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Ministerial Inquiry into the Electricity Industry

Media Statement

3 February 2000

Ministerial Inquiry into the Electricity Industry

The Minister of Energy, Hon Pete Hodgson, announced today the terms of reference and membership of a three-person Ministerial Inquiry into the electricity industry.

“This Inquiry will consider what changes are needed to ensure New Zealanders have the best possible electricity system,” Mr Hodgson said.

"Many New Zealanders remain unconvinced that the restructuring undertaken by the previous Government has benefited or will benefit the ordinary consumer. This Government shares that concern.

"Our overall objective with this Inquiry is to ensure that electricity is delivered in an efficient, reliable and environmentally sustainable manner to all consumers. New Zealanders need to be sure that they will get fair value for their money. At present they have no such assurance.

"The Inquiry process will be open. I urge electricity consumers and the industry to make good use of the opportunity it represents by making their views known.

"It is unfortunate that the Government is forced to this effort and expense to address a problem created by the previous administration. The instability and uncertainty created by National's hasty and ill-conceived changes were both predictable and predicted.

"We must, however, deal with the electricity sector we have inherited, rather than the one we would like. Some of the recent changes are now irreversible, but changes are possible in many other areas to ensure good outcomes for consumers.

"In considering electricity policy, we will listen carefully to both consumers and the industry. Our approach is to use industry solutions where possible, and regulatory solutions where necessary."

The Inquiry will focus on distribution and retailing, the wholesale market and the transmission grid. Its report is due by June 12.

The Inquiry will be headed by Hon David Caygill, a partner in the law firm Buddle Findlay and a former Government Minister. Mr Caygill has extensive experience in public and commercial law and in the electricity industry, where he chairs an industry committee establishing rules for transmission grid security.
The two other Inquiry members are:

 Dr Susan Wakefield (formerly Lojkine), who was Chairman of the Commerce Commission from 1989-94. Dr Wakefield is an accountant by profession with extensive business experience, including directorships, and a thorough knowledge of competition issues.

 Mr Stephen Kelly, Managing Director of the Australian National Electricity Code Administrator (NECA). NECA is responsible for encouraging and fostering the development of the Australian national electricity market, and for administering and enforcing the market rules. Mr Kelly has extensive experience in electricity industry regulation from his previous employment with the Premier’s Department in New South Wales and the UK Treasury.

Mr Caygill and Dr Wakefield have involvements and interests in companies operating in the energy sector. Appropriate arrangements for handling these conflicts have been put in place and full details are set out in the attached material.

“I am fortunate to have secured the services of these three experienced panel members," Mr Hodgson said. "I am confident they will make a very significant contribution to assist us in getting the electricity industry back on track.”

The panel will be assisted by Professor Stephen Littlechild, the former United Kingdom regulator for electricity, acting as an expert adviser. Mr Hodgson said Professor Littlechild was one of the world's foremost authorities on electricity pricing issues and the Government was very pleased to have secured his services.

Further details about the Inquiry will be placed on a special website available from next week. The website address is www.electricityinquiry.govt.nz. Interested parties will be invited to make submissions to the Inquiry and public hearings will be held.

“Establishing this inquiry was always set to be my first task as Minister of Energy,” Mr Hodgson said. “From today my attentions will turn to the second task, which is to begin improving New Zealand’s energy efficiency.”

Attachments: Inquiry Terms of Reference
Background on Inquiry members, including
statements of interest
Questions and Answers on Inquiry issues
Statement from Inquiry Head, Hon David Caygill


Contact: John Gilbert, Inquiry secretariat 04 4601 378

MINISTERIAL INQUIRY INTO THE ELECTRICITY INDUSTRY: TERMS OF REFERENCE

Background

1. Electricity is a necessity. The performance of our economy and the welfare of New Zealanders require our electricity industry to operate efficiently and effectively. Businesses, including land-based industries, need reliable low-cost electricity to remain competitive and households need reliable low-cost electricity to enhance their quality of life.

