A round up of the latest developments in the electricity sector

The electricity sector continues to move forward with a number of new laws in the pipeline. This update includes commentary on the Electricity Industry Reform Amendment Bill; the proposed legislative provisions which will give effect to the government's preference for new renewable electricity generation and the latest changes proposed for the Electricity Governance Rules.

Electricity Industry Reform Amendment Bill

The purpose of this Bill is to implement three main policy changes aimed at making it easier for lines companies to invest in generation by removing unnecessary barriers to investment without creating opportunities for the rise of unwarranted market power.

The Electricity Industry Reform Act 1998 (EIRA) required full ownership separation between electricity lines and electricity supply businesses. Two subsequent amendments, in 2001 and 2004, relaxed the rules on ownership separation to an extent: in 2001 the Act was amended to enable lines companies to invest in new renewable generation without limit (provided it was made in accordance with corporate separation and arms-length provisions in that Act), and to own any generation up to the higher of 5MW or 2% of lines peak load; the 2004 amendment allowed lines companies to own generation up to 50MW or 20% of peak load and unlimited reserve generation contracted to the Electricity Commission, to improve security of supply.

The Electricity Industry Reform Amendment Bill (the Bill) further relaxes the ownership separation rules and restrictions. This is done in three ways:

• By making it easier for owners of lines businesses to sell the output of the generation they were permitted to own under the 2001 and 2004 amendments to the EIRA. A number of amendments are proposed to achieve this objective. Under the proposed amendments, owners of lines businesses will be allowed to sell up to 100% of the nominal annual output capacity of permitted generation, and to trade such permitted generation via financial hedges. The proposed amendments are also aimed at lowering the cost of corporate separation and compliance with arm's length rules by raising the threshold for requiring compliance from 5MW or 2% of maximum demand to 10MW, allowing the same person to be a director of both lines and supply businesses, while requiring at least one independent director and not permitting executive directors, and allowing the same person to be a manager of both companies up to a threshold of 30MW. The lines company is also permitted to utilise the same staff and premises for its lines business and its supply business. This makes it more attractive for owners of lines businesses to invest in permitted generation.

• By narrowing the scope of ownership separation requirements to focus on the geographic areas of operation of the lines business and the supply business. This is achieved by allowing owners of lines businesses to be involved in generation and retailing without limits outside their lines area. The Bill also proposes removing the requirements for corporate separation and compliance with the arm's length rules for supply businesses undertaken by a lines company outside of its lines area. The rationale behind these amendments are that the lines company is likely to have the potential to exercise market power and to engage in anti-competitive practices if it is supplying electricity within its lines area, but there is likely to be no such potential when the lines business and supply business are geographically separate. These changes are consistent with the decisions of the Commerce Commission in the applications for exemption by Eastland Networks Limited (Decision No 575) and Unison Networks Limited (Decision No 576). In those decisions the Commerce Commission placed considerable emphasis on the geographic separation of the lines and supply businesses.

• By amending the definition of "renewables" to include all renewables. Previously the definition included only new renewable technologies, and excluded hydro and geothermal generation using traditional technologies. The new definition includes all renewables to reflect the Government's policy of encouraging the development of renewable energy.

The Bill was introduced on 4 December 2007, with submissions due by 29 February 2008. The Select Committee is due to report on the Bill by 10 June 2008. We will continue to monitor developments in this area, and will look to provide an update in this publication once the Select Committee report has been released.

Climate Change (Emissions Trading and Renewable Preference) Bill

A guiding principle in the New Zealand Energy Strategy (NZES) is that in future it is preferable that all new electricity generation be renewable, except to the extent required to maintain security of supply. This has been reflected in the proposed amendments to the Electricity Act 1992 set out in the Climate Change (Emissions Trading and Renewable Preference) Bill, which introduces a 10-year moratorium on almost all new fossil fuel generation.

The moratorium applies to new base-load thermal electricity generation above 10 megawatts that uses more than 20% oil, coal or gas as its fuel source, although there will be scope for exemptions to be made by the Minister of Energy on the recommendation of the Electricity Commission for specific fossil-fuelled generation proposals that address concerns over security of supply.

