Government Power Package

Garry Downs, Partner and Chris Gordon, Partner and Peter Castle, Partner and Andrew Brown, Consultant | November 2000

The Government recently announced a Power Package in response to the Ministerial Inquiry into the Electricity Industry. All of the Inquiry's recommendations were accepted, either directly or in a modified form. A brief summary of the more significant aspects of the Power Package is set out below.

The Government's overall objective in the Power Package is to ensure that electricity is delivered in an efficient, fair, reliable and environmentally sustainable manner to all classes of consumer in New Zealand. To meet this objective the Government favours industry solutions where possible but regulatory solutions where necessary.

The detail of the Power Package is contained in a Government Policy Statement. This is due to be finalised in early November following consultation with interested parties. The Statement will specify the Government's intentions relating to industry governance and its expectations for industry action and will include a set of Guiding Principles to which the industry will be required to adhere.

Wholesale

Electricity Governance Board and Real Time Prices

The industry is to be governed by a new single body - the Electricity Governance Board. The Board will replace the three existing institutions: New Zealand Electricity Market (NZEM), Metering and Reconciliation Information Agreement (MARIA) and Multilateral Agreement on Common Quality Standards (MACQS).

The Board will comprise an independent chair and a majority of independent members. Any director, employee or significant shareholder of an industry participant will not meet the test of independence. The Government expects the industry to establish a constitution for the Board reflecting key design principles set down in the Government Policy Statement.

The role of the Board will be to develop rules for the industry consistent with the Guiding Principles. The Guiding Principles will include explicit requirements for the Board to follow in relation to energy efficiency and environmental objectives. The rules will cover the wholesale market, transmission, distribution and retail sectors and will be binding on generators, Transpower, distributors and retailers.

The industry is to move quickly to put in place the new governance structure. It will report to the Minister of Energy every two months on progress in implementing the Government Policy Statement, with the first report due in December 2000. A specific report is required in February 2001 on progress in establishing the constitution.

The Government will monitor the industry to ensure that its expectations in relation to setting up the Board are met. If necessary, regulatory powers will be used to create a Board that meets the Government's requirements.

• promote retail competition by taking responsibility for the enforcement and future development of protocols for consumers to switch retail suppliers;
  
  
• develop rules which protect consumers from supply discontinuity in the event of retailer insolvency;
  
  
• draw up a "model" contract for domestic consumers, in consultation with the Ministry of Consumer Affairs;
  
  
• develop "model" approaches to distribution pricing;
  
  
• develop a non-mandatory "model" use-of-system agreement for access by retailers to lines, which is to include terms and conditions for connecting distributed generation to the network;
  
  
• develop rules that cover transmission grid security, grid expansion and replacement;
  
  
• ensure that information on offers by generators into the spot market is made publicly available after three months;
  
  
• ensure that aggregate information on future prices for electricity is made publicly available;
  
  
• ensure that information on the amount, timing and location of hydro spill is made available by hydro generators within four weeks of the end of each quarter;
  
  
• ensure that services provided to the market are contestable wherever possible;
  
  
• promote demand-side participation in the wholesale market in order to reduce the demand for electricity, especially at peak times;
  
  
• set up a real-time market so that the demand-side (retailers and large consumers) can see and respond immediately to real-time market prices.
  
  

Transmission

Transmission Pricing Methodology and Price Control

The Government Policy Statement will include the Government's specific objectives and pricing principles for transmission. Transpower will be responsible for developing the transmission pricing methodology in accordance with these objectives and principles. Transpower's Statement of Corporate Intent will be modified in due course to reflect the new objectives and pricing principles. The Commerce Commission will be given the power to determine Transpower's pricing methodology where it appears that the Electricity Governance Board and Transpower are unable to agree on a satisfactory methodology.

The Commerce Act 1986 will be amended to allow the Commerce Commission to regulate Transpower's prices and to place Transpower under price control if it breaches thresholds or criteria set by the Commission.

Distribution

Price Control, Information Disclosure, Asset Valuation, Rural Line Charges, Distributed Generation and Trusts

The Commerce Commission will regulate pricing by distribution companies and individual companies will be placed under price control if they breach thresholds or criteria set by the Commission. On 10 October 2000 the Commission announced an inquiry into pricing by distribution companies.

The responsibility for content, design and enforcement of the information disclosure regulations will be transferred from the Ministry of Economic Development to the Commerce Commission.

The Commerce Commission will undertake a re-calculation of distribution and transmission asset valuations on a common and specific basis and will review whether ODV (Optimised Deprival Value) is the best valuation methodology.

The Government expects distribution companies to keep changes to rural line charges in line with urban line charges.

The Electricity Industry Reform Act 1998 will be amended to allow distribution companies to own distributed generation of up to 2 per cent of the network's maximum demand or 5MW, whichever is the greater. Ownership beyond these restrictions will be permitted where the source of such generation is a new renewable energy resource and where the generation activity is carried out in a separate company (subject to the rules in Schedule 1 of the Act).

Trusts owning distribution companies will be permitted to establish mirror trusts to generate and/or retail electricity. Trusts owning generation/retail interests will be permitted to set up mirror trusts to acquire distribution companies. Trusts will have increased accountability to the local community through such measures as access to information and publication of accounts.

Retail

Complaints Scheme, Fixed Charges, Pre-payment Meters and Consumer Guarantees

The industry is required to develop an independent consumer complaint resolution scheme, such as an electricity ombudsman. The industry is also required to develop a process for providing for fines to be imposed where there are breaches of rules relating to key consumer issues such as billing and disconnection. The industry is to work with the Ministry of Consumer Affairs to develop arrangements that meet the expectations of Government, as set out in the Government Policy Statement. New legislation will give the Government powers to regulate if the industry fails to put satisfactory arrangements in place.

All retailers supplying domestic consumers will have to offer at least one tariff with a fixed charge of no more than 10 per cent of the average domestic consumer's bill (i.e. consuming 8000kWh per year).

Retailers serving more than 25 per cent of the market for domestic consumers in a line network area must offer pre-payment meters to domestic consumers at a reasonable cost.

The definition of goods and services contained in the Consumer Guarantees Act 1993 will be amended to include electricity, line services and similar network utilities.

What Now?

The Government expects the industry to move quickly to implement the work programme set out in the Government Policy Statement, once it is finalised. Legislation will be introduced before the end of the year giving the Government the power to regulate if the industry does not deliver under the Government Policy Statement. Tight monitoring and reporting arrangements will be put in place to ensure the outcomes sought by the Government are being met effectively.