This statement sets out the Government’s policy for the development of New Zealand's gas industry, and its expectations for industry action.

INTRODUCTION

The Government is committed to a sustainable and efficient energy future. Natural gas will play a significant part in achieving that commitment.

The expected end of the life of the Maui gas field signals the need for significant changes in gas supply arrangements. Production from an increased number of smaller gas fields will require more sophisticated pro-competitive market arrangements, including improved arrangements for gas balancing and reconciliation.

The Government’s policy for gas is consistent with the overall outcomes it seeks from its energy policy. These energy policy objectives are: environmental sustainability, including continuing improvement in energy efficiency and a progressive transition to renewable sources of energy; reliable and secure supply of essential energy services; costs and prices to consumers which are as low as possible while ensuring that prices reflect the full cost of supply including environmental costs; fairness in pricing, so that the least advantaged in the community have access to energy services at reasonable prices; and continued public ownership of publicly owned assets.
Evolution of gas industry arrangements

The Government wishes to see further development of gas market arrangements, and has established the following policy objective, outcomes and guiding principles for the evolution of gas industry arrangements.

Policy objective, outcomes and guiding principles for the gas industry

The Government's overall policy objective for gas is:

“To ensure that gas is delivered to existing and new customers in a safe, efficient, fair, reliable, and environmentally sustainable manner.“

Industry arrangements should promote the satisfaction of consumer’s gas requirements in a manner that is least-cost to the economy as a whole and is consistent with sustainable development.

Consistent with this overall objective, the Government is seeking the following specific outcomes: gas and other resources are used efficiently; barriers to gas exploration and field development are minimised; the costs of producing and transporting gas are signalled so that investors and consumers can make decisions consistent with obtaining the most value from gas; delivered gas costs and prices are subject to sustained downward pressure; risks relating to security of supply, including transport arrangements, are properly and efficiently managed by all parties; gas safety is promoted; and greenhouse gas emissions are minimised.
To meet this policy objective and outcomes, gas industry participants, in conjunction with consumers, should ensure that arrangements are developed to meet the requirements of this Government Policy Statement. The arrangements should be consistent with the following guiding principles. In particular, the arrangements should: enjoy wide support from supply-side gas market participants and consumers; promote enhanced competition, including inter-fuel competition, wherever possible and, where it is not, seek outcomes that mirror as far as possible those that would apply in competitive markets; be stable over time so that investment is encouraged; ensure there are mechanisms to reduce demand when gas is scarce; be consistent with government policies on climate change and energy efficiency; and be consistent with the Commerce Act 1986 and all other relevant laws.

INDUSTRY-LED SOLUTIONS
To meet its objective and outcomes for the gas sector, the Government favours industry-led solutions where possible, but is prepared to use regulatory solutions where necessary. The Government invites the gas industry to establish: a structure and decision-making process to manage the further development of gas market arrangements in the areas that are set out below; and a work programme that enables the development of efficient gas market arrangements in a timely and effective manner.

Principles guiding the development of governance structures The governing entity must: be representative of all stakeholders, including consumers; have an independent chair; have a majority of independent persons (any director, employee or significant shareholder of the supply side of the industry does not meet the test of independence); have the independent members appointed after consultation with the Minister of Energy; not operate in the interests of individual participants; and have the power to develop and enforce arrangements consistent with the Government Policy Statement.

The Government expects the industry, including consumer representatives, to develop arrangements with respect to: Production and Wholesale Markets The development of protocols, standards and conventions applying to wholesale gas trading, including quality standards, balancing and reconciliation. The development of a secondary market for the trading of excess and shortfall quantities of gas. The development of capacity trading arrangements. Transmission and Distribution Networks The establishment of an open access regime across all high-pressure transmission pipelines so that gas market participants can access transmission pipelines on reasonable terms and conditions. The establishment of consistent standards and protocols across all distribution pipelines so that gas market participants can access distribution pipelines on reasonable terms and conditions. The establishment of gas flow measurement arrangements to enable effective control and management of gas. Retail Markets The standardisation and upgrading of protocols relating to customer switching, so that barriers to customer switching are minimised. The development of efficient and effective arrangements for the proper handling of consumer complaints. The development of model consumer contracts that are fair to consumers and retailers. Gas Safety The establishment and delivery of effective and internationally consistent safety standards and conventions. The ensuring of the competency of all those undertaking gas work. The operation of effective self-audit, monitoring and reporting on levels of competency and safety compliance.

Open Access to the Maui Pipeline The Government recognises that there is demand to enable non-Maui gas to use the Maui pipeline to assist with the ongoing supply of gas to markets north of Taranaki. The Maui contracts (to which the Government is a party) currently preclude non-Maui gas from using the Maui pipeline before 2009. The Government, as a party to the Maui contracts, invites Maui Developments Ltd, the Natural Gas Corporation, Contact Energy and Methanex to present it with a proposal to enable open access to the Maui pipeline consistent with the following approach: The Government does not seek to improve its current commercial position as a result of a move to open access; The Government, however, seeks to maintain the value of its existing contractual rights; The Government will not accept any increase in the risk it faces as a party to the Maui contracts as a result of the move to open access; and The open access arrangements need to provide non-discriminatory access to all potential users and not be biased towards those with an existing contractual interest in the Maui pipeline.

Government oversight

The Government will monitor the industry’s progress in developing the arrangements outlined under “Industry-led solutions” above. Gas industry participants, in conjunction with consumers, should report to the Minister of Energy each quarter on progress. The reports should be presented by a representative or representatives selected for the purpose by gas industry participants and consumers.

The first report is expected by 28 February 2003. That report should comment on the institutional arrangements, process and timetable (including measurable milestones) for the work programme envisaged in paragraph 6.

The Government expects that efficient industry arrangements will be in place by December 2004.

If progress towards the measurable milestones is unsatisfactory, the Government will consider regulatory solutions.

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