Whilst the proposed amendments to the Electricity Act certainly reflect the principle set out in the NZES, the question arises as to whether the moratorium is necessarily required. On its own the impending emissions trading scheme provides clear price signals against thermal generation. The introduction of the proposed moratorium alongside the emissions trading scheme, which effectively forces generators to invest in renewable energy regardless of whether this is the lowest or highest cost option, could be seen as acting counter to the purpose of the Bill, namely "reducing New Zealand's net emissions... and complying with our international obligations, including our Kyoto Protocol obligations, while maintaining economic flexibility, equity, and environmental integrity".

RMA call-in for renewable energy projects

The Government signalled in its New Zealand Energy Strategy to 2050 (NZES) released in October 2007, that in the future it expects more projects will be called-in under the existing provisions of the Resource Management Act (RMA). Under section 141A of the RMA, the Environment Minister can call-in a proposal and direct that the matter is referred to either a Board of Inquiry or the Environment Court. This means that the matter is decided by either of these two bodies instead of the relevant district, city or regional councils.

In late January 2008 Environment Minister Trevor Mallard called-in two renewable energy development proposals under the RMA, namely:

• the Unison Te Waka proposal for a 34 turbine wind farm at Te Waka near the Napier-Taupo Road (which has been referred to the Environment Court); and
• a new geothermal power station called Te Mihi being developed by Contact Energy (which has been referred to a Board of Inquiry).

The Minister has stated that the proposals were called-in because of their national significance in respect of their relevance to New Zealand's international obligations to the global environment, in terms of the Kyoto Protocol. That is, if they are approved the proposed projects will contribute to the NZES target of having 90% of our electricity generation as renewable energy by 2050.

Submissions on both proposals were called for on 8 February and close on 7 March 2008.

For more details on both of these proposals visit the Ministry for the Environment's website (www.mfe.govt.nz) or click here for details on the Unison proposal and click here for details on Contact Energy's proposal.

Update on Transpower's North Island Grid Upgrade Proposal

Another proposal to be called-in under section 141A of the RMA is Transpower's North Island Grid Upgrade Proposal. Decisions for that proposal have been referred to a Board of Inquiry which means that the Board of Inquiry will make decisions regarding the Notices of Requirement, instead of the nine affected councils. The call-in process effectively combines the councils' consideration and the Environment Court appeal process.

The Minister stated that he called in Transpower's proposal because he considers the proposal to be a project of national significance on the basis that the proposal:

• has aroused widespread public concern and interest regarding its actual or likely effect on the environment;
• involves significant use of natural and physical resources;
• affects more than one region or district;
• involves technology, processes or methods which are new to New Zealand and which may effect the environment; and
• is likely to result in or contribute to significant or irreversible changes to the environment.

A section 42A Report, commissioned by the Board of Inquiry under section 42A of the RMA, has been prepared for the North Island Grid Upgrade Proposal. It includes key issues of the proposal, an overview of the notices of requirement documentation and resource consent applications lodged, and an analysis of information provided by Transpower. The Board of Inquiry has also made public the submissions received by the Minister and a pre-hearing timetable on Transpower's proposal. The proposal hearing is expected to start on the 25 March 2008.

For further information on the Board of Inquiry hearing visit the Ministry for the Environment's website (www.mfe.govt.nz) or click here.

Electricity Governance Rules: Obligatory testing of physical assets

The Electricity Commission is continuing with its proposed changes to the Electricity Governance Rules to require asset owners to carry out mandatory testing of their plants in order to ensure an acceptable level of asset owner compliance with obligations in Part C of the Rules. Having considered submissions on its draft rule amendments in its April 2007 consultation paper, in December the commission issued further changes to its rule amendment proposal to:

• clarify the meaning of the proposed amendments; and
• improve the consistency of asset testing obligations across different categories of assets.

Submissions on the updated proposed rule amendments closed on 8 February. To access a copy of the commission's second round consultation paper visit the Electricity Commission's website (www.electricitycommission.govt.nz) or click here.

If you have any questions on any of the items noted in this update please contact: Garry Downs Partner Clive Taylor Partner, from our Auckland corporate department, or Chris Gordon Partner, from our Wellington corporate department.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.