Electricity Industry Bill

Transcription

1 Electricity Industry Bill Government Bill Explanatory note General policy statement Overview This Bill replaces subpart 2 of Part 14 and Part 15 of the Electricity Act 1992 and the Electricity Industry Reform Act It also makes minor amendments to Part 4 of the Commerce Act 1986 and consequential amendments to the Gas Act 1992 and other Acts. The overall aim of the Bill is to improve competition in the electricity market and improve security of supply by improving the governance arrangements for the electricity industry: providing for specific regulatory improvements to be made: making improvements to the overall structure of the sector. The Bill also undertakes a general tidy-up and consolidation of provisions relating to the electricity industry. Background The Minister of Energy and Resources set up a Ministerial Review of the Electricity Market (the Review) in 2009 in response to concerns about security of supply and rising electricity prices. The Review was undertaken by an Electricity Technical Advisory Group and of

2 2 Electricity Industry Bill Explanatory note ficials. A discussion paper was released in August submissions were received. Following consideration of submissions, the Review concluded, in brief, that although a large part of the increase in electricity prices over the last decade is justified, prices to some customer groups (especially residential consumers) have risen faster than justified by underlying increases in generation costs: retail margins for residential consumers are high and increasing and competition is weak outside the main centres, particularly in the South Island: some generators have market power in dry (low hydro inflow) years: although enough new generation is being built, dry years could be better managed: current governance arrangements are unsatisfactory and should be improved. The Review made a wide range of recommendations to address these issues. The Government considered these recommendations and announced decisions on reforming the electricity industry in December The Government s announcements are available on This Bill implements those parts of the Government s decisions which require legislation. It is intended to come into effect on 1 October Electricity Industry Governance Electricity Authority The Bill disestablishes the Electricity Commission, which was set up in 2003 following the failure of industry self-governance, and sets up an Electricity Authority to govern the electricity industry. The objective of the change is to improve the timeliness and quality of rule-making relating to competition, efficiency, and security of supply. This is achieved by the changes set out below. Firstly, the objective of the Electricity Authority is much narrower than the Electricity Commission s. The proposed objective is to

3 Explanatory note Electricity Industry Bill 3 promote competition in, reliable supply by, and efficient operation of, the electricity industry for the long-term benefit of consumers. In contrast, the Electricity Commission had multiple objectives, including fairness, environmental sustainability, promotion of energy efficiency, and 7 other more detailed outcomes. This complicated rule-making. The Review concluded that fairness issues were best considered by Ministers (see below on consumer issues): promotion of energy efficiency should be consolidated in the Energy Efficiency and Conservation Authority (EECA): environmental sustainability issues should be addressed through generic environmental policy and law, in particular the Resource Management Act 1991 and climate change policy and legislation. Secondly, the functions of the Electricity Authority are narrower and more tightly defined than the Electricity Commission s. The aim is to improve focus on rule-making, reduce overlap with other bodies, and take advantage of synergies in performing closely-related functions. The Bill provides for the following main functions of the Authority (in general terms): to make and administer rules governing the electricity industry through an Electricity Industry Participation Code (the Code)(see below): to monitor compliance with the Code and other provisions in the Act and regulations and take enforcement action: to undertake market-facilitation measures such as education and providing guidelines, information, and model arrangements: to carry out reviews, studies, and inquiries (including reviews requested by the Minister): to contract for market operation services (required to operate the electricity wholesale market) and system operator services (provided by Transpower New Zealand Limited (Transpower)): to promote to consumers the benefits of comparing and switching retailers.

4 4 Electricity Industry Bill Explanatory note Several functions currently undertaken by the Electricity Commission are transferred to other bodies, as follows: the function of approving grid upgrade plans proposed by Transpower is transferred to the Commerce Commission. This ensures that all of Transpower s capital expenditure (maintenance, replacement, refurbishment, and upgrades) is considered in an integrated manner by the Commerce Commission as part of the regulation of Transpower s revenue requirements and costs under Part 4 of the Commerce Act (Part 4 of the Bill amends Part 4 of the Commerce Act 1986 to require the Commerce Commission to prepare rules called an input methodology relating to processes and evaluation criteria for Transpower s grid upgrade plans and capital expenditure): the function of managing emergencies and providing information and short-to-medium term forecasting on security of supply are transferred to the system operator (which is Transpower see below). The Electricity Authority will set the requirements for these services in the Code: the function of promoting energy efficiency is transferred to the Energy Efficiency and Conservation Authority. Thirdly, the Electricity Authority (the Authority) is set up as an independent Crown entity under the Crown Entities Act In contrast, the Electricity Commission is a Crown agent under that Act, which is not independent from the Government (the Minister may give directions to the Commission and dismiss Authority members for any reason). Making the Authority independent from Government provides greater certainty and predictability about how the market will be governed and operate, reduces incentives for lobbying by industry participants, and improves investor perceptions about market risk. The Bill retains the power for the Minister to make statements of government policy, but the Authority is only required to have regard to, not give effect to, such statements. This parallels the provisions in section 26 of the Commerce Act 1986 which enable the Government to transmit statements of government policy to the Commerce Commission, which is also an independent Crown entity. The Bill also enables the Minister to make written requests to the Authority to undertake a review of particular issues and report to