2. There have been many changes to the structure of the electricity industry since the mid-1980s. Recent reforms include the split of ECNZ into three state-owned enterprises and the requirement that local power companies separate the ownership of their line and energy businesses.

Ministerial Inquiry
3 The Government’s objective is to ensure that electricity is delivered in an efficient, reliable and environmentally sustainable manner to all classes of consumer.

4 The Government considers that an Inquiry is now required to examine whether the current regulatory arrangements for the transmission, distribution, wholesale and retail sectors are best suited to achieving this objective. It has therefore decided to establish a Ministerial Inquiry to explore these issues.

Terms of Reference

5 The Inquiry shall:

a. Assess the extent to which the current regulatory regime meets the Government's objective for electricity, with a focus on the matters for particular comment listed below.

b. If the current arrangements do not achieve the Government's objective for electricity, make recommendations for any amendments to policy and the regulatory framework that will assist in achieving the Government's objective.

c. In developing recommendations, assess the costs and benefits of key options by reference to the Government's objective.

d. In making this assessment, take due regard of:

i. New Zealand's progress to date in the provision of electricity services, including by comparison with progress made in other relevant countries;
ii. regulatory developments in other countries;
iii. relevant theoretical perspectives on the regulation of the electricity industry;
iv. the impact of new technologies;
v. the impact of any options on investment in electricity infrastructure and services;
vi. environmental impacts;
vii. any factors specific to the New Zealand regulatory framework;
viii. any proposals for industry self-regulation;
ix. any proposals for changes to relevant legislation (such as the Commerce Act).
e. Comment on the detailed implementation requirements of any recommendations, for example, any required legislation or regulations.

Matters for particular comment
6 In responding to its terms of reference, the Ministerial Inquiry shall make particular comment on the following issues:

Transmission and distribution
a. whether changes are required to the regulatory regime for transmission and distribution to ensure efficient prices and service delivery;

b. whether asset valuations and efficiency assessments should form part of the regulatory regime;

c. whether the existing information disclosure regulations provide adequate and reliable information for assessing the performance of transmission and distribution companies;

d. whether the present incentives for ensuring system security in transmission and distribution are appropriate.;


Wholesale market

e. whether the efficiency of the wholesale market is jeopardised by its voluntary nature and/or the extent of vertical integration between generation and retail;

f. whether market governance should allow for greater participation by smaller players and end users;

g. whether opportunities for demand-side participation in the wholesale market should be increased;
Retail

h. whether there are barriers to entry by new retailers that restrict the development of retail competition;

i. whether there is a need for the Government to facilitate or require the development of standard arrangements between retailers for consumer switching, and/or standard contracts between retailers and distribution line owners for the use of distribution networks;

j. whether the Government should constrain the use of fixed charges, taking into account economic efficiency, energy efficiency, interfuel competition, and equity considerations;

k. whether there is a need for the Government to facilitate or require the development of standard arrangements between retailers and consumers to promote consumers’ interests.

Process
7. The Inquiry team will:

a. obtain relevant expertise, including consultancy and secretariat services, to assist it to examine issues covered by the Inquiry;

b. examine first-hand the experiences and regulatory arrangements of selected overseas countries which have introduced competition into their electricity industries and which have similar institutional frameworks to New Zealand;

c. invite public submissions and hold public hearings on submissions; and

d. report regularly to the Minister of Energy on progress with the Inquiry.

Reporting date
8. The Inquiry shall report to the Minister of Energy by 12 June 2000.


3 February 2000


Background on Electricity Inquiry Members

Hon David Caygill

Mr Caygill is a partner in the law firm Buddle Findlay. He specialises in public law and has considerable expertise in governance and regulatory issues.

Mr Caygill is a former Government Minister and Christchurch City Councillor, and presently holds a number of Government and private sector positions including Chair of the Accident Compensation Corporation and Chair of the Grid Security Committee.

He has high public standing, recognising his ability in public and commercial law and his personal qualities of integrity and leadership.

Statement of Interests

 Mr Caygill is the independent chair of the Grid Security Committee, an industry-wide body set up to establish a contractual framework for managing electricity grid security issues. This position is not seen as presenting a conflict.

