Electricity Reform - General

Garry Downs, Partner | July 2000

The Ministerial Inquiry into the Electricity Industry recently produced a report of its findings and recommendations. A brief summary of the more significant recommendations is set out below.

The report states that the key broad objectives of the reform are to promote competition in the generation and retail areas and to better the regulatory framework for transmission and distribution, so that outcomes mirror those that would be achieved with effective competition.

Wholesale

A New Single Market Body and Real Time Prices

The bodies currently governing the wholesale market should be replaced by a new single market body, with a clearer distinction between the physical and the financial wholesale markets. The new body should:

• have a majority of its Board members independent of the industry;
  
  
• require compulsory membership for all generators, distributors, retailers and Transpower;
  
  
• be largely self-regulated with guiding principles;
  
  
• take into account the views of all industry participants, including consumers; and
  
  
• promote competition, including ensuring that equally competitive terms apply between participants, and encourage active demand-side participation.

The new body should govern the areas covered by the existing structures, as well as the following: registration, pool rules, dispatch, security, constraint standards, reconciliation, settlement, transmission, and distribution pricing methodology and enforcement.

The Government should invite the industry to put this new structure in place within a year. If this is not achieved, the Government should legislate for the regulatory powers to achieve this.

The wholesale market should have real time price signals. More accurate prices would allow retail companies and consumers to make savings by reducing requirements during times of peak demand or constrained supply. In addition, wholesale market bidding information should be released after one month.

Transmission

Bringing Transpower Closer to the Market

Transpower's principal objective should be to achieve a balance between a fair return for the use of the transmission system, based on commercial principles, and ensuring the availability of efficient, reliable and environmentally sustainable energy services at the lowest cost.

Transpower should be required to adopt pricing policies consistent with a revised and updated Statement of Corporate Intent and develop a pricing methodology in conjunction with the market. The market should provide demand-side solutions to relieve grid constraints.

Distribution

Targeted Price Control, Stronger Information Disclosure and Fixed Line Charges

The Commerce Commission should have the ability to impose price controls on individual distribution companies and the Commerce Act should provide for the procedures to impose such price controls.

The information disclosure regulations should be modified to focus on output and performance indicators that are meaningful to consumers. The Commerce Commission should monitor and enforce compliance with the regulations.

Fixed network charges should account for no more than 25 per cent of a typical household's electricity bill. The Energy Efficiency and Conservation Authority should monitor market developments for fixed charges and involve the Commerce Commission where necessary.

Retail

An Electricity Watchdog and Consumer Guarantees

An Electricity Ombudsman scheme should be established and apply to retail and distribution companies. The Ombudsman could, for example, levy fines and direct that consumers be compensated. The industry should be allowed six months to establish the Ombudsman scheme, after which the Government should look at other options to get the scheme running.

The Consumer Guarantees Act (which provides certain minimum consumer guarantees and rights of redress) should apply to electricity so that, for example, electricity would have to be fit for its common purpose and be as safe as a reasonable consumer would expect.

What Now?

The bulk of the above recommendations either involve legislative changes (e.g. to the Commerce Act) or will be left to the industry to find effective solutions within a time constraint imposed to ensure there is change.

The Minister of Energy has said that the Government will now consider the recommendations and announce decisions within the next few months, although legislation is likely and may be introduced as early as October.