5 Explanatory note Electricity Industry Bill 5 the Minister. This recognises that the Government continues to have a strong interest in electricity and it will help draw the Authority s attention to matters which the Government considers may need detailed consideration. It parallels similar provisions in the National Electricity Law in Australia. Electricity Authority The Bill provides for between 5 and 7 members of the Authority to be appointed by the Governor-General on the recommendation of the Minister. The Minister is required to seek nominations for Authority members from interested parties and to consider those nominations. The Minister must also ensure that the Authority has amongst its members knowledge and experience in the electricity industry, consumer issues, and business generally. Authority members must disclose any material conflicts of interest under the Crown Entities Act 2004 and must not represent or promote the interests of particular groups. Security and Reliability Council The Bill requires the Authority to appoint a Security and Reliability Council, comprising senior industry people (including consumers), to provide advice on the performance of the electricity system and on security of supply issues. The purpose of setting up this council is to provide assurance to the Government, interested parties, and the Authority that senior and experienced advice is available on security of supply and system operation issues. Advisory groups The Bill requires the Authority to set up other advisory groups to provide advice to it on the development of the Code and on market facilitation. The Authority is also required to prepare a charter on how it will interact with advisory groups. System operator The Bill provides for Transpower to be the system operator. (The system operator has the critical function of co-ordinating generation, transmission, and demand to ensure security of supply in real time). Transpower currently provides this role. During consultations on the

6 6 Electricity Industry Bill Explanatory note discussion document, some submitters argued that the system operator role should be contestable to help provide incentives for optimal performance. However, contestability is unlikely to be practical, in that no other party is likely to be able to provide the service on a competitive basis, and contestability potentially has a chilling effect on investments in software and long-life capital assets by the system operator. As far as is known, no other country provides for contestability of system operator functions. The Bill provides that the system operator functions are subject to the performance requirements in, and enforcement provisions of, the Code. Industry Participation Code The Bill provides for the Authority to make and administer an Industry Participation Code in order to achieve its objective and functions. The Code replaces the Electricity Governance Rules 2003 (EGRs), which is the rulebook for the industry. The key difference with the current arrangements is that the Code, unlike the EGRs, will not require the approval of the Minister before coming into force. This change is consistent with increasing the independence of the Authority. Involving the Minister in approving the rules invites lobbying from parties that have been unsuccessful in the rule-making process and increases uncertainty for investors. It is also unrealistic to expect the Minister to be accountable for the rules, which are detailed and technical and extend to over pages. This approach (the ability of the regulatory body to make rules without requiring approval of a Minister) is consistent with the approach taken in other jurisdictions, such as Australia (where rules are made independently by the Australian Energy Market Commission), and the UK (where the detailed conditions of licences are set independently by the regulator). The Code may apply only to industry participants and not to consumers generally. The Code is also subject to the Regulations (Disallowance) Act The Bill requires the Authority to develop a charter on its processes for developing and consulting on proposed amendments to the Code. A regulatory statement is required for any amendments, including an evaluation of the costs and benefits of amendments and an evaluation of alternative means of achieving the objective. The requirements

