinvestmentin
SRCequipment.Theissueitseesisthatthekvarchargerateproposedwouldbesetattoolowa
levelrelativetocostrecoveryofequivalentinvestmentsadistributormaymakeonitsnetwork
becauseSRCequipmentwillneverbeoperatedatfullcapacityinpractice.
2.9.5 TranspowerssuggestedrefinementistocalculatetheTPMkvarchargeusingtheWACCreturn
methodoriginallyproposedbyTranspowerbutbasingthereturnonthereplacementcostofnew
staticreactiveassets,ratherthanonthebookvalueoftheassetsactuallyinplace.Transpower
acknowledgesthatthiswouldresultinahigherkvarchargeratethatwouldoverrecovera
returnonthestaticreactiveassetsactuallybeingused(andhencewouldrepresentasmallcross
subsidyfromtheusersofstaticreactiveassetstotheusersofallotherinterconnectionassets).
2.9.6 Transpoweralsopointsoutaproblemthattheestimatedcurrentreplacementcostsofstatic
reactiveassetscouldbechallenged.Itstatesthatthiscouldberesolvedbyspecifyinginthe
TPMthattheestimatesusedaretobevaluesdeterminedbyTranspowerinitssolediscretion.
2.10 Otherpointsraisedbysubmitters
2.10.1 Somequestionswereraisedaroundspecificdetailsoftheproposal.
2.10.2 Vectorexpressedsupportfortheamendedkvarchargeoptioninprinciplebutsuggestedthat
muchwilldependonthedetailofhowitisimplemented.
2.10.3 Vector,Orion,[RTANZandotherswho?]questionedwhatmethodologyTranspowerwoulduse
tocalculatetheLRMCofgridconnectedSRCequipmentandexpressedsomeviewsonwhat
shouldbeconsidered.
2.10.4 Vectorfeltthediscussionpapercontainedanimplicitassumptionthatunitypowerwas
achievableandwasadesirableobjective.Inthisrespect,itfeltitwascrucialtounderstand
Transpowersobjective[soas]tounderstandthecostimplicationsofthisproposal.IfTranspower
soughttosignalthecostofachievingapowerfactorofunitythentheLRMCoftheproposednew
assetswouldequalthecostofachievingunitypowerfactor,whichwouldmeanthekvarcharge
wouldbeveryhigh.InVectorsviewitwillbeoptimalforpowerfactortobeslightlybelow
unityforalldirecttransmissioncustomersandthismustberecognised.Orionexpresseda
similarviewinrespectofunitypowerfactor.
2.10.5 VectornotedthatdespitethestatementthatDTCscouldencourageorrequiretheirenduse
customerstotakestepstoimproveanypoorpowerfactor,itisnotpossibletomeasurethe
powerfactorofmostresidentialconsumerssopricesignalscannotbeeasilypassedthroughto
thatgroup.
2.10.6 WhileVectorfelttheproposedexpostassessmentofkvarchargesshouldenablesufficienttime
forDTCstomakeprovisionsforcostrecovery,itexpressedarelatedviewthatAnypenalty

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chargewouldalsoneedtobedeterminedwithsufficienttimeforthepenaltychargestobe
notifiedtotherelevantEDBssotheycansetpricestorecoverthosecharges.Vectoralso
questionedhowpenaltychargerevenuewouldbeappliedbyTranspower.
2.10.7 VectorandPanPac[andothers?]expressedaviewthatDTCswithnetleadingpowerfactors
duringRCPDassessmentperiods(i.e.thoseexportingreactivepowerintothegrid)shouldbepaid
orotherwiseappropriatelycompensatedforthatservice.PanPacsviewimplicitlyextendedto
considerationofthispointinrespectofpowerfactormanagementinthelowerislandregions,
giventhatthePanPacForestProductsLtdplantisconnectedtothegridintheLNIregion.
2.10.8 Vectordidnotsupporttherequirementtomeetaminimumpowerfactorateachpointofservice
aspartofthekvarchargingoptionaspowerfactorisaregionalissuefortheUSIandUNIregions.
2.10.9 Anumberofsubmitterscommentedonparagraph8.3.31inthediscussionpaperthatstatedthat
DistributorssubjecttotheCommerceCommissionspricepathregulationshouldbeableto
benefitwheretheyinvestefficientlyintransmissionalternativesbyretainingaportionofthe
benefitrealisedforthecurrentregulatoryperiod.ThosecommentingonthispointwereVector,
ENA,Orion,[others].
2.10.10 ThekeyconcernisthatitisnotcleartothesubmittersthatSRCinvestmentbyregulatedEDBs
wouldbeseenasregulatedassets.Theirviewisthatdistributorsarenotabletoretainaportion
ofthebenefitthatTranspoweraccruesfromEDBsinvestingintransmissionalternatives.They
pointoutthatclause3.1.3(b)(e)oftheCommerceCommissionsInputMethodologies
determinationprovidesforrecoveryoftransmissionchargespayableornewinvestmentcontracts
onlywheretheEDBhasavoidedliabilitytopaythetransmissionchargesasaresultofbuying
transmissionassetsfromTranspower.
2.10.11 ENA,whilesupportingthekvarchargingconcept,questionedwhetheritisnecessarytoadopta
chargeforthepowerfactorrange1.0to0.95lagging.InENAsviewsuchachargeisonly
desirablewheretherearegenuinecoststobeavoidedorbenefitstobeachieved.It
recommendsthatfurtherconsiderationbegiventotherangeswherekvarchargesapply.
2.10.12 OrionexpressedsignificantconcernsinregardtotheuseoftheRCPDasanappropriatecost
allocator.InitsviewtheRCPD[periods]aredeterminedaftertheeventandprovideonlyavery
limitedsignalastowhenreactivepowermayberequired,i.e.RCPDusuallyoccursintheUSI
duringthewintermonthsthiseffectivelymeansEDBsandcustomerswillhavetominimisetheir
kVArofftakeatalltimes.ThepointhereappearstobethattheactualRCPDperiodsarenot
knownwithanydegreeofcertaintyasawinterperiodprogresses,keepingthepressureonDTCs
throughoutthewinterperiodtominimisetheirreactivepowerdemand.
2.10.13 OrionfeltfurtherthatthecurrentRCPD50hourassessmentperiodfortheLSIandLNIversusthe
6hourassessmentperiodfortheUSIandUNIdisproportionatelyallocatesTranspowersrevenue
requirementbetweenupperandlowerislandregions.Theintroductionofakvarchargeinthe
USIandUNIfurtherincreasesthesubsidybetweenupperandlowerislandregions.TheAuthority
shouldgiveconsiderationtohowthisallocativeissue(subsidy)canbeaddressedwhilststill
providingthecorrectinvestmentincentives.
2.10.14 Powercocommentedthatembeddedgenerationisanimportantconsiderationforpowerfactor
managementthatwasnotdiscussedinthepaper.Itsubmittedthatisnotclearhowembedded
generationwouldbetreatedbytheoptionsoutlinedinthepaperandgiventhelikelyproliferation
overthemediumterm[it]shouldatleastbediscussed.

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2.10.15 TheLinesCompanycommentedsimilarlyontheimpactthatdistributedgenerationcanhaveon
gridpointofconnectionpowerfactors.Itsviewisthatpointsofservicenationallythathave
significantdistributedgenerationconnectedhavealowerpowerfactor.Theconcernthisraisesis
thattheproposedchangestotheconnectioncodewitha.95powerfactortriggerforreactive
chargeswilldisadvantageandcausegreatercostsfordistributorswithdistributedgeneration
connected.

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