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Commission declines to grant Reform Act exemption

Issued 21 March 2006/111

Commission declines to grant Electricity Industry Reform Act exemption to Eastland Networks

The Commerce Commission has declined to grant Eastland Networks Limited an exemption under the Electricity Industry Reform Act. The exemption related to Eastland’s proposed investment in a wind farm to be built in Mokairau near Gisborne. Eastland intended to retail the electricity generated by the wind farm directly to customers on its own network.

The EIR Act restricts relationships between electricity lines businesses and electricity supply businesses. A lines business may have an ownership interest in a renewable generation business as long as the two businesses are run as separate companies and kept at arms length, as defined by the Act’s arm’s length rules. The Commission can grant exemptions from the EIR Act and the arm’s length rules in certain circumstances.

Eastland sought exemption from the arm’s length rules, and exemption from the rule stopping them from entering into electricity hedges (financial instruments agreeing the price to be paid for electricity).

After an extensive investigation, the Commission declined to grant the exemption.

“The Commission considers that granting an exemption to Eastland would be likely to create incentives and opportunities to inhibit competition in the electricity industry,” said Commerce Commission Chair Paula Rebstock.

“The Commission had particular concerns because Eastland intended to retail the electricity generated by the wind farm directly to customers on its own network.”

The incentives and opportunities to inhibit competition would include the potential for:

- the lines business charging electricity retailers more than it charges itself for access to lines and contract administration;

- the lines business cross-subsidising its retailing business from its monopoly lines business;

- the lines business delaying or inhibiting access to its lines by its retail competitors;

- the lines business giving preferential treatment to their own retail customers on the network;

- the lines business having information regarding the best customers on its network to the disadvantage of its retailing competitors;

- lines connections being slower for non-retail customers;
- differential treatment in respect of outages; and
- preventing customer transfers.

Ms Rebstock said it was open for Eastland to amend its proposal in such a way that the anti-competitive effects, identified above, were eliminated.

A public version of the Commission’s decision will be available as soon as practicable on the Commission’s website under Public Registers.
Background

The electricity industry has four main parts: electricity generation, electricity transmission, electricity distribution (lines businesses), and electricity retail. Only generation, distribution (lines), and retail are covered by the EIR Act.

Under the EIR Act, a company may have an ownership interest in both generation and retail businesses, but generally needs permission to own both lines and generation, or lines and retail. It seeks that permission by applying for an exemption under the EIR Act.

The purpose of the EIR Act is to reform the electricity industry to better ensure that costs and prices are subject to sustained downward pressure and the benefits of efficient electricity pricing flow through to all classes of consumers.

In considering EIR Act exemption applications the Commission evaluates whether an exemption would:

- create incentives or opportunities to inhibit competition in the electricity industry;

- create incentives or opportunities to cross-subsidise generation activities from electricity lines businesses; and/or

- permit a relationship between an electricity lines business and an electricity supply business which is not at arm’s length.

ENDS

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