7 Explanatory note Electricity Industry Bill 7 can be set aside for urgent amendments (potentially important in the electricity sector), but any such amendments to the Code expire after 9 months. The Bill provides for the initial Code (which comes into effect at the same time the Authority is established) to comprise the EGRs, specific parts of the Electricity Governance Regulations 2003 (relating to the procedures of the Rulings Panel and the exemptions for the Comalco 1 agreements), the Electricity Governance (Security of Supply) Regulations 2008, and the Electricity Governance (Connection of Distributed Generation) Regulations The Bill also provides for the EGRs transferred to the initial Code to be modified to reflect the provisions in the Bill (for example, to reflect the changes in functions between the Electricity Commission and the Authority). The initial Code must be certified by the Minister and the Minister must make reasonable efforts to publish it at least 1 month before the Bill comes into force. Industry participants must be registered with the Authority and must comply with the Code (irrespective of whether they are registered). The Bill provides a detailed list of industry participants including industry service providers. It also provides regulation-making powers to identify other industry service providers as industry participants and to exempt classes of persons from requirements to register or comply with the Code. The Authority may make similar exemptions for individual parties. Rulings Panel The Bill provides for the continuation of the Rulings Panel established under the Electricity Governance Regulations The Rulings Panel is a quasi-judicial body which determines breaches of the Code and makes various remedial orders. Most of the provisions relating to the Rulings Panel are carried forward from the current Act or are brought up into the Bill from the Electricity Governance Regulations A significant change made by the Bill is that members of the Rulings Panel must be appointed by the Governor-General on the joint recommendation of the Minister and the Minister of Justice. Cur- 1 Now held by Rio Tinto Alcan (New Zealand) Limited, with Meridian Energy Limited and Transpower as counter-parties.

8 8 Electricity Industry Bill Explanatory note rently the members of the Ruling Panel are appointed by the Electricity Commission, which is not best practice, since the Commission brings enforcement action in front of the Panel. The Bill also requires the chair to be a barrister or solicitor of the High Court with at least 7 years standing. Provisions relating to appeals from the decisions of the Rulings Panel are brought forward from the current Electricity Act 1992, with the addition of some further grounds (against compensation orders). Specific new matters to be covered in the Code The Ministerial Review recommended a lengthy list of changes that need to be made to the electricity market to improve competition and security of supply. The list is included as part of the Government s announcements available on The Review noted that the Electricity Commission is in the process of consulting on and implementing most of these changes as part of its Market Development Programme. Accordingly, there is a high degree of confidence that many if not most of these improvements will be put in place over the next 12 months or so. These will make a material difference to competition, efficiency, and reliability of supply in the market. However, there are a number of recommended improvements where there is room for doubt that satisfactory improvements which meet the Government s objectives will be put in place by the Electricity Commission or, subsequently, the Electricity Authority. These doubts arise mainly because the issues are highly contentious, with strongly divergent views held by industry participants. Some of the improvements (such as providing for a liquid hedge market and transmission hedges) were identified as priorities in 2003/4 when the Electricity Commission was first set up, but are still outstanding. Accordingly, the Bill sets out a short list of matters that must be addressed by the Authority, and provides powers for the Minister to amend the Code if it does not do so. The matters are as follows: provision of compensation by retailers to consumers during public conservation campaigns. This is designed to encourage industry participants to better manage risk, and to make public conservation campaigns (which may be required in extreme dry years) more acceptable to the public:

9 Explanatory note Electricity Industry Bill 9 imposing a floor or floors on spot prices in the wholesale market during supply emergencies, including during public conservation campaigns. This is designed to remove the current incentive on some industry participants to call early for public conservation campaigns. Campaigns lower spot prices for those participants but rely on creating a sense of crisis to work effectively and shift costs on to consumers. Like the previous provision, it will encourage industry participants to better manage risk: mechanisms to help wholesale market participants hedge against price risks caused by transmission constraints. The absence of transmission hedges, which were an essential part of the original market design, has the effect of discouraging generator-retailers from retailing in regions where they do not have generation assets: mechanisms to allow participants who buy electricity in the wholesale market (that is, the demand-side) to benefit from demand reductions. These provisions are important to improve the overall efficiency of the market and help reduce scope for the exercise of market power by the supply-side, for example in dry years. requirements for distributors (lines companies) to use more standardised tariffs and use-of-system agreements. At present, lines companies, of which there are 29, have a multiplicity of differing tariff structures and business rules. These are an entry barrier for retailers, particularly in smaller regions, and reduce the level of retail competition: facilitating, or providing for, an active market for trading financial hedge contracts for electricity. Provision of a liquid hedge market helps industry participants manage price risk. It is a key reform to reduce entry barriers for new retailers and independent generators. The Minister has invited major generators to put in place a liquid hedge market by mid 2010, but back-up powers are needed to compel the implementation of such a market if industry participants do not design and implement one voluntarily. The Bill requires the Authority to put in place amendments to the Code to implement these reforms within 1 year or provide a report to the Minister explaining why not. (The report may include the view

