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NORTHPOWER ELECTRICITY LINE CHARGES PRICING METHODOLOGY

General Principles

Revenue Requirements

Consumer Groups

Determination Of The Appropriate Consumer Group

Allocation Of Components Amongst Consumer Groups

Allocation Of Network Assets And Cost To Consumer Groups

Derivation Of Prices

Northpower's pricing methodology is based on the following principles:

General Principles

Northpower's line charges will be structured in such a way as to encourage demand-side management at the Very Large Industrial and Half-Hour Metered sites, and to reward energy conservation amongst Mass-Market consumers.

Northpower will endeavour to provide long term stability in line charges and meet all relevant regulatory and industry requirements.

Revenue Requirements

Northpower's line charges cover transmission costs, depreciation, maintenance and operation costs, administration cost and cost of capital.

The cost of capital (WACC) is derived using the Capital Asset Pricing Model. For the financial year ended March 2006, Northpower adopted the following inputs:

• The 10 year government stock rate to estimate the risk free rate at 6.0%,
• An asset beta of 0.40,
• A post tax market risk premium for equity of 7.25%.

Applying these inputs gives a nominal after-tax WACC of 7.09%.

Consumer Groups

Connections to the Northpower network have been re-categorised into three main groupings, primarily based on the volume of electricity consumed in a year, but also influenced by the type of metering (half-hour or non-half-hour). There were previously four groups, but these have been rationalised to three groups by merging two half-hour metered groups. Sites range in consumption from over 200 GWh per annum, down to a few kWh per annum. The groupings are as follows:

Very Large Industrial Sites (Asset-based Line Charges)
The sites are supplied at 33kV or 11kV on dedicated feeders from substations.

Half-Hour Metered sites (Demand-based or consumption-based line charges)
All sites with half-hour metering, excluding the Very Large Industrial sites.

Mass-Market sites (Consumption-based line charges)
The final group contains most the connections to the network and includes households, commercial sites, farming operations and small industrial sites.

It is comprised of all the ICP's with non-half-hour metering and all the unmetered ICP's.

Determination Of The Appropriate Consumer Group

The methodology for allocating a group to each connection is as follows:

Very Large Industrial Sites:
Sites which are obviously very large by the sheer scale of their operation, or which have significant assets dedicated to the electricity supply from the GXP to the site.

Half-Hour Metered sites
Generally sites consuming in excess of 350MWh pa (excluding the Very Large Industrial sites). However, this group also includes lower consumption sites which have half-hour metering for reasons such as group energy contracts. Note that Northpower does not mandate half-hour metering for particular groups of consumers, except where it required in accordance with the EGR's (ie for Category 3 to 6 sites).

Half-hour Metered Sites on Consumption-based Line Charges
This group is for all ICP's with half-hour metering that do not fit into the Very Large Industrial or Large Commercial & Industrial groupings.

Mass-market
All connections with non-half-hour metering and all unmetered connections.

Allocation Of Components Amongst Consumer Groups

Methodology for Very Large Industrial Group

Transmission component:
Grid charges are allocated transparently to each site on the basis of the appropriate share of the total Transpower grid charges for the GXP supplying the site, plus an administration fee. Electricity Commission levies and Voltage Support charges are allocated on the same basis as they are charged to Northpower.

Distribution component:
The distribution charge for each site is derived as a rate of return on the assets providing the connection from the grid-exit to the point of supply for the site, plus any on-site assets owned by Northpower. The rate of return includes components for return on assets, depreciation and maintenance. Assets that provide part of the connection to the site and also provide connections to other sites are allocated on the basis of the share of the load carried at peak loading (for example: an incoming circuit-breaker with a peak current of 200 amps would be allocated on the basis of the assessment of the share of that 200 amps supplying the end-use site at the peak).

Metering component:
The metering charge is calculated as a rate of return on the metering assets owned by Northpower, plus an annualised portion of the certification costs.

Methodology for Half-Hour Metered Group

Sites with load factors favouring a demand-based line charge (subject to a 150kVA minimum) are allocated to the ND9 Price Plan which is demand-based. Sites with poor load-factors or low consumption are allocated to the ND10 Price Plan which is consumption-based.

ND9 Price Plan methodology
Transmission and distribution costs are both recovered via two demand charges assessed on the basis of actual half-hour demands in specific time-periods from 1 April to 31 March. The split of transmission to distribution is presently approximately 50/50.

The input costs that are common to both the Anytime and the Shoulder Demand charges are apportioned between the two, generally (but not exclusively) on a 50/50 basis.

Anytime Demand charge:
This charge provides a return required on assets for dedicated and shared portions of the grid connection, sub-transmission system and the distribution system (11kV lines and distribution transformers). Most of these sites are supplied directly from distribution transformers, so none of the 400V local distribution costs are allocated to this price plan.

Shoulder Demand charge:
This charge is a reflection of the contribution that the site's peak load makes to the total system demand during the period when load control is applied (generally May to September). This includes the contribution to the chargeable demand at the grid exit, plus the grid connection, sub-transmission system and the distribution system. It also covers reactive power requirements for power factors of 0.95 or better.

Reactive Penalty charge:
If the power factor falls below 0.95 lagging for the highest half-hourly demand in a month, the excess kVAr is charged at a published rate per excess kVAr.

Customer charge:
This charge covers a portion of Northpower's general administration costs. In cases where Northpower provides the half-hour metering, standard metering charges are added.

ND10 Price Plan
The methodology presently mirrors the mass-market methodology, but with appropriate adjustments for metering charges. A Reactive Penalty charge applies where the average power factor is below 0.95.

Methodology for the Mass-Market group

Daily supply charges:
These charges cover a portion of Northpower's general administration costs. They also include an average cost for the provision of standard non-half-hour meters (where applicable) and current transformers (where applicable). Only one daily charge applies per ICP, regardless of the number of variable tariffs for that ICP.

For ICP's on domestic pricing plans, the daily charge is set in accordance with the Low Fixed Charge Regulations plus an allowance for metering supplied by Northpower.

Variable charges:
The variable charges recover the balance of the costs that are not recovered by the daily supply charges, including the return on assets and operating & maintenance costs relating to the grid transmission, sub-transmission, 11kV distribution lines & cables and 400V local distribution for this group of consumers. The various rates per kWh are intended to reflect the costs applicable to the various controlled and 24-hour options available.

Transmission:
Transmission is recovered as a portion of the variable charges. There is a differential between 24-hour variable charges and controlled charges to reflect the differing impacts on the peak demands at the grid-exits.

Allocation Of Network Assets And Cost To Consumer Groups

The sub-transmission system costs are allocated to all groups.

Costs associated with the 11kV system are shared between the Half-Hour Metered group and the Mass-Market group.

Costs associated with the 400V system are allocated to the Mass-Market group.

Derivation Of Prices

Line charges are allocated on a fixed (daily or monthly) and variable (consumption related) basis. The mix between fixed and variable charges reflects the government's current requirements and what has been historically acceptable by consumers. Mass-market consumers expect a significant portion of their charges to be based on variable (per kWh) charges, consistent with a "user-pays" approach. Fixed charges comprise 16% of Northpower's income from line function services.

Fixed charges for mass-market consumers are expressed as a "cents per day" charge and cover the costs relating to administration, corporate overheads, billing and other non-system related overheads.

Northpower's fixed charge for all domestic ICP's is 15 cents/day (plus GST) plus 6 cents/day for metering, which complies with the low fixed charge regulation.
("Domestic" is as defined in the EIRA.)

Separation of Revenue and Cost to Consumer Groups

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