Pete Hodgson Speech: Electricity and gas: new legislation, new directions

[Address to the Electricity Networks Association AGM, Te Papa, Wellington]

Thank you for inviting me to speak today, and thanks to Warren Moyes for his opening comments.

You've asked me to speak about the Government’s electricity objectives.

As you probably all know, the Government’s overarching policy objective for electricity is to ensure that it is delivered in an efficient, fair, reliable and environmentally sustainable manner to all consumers.

This objective was in the Energy Policy Framework, released back in 2000, and it has been restated many times since — most recently in the Government Policy Statement on Electricity Governance, released last month, and the Electricity and Gas Industries Bill 2003, tabled in Parliament this morning.

I'm going to focus my remarks today on the GPS and the Bill, with an emphasis on issues of interest to you. These include:

• the division of responsibilities between the Electricity Commission and the Commerce Commission;

• finalising the GPS;

• distributed generation;

• retail competition;

• the future development of the gas industry; and

• the independence and powers of the Electricity Commission.

I'll start with the revised Government Policy Statement on Electricity Governance. The 2003 draft GPS has been extensively re-written compared to the December 2000 version, so I'll run through some of the key changes.

Firstly, the statement is explicitly linked to the Sustainable Development Programme of Action and other key government documents relating to energy, such as the National Energy Efficiency and Conservation Strategy and the Growth and Innovation Framework. This recognises that infrastructure in general and electricity in particular are critical to both sustainable development and economic growth.

Secondly, the focus of the previous GPS was on encouraging the electricity industry to establish self-governance arrangements to deliver on a number of specific Government policy objectives. Despite the best efforts of many people, industry self-governance didn't get off the ground. So the new GPS reflects the establishment of the Electricity Commission and a wide-range of new regulation-making powers to ensure the Commission can do the governance job required of it.

Thirdly, the statement includes the Government’s security of supply objectives and mechanisms for the Commission. These have been developed in response to the second severe dry hydro season in three years and the risk of similar problems in the future. They also represent an acceptance that the current market arrangements do not deal satisfactorily with supply risks.

The GPS spells out in some detail how the Government wants the new reserve energy mechanism to work. This will not by itself guarantee security of supply, but it will significantly reduce risks and undue spot market volatility.

Fourthly, there are new provisions relating to consumer protection. These include a requirement for the Electricity Commission to recommend minimum terms and conditions for consumer contracts, including disclosure of more information on customer’s bills. The GPS also requires all lines businesses, including Transpower, and all retailers to belong to an approved consumer complaints resolution scheme. Most of you already do, of course.

Finally, the GPS clarifies the respective roles of the Commerce Commission and the Electricity Commission regarding price control of lines businesses including Transpower. This is particularly important for lines companies. The interface between the two Commissions must be effective.

If we were starting from scratch, we would not have two regulatory bodies with overlapping jurisdictions. But we are not starting from scratch. The Electricity Commission has an enormous workload in front of it and I do not want to burden it with price control issues.

Besides, the Commerce Commission is well advanced, after a few hiccups, in putting in place a regime to deliver on the Government’s objectives. It makes sense for them to see this through. In the meantime we do need to have a clear delineation of responsibilities. We have a number of proposals in this area.

First, the Commerce Commission will continue to have sole responsibility for setting the revenue requirements of Transpower and other lines businesses. This will enable it to consider issues such as WACC and asset valuation methodologies on a cross-sectoral basis. In setting revenue requirements the Commerce Commission will be required to take account of regulations and rules which impact on costs. In turn, the Electricity Commission will have to notify the Commerce Commission of any regulations or rules affecting the costs faced by Transpower or lines.

Second, the Electricity Commission should have sole responsibility for determining the pricing methodologies for prices charged by Transpower and lines businesses, within the total revenue requirements set by the Commerce Commission. The Electricity Commission has multiple objectives, including social and equity objectives, security of supply, sustainability, competition and energy efficiency. Prices are critically relevant to these objectives, which are mostly outside the mandate of the Commerce Commission.

Third, we’ve come to the pragmatic conclusion that the Electricity Commission should be responsible for determining quality standards for Transpower, whereas the Commerce Commission should continue to have jurisdiction over quality standards for other lines businesses. The Electricity Commission will need to be extensively involved in setting quality and security standards for Transpower as part of ensuring real-time security of energy supply and the secure and efficient provision of the transmission network. However, the Electricity Commission has much less need to be involved in quality issues for other lines businesses, so we propose to leave quality issues with the Commerce Commission for the time being.

In addition to these clarifications in the new legislation, the Government expects the Commerce Commission and the Electricity Commission to work together closely and to minimise the scope for any uncertainties over jurisdiction. The GPS asks them to develop and publish a Memorandum of Understanding on how they propose to handle their separate tasks.

We intend to provide power in the new legislation to transfer responsibility for Part 4A of the Commerce Act, concerning the thresholds regime for lines businesses, from the Commerce Commission to the Electricity Commission by Order in Council. We propose that such a transfer may not be made before 31 December 2005, to allow time to determine whether problems emerge in practice and to avoid overload of the Electricity Commission during its initial two years of operation.

