Background

The Government established the Caygill Inquiry to conduct a comprehensive and strategic review of New Zealand’s electricity industry.

The review was necessary because recent changes to the industry have not delivered sufficient benefits to consumers – particularly domestic consumers – and to the environment.

In establishing the Inquiry, the Government's objective was to ensure that electricity is delivered in an efficient, fair, reliable and environmentally sustainable manner to all classes of consumer in New Zealand.

The Caygill Inquiry presented its report in June. This Power Package is the Government's policy announcement resulting from that Inquiry.

Two key values sit at the heart of the Government's policy initiatives:
 changes must result in fairness and transparency for electricity consumers, and they must be sustainable; and
 where possible, industry solutions should be found. The Government will intervene with regulation only where necessary.

Much of the detail of the Power Package is contained in a Government Policy Statement, which specifies the Government’s intentions relating to electricity industry governance and its expectations for industry action. The Statement includes a set of Guiding Principles which the Government will require the industry to adhere to.

The Government Policy Statement will be finalised in 3 to 4 weeks following consultation with interested parties.

Establishing a governance framework
 Governance of the industry will be by a new single body, the Electricity Governance Board, comprising a majority of independent members and having an independent chair. The independent members will be appointed after consultation with the Minister of Energy. The Board will replace three existing institutions: New Zealand Electricity Market (NZEM), Metering and Reconciliation Information Agreement (MARIA), and Multilateral Agreement on Common Quality Standards (MACQS).
 Key design principles for the Board’s constitution are included in the Government Policy Statement.
 The Governance Board is to develop rules for the industry consistent with the Government’s Guiding Principles. These rules cover the wholesale market, transmission, distribution, and retail sectors. The rules will be binding on generators, Transpower, distributors and retailers.
 The industry is required to move quickly to put in place the new governance structure. The Chair of the Governance Board will report to the Minister of Energy every two months on progress in implementing the Government Policy Statement, with the first report in December 2000.
 A specific report is required in February 2001 on progress in establishing a constitution for the Governance Board that meets the Government’s design principles. The Government will introduce mandatory arrangements by regulation if necessary. Legislation will be enacted to provide the Government with the necessary regulation-making powers. The Government will be able to direct the Board if regulations are promulgated under this provision.

Establishing a consumer complaints resolution system
 The industry is required to develop an independent consumer complaints resolution system such as an electricity ombudsman, and 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.
 Legislation will give the Government powers to regulate if the industry fails to put in place satisfactory arrangements.

Initiatives relating to electricity retailers
Fixed charges
 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 bill of the average domestic consumer (i.e. consuming 8,000kWh a year).
 The Government Policy Statement outlines the design features the Government requires the new tariff to include. The Ministry of Economic Development will monitor and report to the Government, and if necessary the Government will regulate to ensure that its policy is enforced.
 The new tariff option will be genuinely useful for domestic consumers. For example, increases in variable charges will be constrained and the tariffs must cover both standard tariffs and tariffs for interruptible load. This ceiling on fixed charges applies only to homes where the consumer usually resides (i.e. not holiday homes).
Promotion of retail competition
 The Governance Board will take responsibility for the enforcement and any future development of the protocols for consumers to switch retail suppliers. The Government will regulate if the industry arrangements do not work satisfactorily.
 Section 170A of the Electricity Act 1992 allows the Government to regulate to require the electricity industry to promote retail competition for domestic consumers. The expiry date for this section will be extended by five years to 31 March 2006.
Prepayment meters
 Retailers serving more than 25 per cent of the market for domestic consumers in a line network area will be required to offer pre-payment meters to domestic consumers at a reasonable cost.
Insolvent retailers
 The Governance Board will ensure that rules are developed under which consumers are protected from supply discontinuity in the event of retailer insolvency.
Model consumer contracts
 The Government expects the Governance Board to draw up a ‘model’ contract for domestic consumers, in consultation with the Ministry of Consumer Affairs. The model contract will not be mandatory but will be available for retail companies to consider in developing their approach.
 Features to be included in the model contract include transparency of charge components, company-specific arrangements for dispute resolution, and arrangements for consumer protection relating to outages. The arrangements for the availability of prepaid meters and to protect consumers in the event of insolvency of a retailer mentioned above are also to be included.
Consumer Guarantees Act
 The Consumer Guarantees Act 1993 will be amended to ensure the definition of goods and services includes electricity, line services and similar network utilities. This amendment will progress alongside the proposed new legislation for the electricity industry.