 Mr Caygill is a partner at Buddle Findlay, a legal firm that acts for a number of electricity industry clients. He will not act for any electricity industry clients while serving on the Inquiry (apart from continuing as Chair of the Grid Security Committee). In addition Buddle Findlay will not represent any parties before the Inquiry and Mr Caygill has undertaken not to make confidential information submitted to the Inquiry available to Buddle Findlay.


Dr Susan Wakefield

Dr Wakefield, an accountant by profession, was Chairman of the Commerce Commission from 1989-1994.

Dr Wakefield has extensive business experience, including past directorship of the Bank of New Zealand (Deputy Chair in 1988) and was a former partner in the international accountancy practice of KPMG.

Dr Wakefield has a thorough understanding of the law and economics of competition and extensive experience working within the public arena.

Statement of Interests

Dr Wakefield owns fifty percent of a company (her husband owns the other fifty percent) which in turn owns a portfolio of shares and bonds including:

 Contact Energy 9672 ordinary shares
 Natural Gas Holdings 15,000 ordinary shares
$100,000 bonds due 15/7/00

Dr Wakefield has undertaken that neither she nor her husband will trade in the shares or bonds of these companies or any other companies which may become involved in the electricity industry during the inquiry and for twelve months thereafter, unless there is a general takeover offer made.


Mr Stephen Kelly

Mr Stephen Kelly is Managing Director of the Australian National Electricity Code Administrator Ltd (NECA) based in Adelaide, Australia. NECA is responsible for encouraging and fostering the development of the Australian national electricity market, and for administering and enforcing the market rules.

Prior to that, in 1995/96, Mr Kelly worked in the Premier’s Department in New South Wales on reform of the electricity and transport sectors. Earlier, Mr Kelly worked in the UK Treasury on a wide range of public utility competition and regulatory issues.

He has an impressive record of dealing with strategic issues at the highest levels of Government, combined with wide experience in working with the private sector. He will also bring an international perspective to the Inquiry panel.

Statement of Interests

Mr Kelly does not have any interests in companies operating in New Zealand, or any other involvements which could give rise to a conflict.


3 February 2000

MINISTERIAL INQUIRY INTO THE ELECTRICITY INDUSTRY


QUESTIONS AND ANSWERS


Q. Why is it necessary to hold an Inquiry into the electricity industry?

A. The Government has listened to consumers when they complained about electricity prices and the accuracy of their bills. We have also listened to the electricity industries who were critical of the previous Government’s attempt to rush through urgent legislation which wasn’t properly considered.

So we need a proper assessment of what the problems are, along with concrete advice on how to go about dealing with those problems. The Inquiry will provide this assessment.

Q. What is the Government’s objective for the electricity industry?

A. The Government wants to ensure that we have an electricity industry that delivers electricity in an efficient, reliable and environmentally sustainable manner to all classes of consumer.

The Government will be satisfied when consumers, when they get their monthly bill, can say “yes, that’s a fair deal”.

Q. What will the Inquiry cover?

A. The Inquiry will assess the extent to which the current regulatory regime for electricity transmission, distribution, wholesaling and retailing meets the Government’s objective for the industry (described above). The Terms of Reference for the Inquiry are being released today.

Q. Why do the Terms of Reference for the Inquiry not explicitly include electricity generation issues?

A. Including generation issues such as dry year security and environmental protection would expand the Inquiry’s scope very significantly and would jeopardise an early report back. I want an early report back because if legislation is required I want it passed this year so that consumers benefit as soon as possible. I will commission work on generation separately as necessary.

Q. Who will run the Inquiry?

A. A three person team has been appointed to undertake the Inquiry.

The Government has been fortunate in securing the services of a very impressive team, chaired by Hon David Caygill, a former Minister of Trade and Industry and Minister of Finance, who is now employed as a senior lawyer focussing on public policy issues.

Dr Susan Wakefield, who was chairman of the Commerce Commission from 1989 to 1994 and is highly respected for her understanding of competition policy, will also join the panel.