10 10 Electricity Industry Bill Explanatory note that suitable alternatives have been or are being put in place, or that, on further analysis, 1 or more of these provisions are unnecessary or undesirable). If the Minister is not satisfied with the outcome, the Minister may amend the Code (after the expiry of the 1 year period) to deliver on these matters. The Minister must consult with interested parties and the Authority before amending the Code, and the Minister s power is limited to a 3-year period. Separation of distribution from certain generation and retailing Part 3 of the Bill replaces the Electricity Industry Reform Act 1998 (EIRA). EIRA required the ownership separation of distribution (lines) businesses, which are natural monopolies, from generation and retailing, which are contestable or competitive activities. The aim of EIRA was to facilitate competition in the retailing and generation markets by removing the incentive and ability of the then integrated supply authorities to discriminate against competing retailers and generators. EIRA also sought to remove the ability to cross-subsidise retailing and generation activities from captive line customers. The original legislation has been amended 3 times (2001, 2004, and 2008) to progressively reduce the extent of cross-ownership restrictions. This recognised that EIRA has largely succeeded in achieving its objectives (in particular, achieving open access to lines), and that the introduction of price control under Part 4 of the Commerce Act 1986 and additional regulatory powers under the Electricity Act 1992 reduced the need for ownership separation. The current EIRA allows lines businesses to be involved in retailing without restriction outside their own network areas but capped to the quantity they generate in their own areas and subject to a number of rules. The Review concluded that the time has come to allow lines businesses back into retailing without any quantity restrictions to encourage further retail competition (and to remove a residual 50MW cap on the quantity of thermal generation a lines business may build). However, the Review also noted that there was a danger that lines businesses with a retail and/or generation business would have the ability and incentive to discriminate against competing retailers and generators (for example by tougher use-of-system arrangements, real or perceived delays in fault repairs, and unfair use of information on the best customers), and it recommended retention of certain restric-

11 Explanatory note Electricity Industry Bill 11 tions and rules to weigh against these incentives. The Government agreed with these recommendations. The Bill accordingly repeals the Electricity Industry Reform Act This has the effect of allowing lines businesses back into retailing without quantity caps and to build any type of generation. The Bill also provides for the following restrictions: retention of the existing requirements in EIRA requiring corporate separation and compliance with arms-length rules between lines and generation and retailing. The specifications relating to when these rules apply, and the arms-length rules, are carried over in Schedules 2 and 3: retention of the existing requirements in EIRA for distributors to put in place transparent and non-discriminatory use-of-system agreements with their own retailer and generation businesses: retention of ownership separation between lines businesses and generators with more than 100MW of grid-connected generation. The aim is to prevent large-scale vertical integration between generator-retailers and lines businesses. This could have seriously negative effects on competition, especially where the generator-retailer is the incumbent retailer: prohibiting lines businesses buying the customer bases of an existing retailer. This is a new provision. The reason for allowing lines businesses to retail is to benefit consumers by increasing the level of competition. This objective is not met if lines businesses buy-out an incumbent retailer (indeed the overall competitive situation could worsen; other new entrant retailers may be discouraged from entering if they have to deal with a lines businesses which is also an established retail competitor). Accordingly, this provision aims to ensure that lines businesses involved in retailing acquire customers by making them attractive offers (rather than by making attractive offers to other retailers). The enforcement provisions are largely carried over from the existing legislation, although some provisions that are no longer required are not retained. However, the Bill provides for the Electricity Authority to enforce the provisions, not (as currently) the Commerce Commission. This is part of the overall rationalisation of regulatory functions

12 12 Electricity Industry Bill Explanatory note in the Bill, with the Electricity Authority focusing on pro-competition rules and requirements, and the Commerce Commission focusing on economic regulation (price control) under Part 4 of the Commerce Act Consumer issues Disputes resolution The general provisions in the Electricity Act 1992 relating to consumer dispute resolution schemes have been carried over to the Bill. The opportunity has been taken to update them to reflect, with modifications, similar provisions in more recent legislation (notably the Financial Service Providers (Registration and Dispute Resolution) Act 2008). The provisions allow for an approved industry scheme or a regulated scheme if there is no suitable industry scheme to approve. The powers relating to disputes resolution schemes are, however, now conferred on the Minister of Consumer Affairs rather than the Minister of Energy. The Bill similarly amends the Gas Act Continuance of supply The Bill incorporates the provisions of the Electricity (Continuance of Supply) Amendment Bill, which was reported back from the Commerce Select Committee in July This requires lines businesses to continue to ensure the supply of line function services (or arrange for an alternative electricity supply) to places which received such services before the 1993 electricity reforms. Without this provision, current requirements to maintain supply would expire in Powers to make regulations about tariffs and other consumer issues The Bill provides powers for the Minister, after consultation with the Minister of Consumer Affairs and the Authority, to make regulations relating to consumers for fairness reasons (for example, to ensure that retailers and distributors deal fairly with consumers in supply contracts). This is necessary because fairness is not part of the Authority s objectives, which precludes it from amending the Code to cover contracts with consumers other than for efficiency-related reasons.

