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Progress On The Power Package

Minister of Energy Pete Hodgson says he is pleased the electricity industry is getting on with the job of setting up the new governance structure required by the Government's Power Package.

Mr Hodgson released today the first report he has received from the Electricity Governance Establishment Committee, set up by the industry in response to the Power Package and chaired by David Caygill.

"The industry has set itself an ambitious work programme," Mr Hodgson said. "I am satisfied it is aiming to take no longer than necessary to make the arrangements the Government requires."

The new Electricity Governance Board required by the Power Package is expected to be operating by the beginning of July 2001. The industry aims to submit a proposal for Commerce Commission approval by April, allowing three months for it to be processed.

The Board is to have a majority of independent members and an independent chair.

The industry and the Ministry of Consumer Affairs are also moving rapidly to set up an Electricity Ombudsman scheme. Mr Hodgson said he hoped to see the scheme open early next year.

The establishment committee report is available on www.egb.co.nz


14 December 2000


Hon. Pete Hodgson
Minister of Energy
Parliament Buildings
WELLINGTON


Dear Minister

Electricity Governance Establishment Project: Report on Progress

The purpose of this letter is to outline to you the nature of the progress that has been made by the industry towards achieving the outcomes sought by the Government for the electricity industry. These goals are being pursued through a pan-industry and stakeholder project known as the Electricity Governance Establishment Project.

Creation of Electricity Governance Establishment Committee (“Establishment Committee”)

With the support of a senior CEO group from the electricity industry, an Establishment Committee has been put in place by the existing governing bodies of MARIA, NZEM and MACQS, together with Transpower and other key stakeholders (represented in part through appointments by the Consumer Coalition on Energy and the Electricity Networks Association). The Establishment Committee is overseeing the project. The project’s ultimate objective is to establish an Electricity Governance Board (“EGB”), which meets the requirements of the recent government policy statement. The Establishment Committee consists of the following members:

Person Representing
David Caygill (Chair) Grid Security Committee
Catherine Petrey Consumer Coalition on Energy
George Riddell Consumer Coalition on Energy
Richard Rowley MARIA Governance Board
Toby Stevenson NZEM Rules Committee
Patrick Strange Network companies
Keith Tempest NZEM Rules Committee
Bob Thomson Transpower NZ Limited
Keith Turner Grid Security Committee
Robert Reilly MARIA Governance Board

The Establishment Committee is tasked with developing and recommending a set of rules and contractual arrangements encompassing a broad scope of electricity sector activity which:

 Remove the need for each of the existing governing bodies;
 Provide for a new industry governance board;
 Provide for such additional arrangements as are foreshadowed in the Government Policy Statement;
 Are capable of being implemented through private multilateral contract; and
 Provide for the smooth transition of the existing industry arrangements into the new single governance structure.

Key results sought from the Establishment Committee

To fulfil its role, the Establishment Committee must achieve:

 A comprehensive governance design agreed by the industry and stakeholders, and supported by the Government;
 A rationalised and integrated set of rules covering the existing NZEM, MARIA and MACQS arrangements – agreed with the members of those arrangements and supported by other stakeholders. This includes dividing these rules into mandatory and voluntary sections and ensuring (through the contract structures) that in respect of the mandatory rules all industry participants must comply with those rules;
 Substantial progress toward a set of rules covering the required elements of transmission and distribution – supported by the industry and other stakeholders;
 The necessary regulatory approvals (e.g. Commerce Act) for the new arrangements, or any part of them, to come into force; and
 A smooth transition from the existing governance arrangements to a single governance structure.

The Establishment Committee will cease to have a role once an Electricity Governance Board is appointed pursuant to the legally approved constitution.

Progress to Date: Overview

Since its establishment, the Establishment Committee has achieved the following outputs:

 It has appointed a Project Team to manage the project (a description of the project structure is set out below);
 It has agreed a work programme and budget. It is anticipated that an Electricity Governance Board can be operational by the beginning of July; and
 It has established three specialist working groups to progress governance design, rationalisation of the operational rules; and to develop new rules in the transport area.