Initiatives relating to distribution of electricity
Regulatory objectives
 The Governance Board will be invited to develop ‘model’ approaches to distribution pricing.
Rural line charges
 The Government expects distribution companies to keep changes to rural line charges in line with urban line charges. The Ministry of Economic Development will continue to monitor developments in rural line charges and report as required.
Distributed generation
 The Electricity Industry Reform Act 1998 will be amended to allow lines companies to own distributed generation up to 2 per cent of the network’s maximum demand or 5MW, whichever is the greater.
 The Electricity Industry Reform Act 1998 will also be amended to allow lines companies to own distributed generation beyond these restrictions, provided that the source of such generation is a new renewable energy resource and provided that, where the limits above are exceeded, the generation activity is carried out in a separate company and be subject to the arms length rules set out in Schedule 1 of the Act.
 Lines companies will be required to publicise their intentions to construct distributed generation 30 days prior to entering binding contracts including giving reasons for proposals and demonstrating that alternatives have been considered.
 The Electricity (Information Disclosure) Regulations will be amended to require the asset management plans published by lines companies to include proposals for construction of distributed generation under consideration by the company.
 Terms and conditions for the connection of distributed generation to distribution networks will be determined under the distribution pricing methodology developed by the Governance Board, and be subject to dispute resolution under the new market rules to be developed by the Board. Legislation will give the government regulation-making powers in case the industry fails to deliver an effective arrangement.
Model use of system agreements
 The Governance Board is to develop a non-mandatory ‘model’ use of system agreement for access by retailers to lines. The interests of retailers and users are to be given weight equal to that of line companies in this agreement. The agreement should include terms and conditions for connecting distributed generation to the network.
Rights of line owners and landowners
 Amendments to the Electricity Act 1992 are proposed to clarify the existing policy underpinning the Act (i.e. to protect the ownership and maintenance of network assets). These relate to lines constructed before January 1993, and are that the definition of line maintenance is to be clarified, and lines are to be deemed to be lawfully fixed where landowners had not objected to the presence of the lines. The definition of the point of supply is also to be clarified.

Regulation of electricity lines businesses
 Individual line companies will be placed under price control if they break thresholds or criteria set by the Commerce Commission.
 Amendments to legislation will be made to enable the cost of price control to be recovered by a levy on electricity lines businesses. Information disclosure
 The responsibility for content, design and enforcement of information disclosure regulations on electricity transmission and distribution will be transferred to the Commerce Commission.
Asset valuations
 The Commission will undertake a re-calculation of distribution and transmission asset valuations on a common and specific basis. It will also review whether ODVs are the best valuation methodology and mandate changes as appropriate.
Initiatives relating to transmission of electricity
 The Government Policy Statement includes the Government’s specific objectives and pricing principles for transmission.
 Transpower will be responsible for developing the transmission pricing methodology consistent with the objectives and principles for the provision of transmission services. The Governance Board will ensure that Transpower’s pricing methodology conforms to the Government’s objectives and principles, and that Transpower and its customers comply with that methodology. Transpower’s charges established consistent with the methodology are to be enforceable on the same basis as other rules set by the Electricity Governance Board.
 Legislation will be amended so that the Commerce Commission will have the power to determine Transpower’s pricing methodology, with this power to be activated by the government if it appears that the Governance Board and Transpower are unable to agree on a satisfactory methodology. Transpower’s charges levied in accordance with any Commerce Commission decision will be recoverable as a debt.
 Rules will be developed by the Governance Board that cover transmission grid security, and grid expansion and replacement.
 The Governance Board may make recommendations from time to time to the Government (as Transpower’s owner) on any services provided by Transpower that could be made contestable in the interests of efficiency.

