Ministerial inquiry into the electricity industry
On February 3 2000, the minister of energy, Pete Hodgson, announced a ministerial inquiry into New Zealand's electricity industry. The purpose of the inquiry was to evaluate whether the present regulatory regime meets the government's object of ensuring electricity is delivered in an efficient, reliable and environmentally sustainable manner and, where existing arrangements were found not to achieve these objectives, to recommend changes. The report was formally delivered to Hodgson on June 12 2000 and released the following day.
Fifteen years ago, the electricity industry in New Zealand was a single, government-owned generation and transmission system, with local, publicly-owned distributors and retailers. There was no competition at any point in the supply chain. Today, although national grid transmission is still under the control of the government (through its ownership of Transpower New Zealand Limited), there is competition in the generation industry, with private companies and three state-owned enterprises actively competing to supply the wholesale market. Distribution companies are prevented by legislation from owning retail activities or significant generation facilities. Retail companies, many of which are integrated with the generators, compete to supply final customers.
The government is responsible for establishing the regulatory framework in which the electricity industry operates. Within that framework, the industry has evolved in response to commercial pressures. Like many other countries, in order to achieve low cost and reliable supply of electricity to customers, New Zealand has sought to open up the range of ownership options and to increase competition where possible. New Zealand presently differs from other countries in two important respects:
- New Zealand has no recent history of generic price control
regulation such as applies in, for example, the United Kingdom
and the United States; and
- New Zealand has required complete ownership separation between distribution and supply businesses.
The review undertaken is considered an important opportunity to consider the overall regulatory framework after 15 years of reform. The report has focused particularly on two key areas. The first is that in the generation and retail areas, where competition is possible in the generation and retail areas, initiatives have been recommended that will make it more effective. The second is that in transmission and distribution, where there is little or no prospect of effective competition in transmission and distribution, initiatives have been recommended to strengthen the regulatory framework so that, as far as possible, it encourages outcomes that would apply in competitive markets.
The inquiry panel considered 477 written submissions and held three weeks of hearings in five centres. The panel also informed itself of the approaches to electricity governance and regulation in other jurisdictions. The inquiry panel recommended a comprehensive and principle-driven approach to improving the efficiency and fairness of the electricity market, with a focus on the needs of consumers, including through majority representation of independent members on the proposed new single market governance board. The panel's key recommendations are:
Regulation:the regulatory framework should reflect the interconnected nature of the electricity industry, focusing on the principles and process and leaving room for flexibility and growth.
Wholesale: There should be a clearer distinction between the financial and physical wholesale markets. The governance structure for the physical market should be strengthened by the existing governance bodies (NZEM/MARIA/MACQs) being replaced by a new single market structure, with membership of the structure compulsory for generators, retailers, distributors and Transpower. This would promote enhanced competition, efficient and effective operation, and active demand side participation. The government should invite the industry to put the proposed new governance structure in place within a maximum of 12 months.
Transmission: Transpower's principle objectives should be to achieve a reasonable and transparent balance between a fair return to the tax payer and fulfilment of the government's energy policy objectives (including efficiency).
Distribution: The Commerce Commission should be responsible for the content and enforcement of the Information Disclosure Regulations and analysis of line company performance. The Commerce Act should be amended to empower the Commerce Commission to impose price controls on individual distribution companies (and Transpower) for a maximum of five years, and be given responsibility for developing criteria and thresholds upon which price controls should be imposed. Targeted price control in combination with the other measures recommended, is considered likely to be just as effective as universal price control, and much less risky in terms of economic costs. Distribution companies that are majority-owned by trusts should be subject to the local government Official Information Act, the Public Finance Act and the Ombudsman Act.
Retail: Protocols for switching consumers should be enforced by the new market board. The government should invite the industry to establish an electricity ombudsman scheme to apply to retail and distribution companies, including provision for the application of fines on companies and compensation for consumers. The government should allow the industry six months to establish such a scheme. The Consumer Guarantees Act, which provides protection for consumers in relation to the supply of goods and services, should be amended so that it applies to electricity. Arrangements should be introduced for consumers whose retailer becomes insolvent to be supplied by the "incumbent" retailer. The government should require retailers to supply pre-paid meters at reasonable cost.
Energy efficiency/sustainability and the environment: Fixed charges should comprise no more than 25% of the typical household's electricity bill. The Energy Efficiency and Conservation Authority should monitor fixed charges and refer the matter to the Commerce Commission if that percentage is exceeded. Transpower charges should be amended to promote co-generation.
The government is now to carefully consider all the panel's recommendations, with decisions expected to be announced within six to seven weeks following the release of the report. The government has indicated that it hopes to introduce legislation in October of this year.
James Aitken/Hamish Walker
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