Design work has already begun in the governance and rationalisation areas. The transport work stream commences next week.

The critical issues to note in terms of the project are:

 First the key work streams need to proceed (and are proceeding) in parallel. This creates management challenges that the Establishment Committee and Project Team are actively managing;
 Communications is critical to the project’s success. A communications strategy now is in place to ensure that all stakeholders are kept informed;
 The need to obtain regulatory approvals must be factored into the work programme timeline;
 The Establishment Committee believes that strong liaison with government is necessary to ensure that there is a clear understanding on both sides of the expectations of each party.

Project Structure

The project is being managed by a joint venture made up of Concept Consulting Limited, Law and Economics Consulting Group, and M-co Limited. Each of these organisations has extensive knowledge of the electricity industry.

The Project manager is Lee Wilson of Concept Consulting Limited. Principals from each of the joint venture partners lead a particular work stream. The following diagram outlines the project structure and key project resources. The vertical boxes represent the three principal work streams, whilst the horizontal boxes represent work streams common to each of the three principal work streams.

(a) Governance Design Work Stream

The key outputs of this work stream include:

 The scope of the EGB;
 The composition of the EGB;
 Election procedures;
 Rule making processes; and
 Compliance and dispute resolution.

These matters are being progressed by the Governance Working Group. Its members are:

 Richard Rowley, Chair (independent);
 Tim Lusk (Transpower);
 Murray Jackson (Genesis Power);
 Terrence Currie (Consumer Coalition on Energy);
 David Hunt (Contact Energy);
 Pat Morrison (Consumer Coalition on Energy);
 Richard Bentley (NGC);
 James Hay (Meridian Energy);
 Simon Whyte (United Networks); and
 Stuart Shepherd (Vector).

(b) Rationalisation Work Stream

The chief focus of this work stream is rationalising the three existing rulebooks and dividing them into mandatory and voluntary components. The key issues to be addressed include:

 Overlapping reconciliation arrangements (MARIA and NZEM);
 Common dispatch rules (NZEM and MACQS);
 Rationalising Grid Operator functions (NZEM and MACQS);
 Identifying the mandatory components of the market; and
 The nature of the role of the load following generator (mismatch trading).

These matters are being progressed by the Rationalisation Working Group. Its members are:

 Toby Stevenson, Chair (Contact Energy);
 Dean Carroll (Genesis Power);
 Jason Franklin (Consumer Coalition on Energy);
 Doug Goodwin (Transpower);
 Patrick Harnett (Phoenix Energy);
 Ralph Matthes (Consumer Coalition on Energy);
 Ari Sargent (Meridian Energy);
 Therese Thorn (TrustPower);
 Martin Walton (PowerNet); and
 Neil Williams (Mighty River Power).

(c) Transport Work Stream

The chief focus of this work stream is extending market governance to include aspects of transmission and distribution. The key initial output is a governance design on agreeing transmission system expansion and pricing methodology.

These matters are being progressed by the Transport Working Group. Its members are:

 Brent Layton, Chair (independent);
 Peter Calderwood (TrustPower);
 Mervyn English (TransAlta);
 Bill Heaps (Transpower);
 Russell Longuet (Consumer Coalition on Energy);
 Kerry Nichols (Vector);
 Graham Pinnell (Consumer Coalition on Energy;
 Peter Robertson (Transpower);
 Roger Sutton (Orion);
 Carsten Thomson (Meridian Energy);
 John Walsh (Delta); and
 Dick Whitelaw (Consumer Coalition on Energy).

The key milestones of the project are set out in the appendix to this letter.

Commerce Commission Authorisation

A core set of the combined rules needs to form a minimum requirement for all participants in the electricity market. This was clearly signalled in the Government Policy Statement, as was the requirement to comply with the Commerce Act.

The new arrangements will constitute a private multilateral contract between industry participants. In order to achieve a mandatory set of rules, it will be necessary to exclude the possibility of participants trading outside these core rules. Such an arrangement may have effects detrimental to competition and, if so, may require authorisation by the Commerce Commission. In which case, we are likely to need to demonstrate that the arrangements are in the public interest. Other elements of the combined rulebook may also be caught by provisions in the Commerce Act.