13 Explanatory note Electricity Industry Bill 13 The Bill also carries over powers for regulations to be made requiring low fixed-charge tariff options to be made available to consumers. The Electricity (Low Fixed Charge Tariff Option for Domestic Consumers) Regulations 2004 are deemed to be made under this provision. The Bill also carries over 2 other regulation-making powers in the Electricity Act 1992 and the Electricity Industry Reform Act 1998 respectively. These are the power to make regulations to promote accountability of customer trusts and community trusts to their beneficiaries: the power to make regulations to restrain the rate of increase in line charges for domestic and rural consumers. The purpose of this power is to discourage, and, if necessary, prevent price shocks for rural consumers that could occur if lines business implemented fully-allocated costings for line services to remote rural consumers. It enables effect to be given to the policy in the Government Policy Statement that The Government expects distribution companies to keep any changes to rural line charges in line with changes to urban line charges. (The price control provisions of Part 4 of the Commerce Act 1986 do not allow for constraining price increases to particular classes of consumer for fairness or equity reasons). Neither of these regulation-powers have been used. Their retention, however, ensures that the policy objectives continue to be met in practice. The Bill also carries over existing provisions in the Electricity Act 1992 requiring customer and community trusts to prepare audited financial statements. SOE asset reconfiguration The Government has decided, following consideration of the recommendations of the Ministerial Review, to undertake a limited reconfiguration of the assets of the 3 state-owned generator-retailers, Meridian Energy Limited, Mighty River Power Limited, and Genesis Energy Limited. The objective is to improve the level of market competition, particularly in the retail sector, and potentially to help improve security of supply.

14 14 Electricity Industry Bill Explanatory note The asset reconfigurations decided on by the Government are as follows: the Tekapo A and B stations, currently owned by Meridian, are to be sold to Genesis. This is designed to provide Genesis with generation assets in the South Island, which will enable it to provide more retail competition in the South Island. (At present, the State-owned enterprise generator-retailers largely focus their retailing activities in the island where they have generation assets). It also improves diversity of views and competition regarding the value of water storage: at present Meridian owns 70% of New Zealand s hydro storage capacity. This will reduce to 50% after the transfer: the Whirinaki power station, currently owned by the Crown and contracted to the Electricity Commission as reserve energy, is to be sold to Meridian. This helps compensate Meridian for the loss of the Tekapo A and B power stations, and improves competition in the management of peaker power plant. The sale also dovetails with the decision of the Government to rescind the reserve energy policy, which is not carried through from the Electricity Act 1992 into the new legislation. The Review, submissions on the discussion paper, and the Government agreed that the reserve energy policy has the perverse effect of reducing energy security, since it encourages parties to rely on the Electricity Commission to manage supply risks rather than managing those risks themselves, and it disincentivises generators from building back-up plant: requiring the 3 State-owned enterprises (SOEs) to enter into one-off, long-term (up to 15 years) contracts for financial hedges. This can be regarded as a virtual asset swap, in that it has the effect of providing each of the SOEs with access to energy at fixed prices in the island (North or South) where they currently have little or no generation capacity. The aim is to facilitate and encourage the SOEs to be more active in retailing nation-wide. At present the generation assets of the SOEs are not well-balanced geographically, with Genesis and Mighty River Power having no generation in the South Island and Meridian having relatively little generation in the North Island. The SOEs have tended to focus their retail competition