Initiatives relating to the wholesale electricity market
Information disclosure
 Wholesale market information - information on offers by generators into the spot market will be made publicly available after three months.
 Hydro spill - hydro generators are requested to release quarterly information on the amount, timing and location of spill within four weeks of the end of each quarter. Regulation-making powers are proposed for this in case the industry fails to deliver an effective arrangement.
 Future prices - the Governance Board is expected to ensure that aggregate information on future prices for electricity is publicly available. Regulation-making powers are proposed for this in case the industry fails to deliver an effective arrangement.
Dry year risk
 The Government has reissued a policy statement on dry year risk as part of the Government Policy Statement. This makes it clear that market participants are responsible for managing dry year and other supply risks.
Other features
 Contestable service provision – the Governance Board will be responsible for ensuring that services provided to the market are contestable wherever possible.
 Competing market arrangements – the new framework does not preclude the establishment of any competing trading arrangements which are consistent with the Government Policy Statement.
 Market surveillance arrangements – an effective and independent market surveillance body must be established to monitor compliance with and enforce market rules.
 Real time market – the Governance Board is to move urgently to implement a real time market so that the demand side can see and respond to actual prices immediately they change. Projections of system adequacy – the Governance Board will explore arrangements for the preparation and release of short and medium term projections of system adequacy covering issues such as forecasts of energy, reserve availability and transmission outages to ensure that industry participants are fully informed on factors likely to affect prices.
 Financial transmission rights – the Government supports the development of innovative financial instruments such as financial transmission rights, so that market participants can better manage risks in respect of transmission losses and constraints.

Electricity trust initiatives
Electricity trust accountability
 Electricity distribution and retail/generation trusts will be required to develop a Code of Practice providing for access to information and meetings by trust beneficiaries, together with procedures for review of decisions. Legislation will give the government powers to regulate if trustees fail to make satisfactory progress.
 Electricity distribution and retail/generation trusts are to publish financial statements and be audited by the Audit Office.
Expansion of electricity trust activities
 The mirror-trust option in the Electricity Industry Reform Act 1998 (EIRA) is to be re-instated with no time restriction. Trusts which own lines companies will be able to establish a mirror trust to generate electricity or trusts owning generation/retail interests could set up a ‘mirror’ and acquire lines businesses.
 The arms length provisions in the EIRA will apply to mirror trusts and their companies.

Ongoing monitoring of the performance of the electricity sector

Ongoing monitoring and reporting on whether and to what extent the outcomes the Government has set for the electricity sector are being met effectively will be undertaken by:
 the Electricity Governance Board reporting to the Minister of Energy each year on its activities;
 the Minister of Energy tabling the Board’s report in Parliament; and
 the Controller and Auditor-General and the Parliamentary Commissioner for the Environment reporting to Parliament annually. The Parliamentary Commissioner will report on environmentally sustainability issues and the Auditor General will provide assurance to Parliament that the Governance Board’s report is soundly based.
Section 26 statement
The Government proposes to issue a Statement to the Commerce Commission of Government policy (under section 26 of the Commerce Act 1986) with the Government Policy Statement attached.

Other statements of Government policy transmitted to the Commerce Commission under section 26 of the Commerce Act 1986 are to be withdrawn (namely Electricity Transmission (20 December 1994), Development of a Competitive Wholesale Electricity Market (12 December 1995), and Market Power in the Electricity Sector (23 December 1998)).

3 October 2000

POWER PACKAGE

Power to the Consumer

Recent changes to the electricity industry have not brought the expected benefits to domestic consumers. This led the Government to establish the Caygill Inquiry into the Electricity Industry.

The Government’s overall objective for the electricity industry is:

"to ensure that electricity is delivered in an efficient, fair, reliable and environmentally sustainable manner to all classes of consumer".

In short, to ensure that domestic consumers benefit. This document summarises how the Government's Power Package will benefit domestic consumers.

Price control on electricity lines

Electricity lines companies and Transpower will be placed under price control if they breach thresholds or criteria to be developed by the Commerce Commission.

The Commerce Commission will re-calculate distribution and transmission asset valuations on a common basis. It will also review whether ODVs are the best valuation methodology and mandate changes as appropriate.

Putting a ceiling on fixed charges

Consumers have suffered from continuing increases in the fixed charge elements of their power bill. This impacts more severely on smaller consumers, especially low income consumers.

In limiting fixed charges in some tariffs, the Power Package ensures that smaller consumers will have a tariff option giving them reasonable electricity bills that reflect their low usage.

The Power Package will require retailers who supply domestic customers to offer at least one tariff package with a fixed charge of no more than 10 per cent of the bill of the average domestic consumer (i.e. consuming 8000 kWh a year). Additional design features will ensure this is a genuinely useful tariff option for consumers. The ceiling on fixed charges will only apply to homes where the consumer usually resides (i.e. not holiday homes).

Establishing a consumer complaints resolution system

The Power Package requires the industry to establish an independent consumer complaints resolution system including an electricity Ombudsman or similar office. It also provides for imposing fines where there are breaches of rules relating to key consumer issues such as billing and disconnection. The Ministry of Consumer Affairs will work with industry in setting up the arrangements.

