Government's recommendations to improve electricity governance

Thursday 21 May 2009

A Government Policy Statement (GPS) on electricity governance has very recently been released (11 May 2009) detailing objectives for the Electricity Commission (Commission) to implement. The Government is encouraging the Commission to work with stakeholders to achieve the objectives and to use its powers, under the Electricity Act 1992 (Act), to recommend to the Minister of Energy changes to regulations and rules. We summarise briefly, several policy objectives the Government wants the Commission to give effect to.

Security of Supply

Security of supply remains a firm Government priority (see Bell Gully article). The Government expects the Commission to ensure that the generation system is capable of maintaining a mean winter energy margin of 17% of total reserves for New Zealand overall and 30% for the South Island. If the New Zealand or South Island energy margin is unlikely to be met, the Commission should contract for the reserve energy supply to ensure the specified energy margins are maintained. The same reserve energy should also be available to assist with unexpected supply contingencies, i.e. grid disruptions.

To achieve security of supply, the Government also wants the Commission to:

  • develop and publish a security of supply policy to provide a greater degree of certainty to market participants;

  • annually conduct and publish detailed supply and demand modelling and forecasting to provide both short-term and long-term security of supply, including the availability of fuels and new generation options in various circumstances;

  • monitor resource availability by determining whether the market is consistently failing to deliver new capacity sufficient for an adequate energy margin and to meet peek demand. If the market is consistently unable to meet demand it should make recommendations to the Minister of Energy on ways to achieve better outcomes;

  • develop and publish a set of hydro storage guidelines providing an estimate of the hydro storage levels that reflect different levels of shortage risk. As part of these guidelines, the Commission should have emergency storage guidelines to trigger various emergency response measures i.e. a conservation campaign; and

  • undertake a review and consultation with interested parties of the security standards and policies in the GPS and make recommendations to the Minister by the end of 2012.

Consumer Protection

The Commission should ensure that the terms and conditions of contracts between domestic consumers and electricity retailers (and where applicable, electricity distributors) reflect the reasonable expectations of consumers. The Commission is to ensure that these items are addressed in contracts:

  • transparency in charging;
  • frequency of billing;
  • company-specific arrangements for dispute resolution;
  • arrangements for notifying consumers of planned outages; and
  • arrangements for low-income domestic consumers.

In relation to the consumer complaint resolution system, it is the Government's intention that all stakeholders, which include potential consumers, owners and occupiers of land, as producers or consumers of electricity, have access to an independent and cost-effective system for resolving complaints about electricity distributors and electricity retailers. It should operate without charge, whether or not the consumer has a contract with the retailer or distribution electricity company. The Government advises that the Commission, in consultation with the Ministry of Consumer Affairs, should ensure that an improved system sufficiently addresses consumer interest. It is envisaged that any approved complaints resolution system will have a membership of all distributors, including Transpower and retailers.

The Government also recommends the complaint resolutions system, in its ambit, covers the gas industry. The size of the gas market does not give rise to a separate scheme and many of the same companies are involved in both the gas and electricity sector. In this case, the Commission should work closely with the Gas Industry Company.

Electricity Efficiency

The Government recommends the Electricity Commission should continue to carry out research and information sharing with the Energy Efficiency and Conservation Authority (EECA) on potential cost-effective electricity efficiency initiatives. Its long-term intention is for EECA to become the delivery agent of more of the Electricity Commission's energy efficiency programmes. The Government also seeks to formalise the purchase of services from EECA from the Commission and for these formalised arrangements to be available publicly on the Electricity Commission's website. A review of the Memorandum of Understanding between the Commission and EECA is sought.

Transmission

Transmission services not only have an impact on the electricity industry, but on the wider economy and environment. The GPS lists a number of objectives for the provision of transmission services. Essentially, the Government requires the grid to be reliable, resilient and efficient.

The Government wants the National Grid to be maintained and operated according to a common set of reliability standards. These standards should apply to all agreements between Transpower and its customers. The standards should be determined by the Commission with prior consultation with Transpower and affected parties and should be reviewed continuously to ensure they promote a secure and reliable grid. Other expectations of the Government for the Commission on its transmission objectives include:

  • developing a benchmark agreement, as a default, when customers do not have a transmission agreement with Transpower. The customers will be permitted flexibility over the standards they incorporate in their agreement so long as the integrity of the core grid is not compromised.

  • as part of its model and forecasting work, reporting on potential opportunities for the efficient management of Transpower's transmission network and transmission alternatives, at the minimum, every two years;

  • reviewing and approving grid upgrades plans received from Transpower that meet the criteria set out in the Electricity Governance Rules and to streamline the process for transmission works by approving works valued at less than $20 million that meet the criteria. In approving plans the Commission is not required to assess and evaluate their merits, for example in terms of whether such works are economical or not; and

  • where the cost of a project is more than $20 million, the Commission should ensure that transmission alternatives are considered to the extent practicable.

Interrelationship with Commerce Commission

The Government outlines a number of objectives about the interrelationship between the Electricity Commission and the Commerce Commission on the regulation of Transpower and electricity lines businesses pursuant to the Commerce Act 1986 and the Electricity Act 1992. The Government's wants to ensure that interested parties have certainty and clarity on how both Commissions will coordinate their respective roles.

The Government's intention is that costs of grid upgrades will be recoverable by Transpower and the Commission will ensure the transmission pricing methodology applied by Transpower, among other things, will mean the cost of connection will be allocated on a user-pays basis to the extent practicable.

Retail

The Government is looking to the Commerce Commission to promote and facilitate retail competition. Although competition has improved, it still remains less vigorous than had been hoped. It wants the Commission to take primary responsibility to promote and facilitate efficient and well-functioning markets and related arrangements for:

  • terms and conditions for access to end-use electricity meters by retailers;
  • processes and procedures to ensure that consumers are able to switch retailers with minimum inconvenience and cost; and
  • measures to enable retailers to effectively manage price risk, e.g. through hedging.

This is a brief summary of some of the Government's key action points for the Electricity Commission to implement policy objectives. The Commission has a tall order to meet and faces additional accountability. In addition to existing reporting requirements required by legislation, the GPS requires quarterly reporting to the Ministry of Energy on its progress in delivering on the Government's objectives.

This paper was prepared by Garry Downs and Sukhdeep Johal of Bell Gully's Energy Group.

Garry Downs, co-lead partner of Bell Gully's Energy Group, has had a long involvement with the electricity industry acting for many participants including in relation to industry consolidation, generation projects, major supply and customer contracts and regulatory matters.

 

For further information, please contact:

Garry Downs
Partner

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