The third panel member is Stephen Kelly, who has many years experience working on public utility issues in the UK and Australia. He will bring to the panel valuable hands-on experience in utility regulation combined with an international perspective.

Q. When will the results of the Inquiry be known?

A. The Inquiry will begin work immediately. It has been asked to report to me by 12 June. It is expected that the Inquiry report will be made available to the public shortly thereafter.

Q. What happens then?

A. If the Inquiry concludes that changes to current policy settings and the regulatory framework are needed, it is charged with making detailed recommendations as to what should be done. The Government will then need to consider the panel’s recommended changes and decide how best to proceed.

Q. Does the public have any role in the Inquiry?

A. The Inquiry will be seeking submissions from interested parties. Consumers and others can make written submissions. The Inquiry will also hold public hearings in main centres. The Inquiry proposes to release a discussion paper in the near future to assist people making submissions. Details will be available on the Inquiry website www.electricityinquiry.govt.nz, next week.

Q. What will the Inquiry cost?

A. The budget for the Inquiry is $850,000 (excluding GST). A contribution of $250,000 will come from the existing Energy budget - $600,000 is new funding allocated by the Government. This is a small budget for such a major task. It includes all expenses for the Inquiry, including fees, premises, expert advice, costs of holding public hearings and travel.

Q. Is the Inquiry going to use consultants?

A. The Government’s expectation that use of consultants be kept to a minimum will be taken very seriously by the Inquiry, which will make as much use as possible of existing public service resources. However, given the tight timeframe for the Inquiry and the specialist nature of much of the material, the Inquiry will need to use expert advisers.

In particular, I have arranged for the panel to be assisted by Professor Stephen Littlechild, who is an internationally renowned expert on electricity regulatory issues. Until recently Professor Littlechild was the UK regulator for electricity.

Q. Will the panel study overseas regimes?

A. It is planned that the Inquiry panel will visit a small number of countries to obtain a first hand understanding of policies for the electricity industries which are being explored and introduced by countries grappling with the same problems as New Zealand. The trip will be tightly focussed. It will cover regulatory authorities, government departments, think tanks, and trade associations in Australia, USA, UK and Norway.

Q Will the Inquiry deliver lower power prices for consumers?

A. Unlike the previous Government, this Government is not going to rush through radical changes to the electricity industry with the promise of lower power prices. Lower power prices may result from the Inquiry, but the Government is most interested in ensuring that all consumers are dealt with fairly and get the best deal possible.

Q. Does this Inquiry mean that electricity lines will be placed under price control?

A. The Inquiry will not approve or establish the detailed prices that individual electricity companies charge to consumers.

The Government supports competition to keep prices down where this is feasible. However, if the Inquiry decides that detailed price controls are needed on those parts of the industry where competition is not likely, the Government will ensure that the additional work required is undertaken as quickly as possible.

The Government will await the outcome of the Inquiry before deciding what should happen to the Commerce (Controlled Goods or Services) Amendment Bill. This Bill, which was introduced by the previous Government but which has not progressed through Parliament, would place electricity lines under price control.


Q. What about conflicts of interest involving panel members?

A. Two of the panel members, Mr Caygill and Dr Wakefield, have existing interests or involvements in the industry. I have released details of the interests and steps for dealing with them. Mr Kelly, who is British and currently resident in Australia, does not have any interests in the New Zealand electricity industry.

Given New Zealand’s size, it is very difficult to find well qualified people to undertake an Inquiry of this nature who do not have some degree of involvement with the industry.

It should also be noted that the Inquiry will not decide Government policy. While it is expected that the panel will make recommendations to the Government, decisions rest with the Government, and implementation of those decisions will follow transparent accountability processes. This will include Select Committee consideration of any new legislation. The public will have further opportunities to make submissions at that point.

The Government regards the steps it has taken to deal with the conflicts of interest as a model to be followed for other Inquiries set up in the future.

Hon Pete Hodgson
Minister of Energy
3 February 2000


3 February 2000

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