Twenty-two submissions have been received on the draft GPS, including from the ENA. Thank you for your contribution. I have formally requested comment on the draft GPS from the Electricity Commission, as required by the Act. After receiving and considering the Commission’s comments and the submissions, the Government will finalise the GPS. I hope that this can be done before the end of this year, so that everyone has a clear understanding of the Government’s expectations in good time.

I want to move on now to the Electricity and Gas Industries Bill, which was tabled in the House today.

Besides giving statutory backing to the Electricity Commission functions I have been discussing, the Bill contains measures concerning distributed generation that directly interest you.

The Government’s 20 May announcements included increasing the amount of generation lines companies are permitted to own. This includes reserve generation as well as new renewables without limit and all generation up to 25 MW or 10 per cent of maximum demand of the line owner or operator, whichever is higher.

The Bill also abolishes the requirement that generation owned by lines companies be connected to the line company’s network. This requirement is unnecessarily restrictive, and prevented, for example, a remote wind project being connected to the grid or another company’s network even where it would be more efficient to do so. Line companies will now be able to own this generation anywhere in New Zealand.

Some have recommended a further reform, to allow lines companies to sell the output of this generation direct to customers, rather than to retailers. The argument is that the existing retailers are your competitors as generators, since they are largely the big integrated generator/retailer companies, and that this move would improve the level of retail competition. The idea is an interesting one, and I have requested further work be done on it, as I remain concerned that retail competition is not as vigorous in many regions as I would like to see.

However I note that the call for this further reform has come predominantly from owners of lines companies, not the companies themselves. I would be interested to learn what your view is. In particular I would be interested to learn what you have to say about the back-office implications of retailing, that is the establishment of facilities to enable switching and so on.

The legislation being introduced today is more to do with generators and retailers than with transmission and distribution. As a rough rule of thumb, it is the competitive part of the industry where more attention is needed.

The public provision of information on the availability of fossil fuels is a good case in point. All markets work best with good information and this market needs more of it. Whereas hydro fuel information is available, real time, the same cannot be said of coal or gas. So a variety of changes are being proposed to improve disclosure of information on coal supplies, gas production, petrochemical exploration and the like.

Similarly transparency is missing in the way power bills are presented to consumers, especially small consumers. This has been a thorn in the side of, for example, Grey Power, for some time. Perhaps a thorn in your side too. Over recent years electricity prices have been tracking upward to the long run marginal price , whereas distribution prices have been tracking downward as lines companies secure and pass on efficiencies. Designing transparent billing that is easily understood is a bit of a challenge, but it's surely achievable and it hasn't yet been achieved.

A third example of changes that affect retailers more than your organisation is the need to have terms and conditions under which retailers purchase distributed generation from domestic consumers. For distributors this work is largely complete. For retailers it is not. The legislation empowers the development of those terms and conditions.

As earlier announcements foreshadowed, the Bill covers gas as well as electricity. It seeks to apply a consistent regulatory framework to the two sectors, reflecting the linkages between them.

In particular, the Bill contains powers to expand the functions of the Electricity Commission to govern gas if the gas industry is unable to achieve the Government’s policy objectives for gas, and for the Commission to be renamed the Energy Commission in that event. It also provides related regulation-making powers.

The ENA is one of a number of organisations that has advocated that the Electricity Commission should be more independent of the Government, along the lines of the Commerce Commission.

I am open to giving this issue further consideration, and I know that the Commerce Select Committee, which will consider the Bill, will welcome submissions on it.

The Bill already includes a number of amendments to the 2001 legislation to constrain the powers of the Minister. They include the following:

• The Minister can no longer recommend a regulation or make a rule without first receiving a recommendation from the Commission.

• The Minister can no longer reject or defer a recommendation unless he considers this will better meet the Commission’s objective. Previously the Minister could reject or defer for any reason.

• The Minister cannot amend the Commission’s recommendations unless this still gives “substantive effect” to the recommendations.

• The Commission is no longer required to consult with the Minister before making recommendations.

• The prohibition on a court from invalidating regulations or rules because of inadequate consultation has been deleted (although, to avoid a potentially chaotic situation, a six month grace period is provided before any regulations may be made invalid).

The decisions of the Minister and the Commission are subject to judicial review. That is, they must be reasonable, have followed good process (including proper consultation), considered all relevant factors and not considered any irrelevant factors.

The checks and balances in the system mean that the risk of arbitrary, ad hoc or capricious exercise of powers is low.

While good progress was made on many issues during the last few years when everyone was trying to make self-governance work, there is a large backlog of unfinished business.

We need to get the new regulatory regime in place urgently so we can make much-needed improvements in a whole host of critical areas, from security of supply to retail competition to transmission investment and pricing. We are faced with crucial challenges with the impending depletion of Maui, our on-going vulnerability to dry hydro years and the steady increase in demand for electricity.

This means that there is real pressure on everyone in the electricity business, and it’s likely to remain that way for a year or two yet.

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