The Establishment Committee expects to approach the Commission in April 2001 with a combined package of governance arrangements and a rationalised set of rules. It would be usual in these circumstances for the commission to take 60 working days (i.e. 3 months) to finally achieve the application.

Liaison with other work programmes

Notwithstanding its commitment to the project, the industry also is committed to continuing to work on other issues within the scope of the present governance arrangements. Key work streams include finalising the common quality work in MACQS, evolution of the customer switching arrangements in MARIA, and development of a real time pricing market in NZEM.

The Establishment Committee is also liaising with groups in the industry who are addressing the issues of customer complaint mechanisms and fixed charges.

Communications

An important feature of the project is the need to keep all interested parties informed on progress and developments. The Establishment Committee has approved a strategy that includes a combination of regular reports to key stakeholders, workshops on key issues as they emerge, and a transparent approach as material is processed through the Establishment Committee and its working groups. To facilitate the latter, working papers and minutes of meetings will be available on a recently established website – egb.co.nz.

Conclusion

The industry has moved quickly to respond to the Government’s desired outcomes. In many regards, the project builds on conceptual and detailed work that the industry previously of its own volition had commenced.

As Chair of the Establishment Committee, I believe that the industry is making good early progress. I will keep you and your officials fully informed of progress as the project moves forward. The Establishment Committee is willing to elucidate further on any aspect of the project that you desire.


Yours faithfully

Hon. David Caygill
Chair
Establishment Committee
Electricity Governance Establishment Project


Appendix

Key Milestones

Key Milestone Target Status
1. Establish Governance Working Group (GWG) 17 Nov 2000 Completed
2. Establish Rationalisation Working Group (RWG) 24 Nov 2000 Completed
3. Establish Transport Working Group (TWG) 24 Nov 2000 Completed
4. Agree arrangements for dispatch, scheduling & grid operation (RWG) 18 Dec 2000 RWG work in progress
5. GWG reports to EGEC 25 Jan 2001 GWG work in progress
6. Agree arrangements for pricing physical market trades (RWG) 29 Jan 2001
7. Commerce Act authorisation application preparation commences 29 Jan 2001
8. EGEC agrees governance design (GWG) 16 Feb 2001
9. Agree how arrangements for common quality are to be achieved within the new framework (RWG) 19 Feb 2001
10. Agree how ancillary services are to be provided and priced (RWG) 19 Feb 2001
11. Governance design referred to industry stakeholders for approval 23 Feb 2001
12. TWG recommends conceptual design on contract mechanisms to EGEC 23 Feb 2001
13. Governance design voted on/agreed by stakeholders 9 Mar 2001
14. Agree reconciliation and settlement arrangements (RWG) 12 Mar 2001
15. Finalise mandatory/non-mandatory rules (RWG) 12 Mar 2001
16. TWG recommends model contracts for distribution to EGEC 12 Mar 2001
17. Transport contractual mechanisms finalised in concept with EGEC 12 Mar 2001
18. Complete rationalisation rule drafting (RWG) 26 Mar 2000
19. Model distribution contracts finalised in concept (TWG) 28 Mar 2001
20. Provide key recommendations on other elements of Government Policy Statement 1 April 2001
21. Commerce Act authorisation application submitted 2 Apr 2001

Key Milestone Target Status
22. Detailed governance design voted on / agreed by stakeholders 9 Mar 2001
23. Submit Electricity Industry Reform Act exemption application (if necessary) 23 Apr 2001
23. Finalise EGB decision process and mechanism for engaging with Transpower in concept (TWG) 28 Apr 2001
24. Draft rules completed for contract mechanisms for transport and new investment (TWG) 4 May 2001
25. Draft rules completed for EGB decision process and engagement with Transpower (TWG) 18 May 2001
26. Finalise transport transitional arrangements (TWG) 25May 2001
27. Commerce Act authorisations granted 2 Jul 2001

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