The system will deal with consumer complaints against retail and distribution companies and promote improved business practices.

If the industry fails to make progress towards a suitable system by early next year, the Government will regulate to do this.

Representation on the Governance Board

An Electricity Governance Board will oversee industry self-regulation. The Board will determine the rules and monitor compliance with them.

The Board will be made up of a mixture of industry representatives and independent members, with the majority and the chair being independent. The independent members will be appointed after consultation with the Minister of Energy. All members of the Board are to be aware of the interests of consumers. A key measure of the Board's success will be their actions in advancing the interests of domestic consumers.

The Board will ensure the development of rules, binding on the companies in the electricity industry, covering issues listed in this document.

The Government will intervene if it is not satisfied that the Board is achieving satisfactory outcomes.

Bringing electricity under the Consumer Guarantees Act

Electricity is not currently covered by the Consumer Guarantees Act. The Government will introduce legislation to bring electricity under this Act, to ensure that consumers have the same guarantees and redress from suppliers of electricity as they do for other goods and services.

Among other things, the Act requires goods and services to be of acceptable quality and to match their advertised description. Consumers have legal rights to have problems fixed within a reasonable time, or to get discounts or refunds. Suppliers can also be liable for consequential damage caused by their failure to deliver goods or services of acceptable quality.

Pre-payment meters to help people budget

Pre-payment meters can assist low-income consumers by allowing them to pay for their electricity before they consume it, thus avoiding unexpectedly large bills, or possible disconnection if they can't pay.

Currently, these are available on a very limited basis. In some areas they are not available at all.

Retailers who serve more than 25 per cent of domestic consumers in a line network area will be required to offer pre-payment meters at a reasonable cost.

Contracts to protect consumers' rights

The Industry Governance Board will be required to draw up a model customer contract, in consultation with the Ministry of Consumer Affairs and consumer representatives. The model contract will provide a guide and benchmark for fair and balanced contracts between domestic customers and their electricity retailer.

Features to be included in the model contract include transparency of charge components, company-specific arrangements for dispute resolution, availability of prepaid meters, arrangements to protect consumers in the event of insolvency of a retailer and arrangements for consumer protection relating to outages.

Making it easier to switch

When competition was introduced to the electricity industry, it was expected to bring benefits for consumers. However, competition is meaningless if consumers are unable to switch from one retailer to another.

The industry is working to improve the arrangements for the transfer of customers between retailers, including the introduction of strict deadlines for how long the process must take. The current allowable time to switch a customer is 23 working days, although some companies take longer. This timeframe is due to be reduced significantly as retailers' systems are upgraded to enable faster processing.

The Government will also require the industry to draw up rules for an orderly transition for consumers in the event of a retailer going out of business.

The Power Package sets out the Government's intention to intervene and regulate, if necessary, if the industry does not make sufficient progress.

Ensuring rural line charges are fair

Rural consumers are entitled to receive a reliable and affordable supply of electricity. The Government expects distribution companies to keep changes to rural line charges in line with urban line charges. The Government will monitor rural charges closely.

Trust accountability to consumers

In many parts of New Zealand, electricity distribution companies are owned in part or in whole by electricity trusts on behalf of local consumers.

Although there is generally strong local support for trusts, there are some concerns about the accountability of these trusts to the local community.

The Power Package sets out the Government's intention to strengthen the accountability regime by requiring trusts to develop a Code of Practice relating to access by consumers to certain information about trust activities and trust meetings, requiring the publication of accounts and making the Audit Office the auditor of the trusts. The Code will include a process for dealing with complaints about refusal to supply information or provide for attendance at meetings.

Mirror trusts to give consumers choice

The Government will reinstate the mirror trust option in the Electricity Industry Reform Act 1998, to allow trusts which own lines companies to establish a mirror trust to generate and/or retail electricity. (It will also allow trusts owning generation/retail interests to set up a mirror trust and acquire lines businesses.)

This decision is designed to enable local communities unhappy with existing retailers to re-establish a trust to retail electricity.

Assisting consumers to choose an electricity supplier

The Government will explore possibilities for funding an 0800 line so that consumers can seek advice on which electricity retailer offers the best deal. At present, this service is available from the Consumers' Institute, but only through the internet. An 0800 number would make the service accessible to all New Zealanders.

The Government will also explore plans to publish power price information in community newspapers to allow consumers to make price comparisons.

3 October 2000

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