15 Explanatory note Electricity Industry Bill 15 in the island in which they have generation assets as a way of managing price risk. The Government, as owner of the SOEs, will request the SOEs to undertake the above transactions. However, the Bill provides a temporary (1 year) power for shareholding Ministers to direct the SOEs to this effect and to set the terms and conditions of the transactions if necessary. This overrides the duties of the directors of the SOEs under the State-Owned Enterprises Act 1986 and the Companies Act The same provisions were made in Part 8 (now repealed) of the Electricity Industry Reform Act 1998 for the split of ECNZ. Other regulation-making powers and consequential amendments to other legislation Levies The Bill carries forward amended powers to make regulations to recover costs by way of a levy on industry participants. The levy-making powers cover the costs of performing the Authority s functions and duties, the electricity efficiency programmes transferred to the Energy Efficiency and Conservation Authority, any on-going contractual obligations under the reserve energy scheme, and the costs of the Ministry of Economic Development in undertaking forecasting and analysis for the purpose of assisting investment planning by industry participants. In addition, the powers provide for up to $15 million to be collected over 3 years to fund a campaign to promote to consumers the benefit of comparing and switching retailers. This is expected to encourage retail competition and put pressure on prices. Overall, the costs imposed on industry participants by the levy are expected to be lower than the current levy because of the rescinding of the reserve energy provisions. Other regulation-making powers The Bill provides powers to regulate to provide class exemptions for industry participants from obligations to register with the Authority as market participants or to comply with the Code.

16 16 Electricity Industry Bill Explanatory note The Bill also carries forward powers from the current legislation to regulate regarding monitoring, investigating, and enforcing compliance with the Code, and in relation to the Rulings Panel. Transitional provisions The Bill provides standard transitional provisions relating to the transfer of the assets of staff, assets, liabilities, etc, of the Electricity Commission. Consequential amendments The Bill makes a number of consequential amendments to other legislation. The most important of these is an amendment to the Gas Act At present, the Gas Act 1992 provides for the Governor- General by Order-in-Council to transfer responsibilities in relation to the regulation of the gas industry to the Electricity Commission, which would be renamed the Energy Commission, if the Gas Industry Company (which is an industry-led body) fails to meet Government objectives for the gas sector. The Bill makes consequential changes relating to the Electricity Authority (and hence, Energy Authority). It also takes the opportunity to ensure that the Energy Authority, if established, includes expertise in the gas industry. Tidy-up provisions The Bill makes several tidy-up changes. These include removing the power of the Minister of Energy under the Energy (Fuels, Levies, and References) Act 1989 to recommend the economic regulation of energy goods and services under Part 4 of the Commerce Act This should have been done when Part 4 was comprehensively amended in 2008: clarifying the provisions relating to the election of trustees to consumer and community trusts, and directors to consumer cooperatives, under Part 4 of the Commerce Act (Under Part 4, lines businesses owned by trusts or cooperatives are exempt from price control on the grounds that they are ultimately controlled, through election processes, by the consumers they serve).

17 Explanatory note Electricity Industry Bill 17 Conclusion The Bill makes wide-ranging changes, but of an evolutionary and fine-tuning nature, to put in place improved governance and regulatory provisions for the electricity industry. The overall objective is to improve competition, efficiency, and reliability of supply in the sector, for the long-term benefit of consumers of New Zealand. Clause by clause analysis Clause 1 is the Title clause. Clause 2 provides that the Act commences on 1 October Clause 3 provides that the Act binds the Crown. Part 1 Preliminary provisions Clause 4 provides that the purpose of the Act is to provide a framework for the regulation of the electricity industry. Clauses 5 to 9 set out various matters of interpretation. Part 2 Electricity Industry Governance Subpart 1 Who does what Subpart 1 identifies the main players in the regulation of the electricity industry (ie, industry participants, the Electricity Authority, and the Rulings Panel) and what their roles are. Industry participants Clause 9 identifies the industry participants for the purpose of this Act. As well as the obvious ones (generators, Transpower, distributors, and retailers), there are a number of other participants including industry service providers. These have highly technical roles within the industry. Some are identified in clause 9 as industry participants, and regulations can be made identifying others. Clause 10 identifies that Transpower (the owner and operator of the national grid) is the system operator.

18 18 Electricity Industry Bill Explanatory note Clause 11 identifies the 2 basic obligations of every industry participant. They are to register with the Authority: to comply with the Code. Clauses 12 and 13 provide for exemptions from these obligations. Exemptions can be either class exemptions, which must be made by regulations, or individual exceptions, which must be made by the Authority by Gazette notice. Exemptions from the Code may be partial. Electricity Authority Clauses 14 to 21 are about the Electricity Authority which replaces the existing Electricity Commission. It is to be an independent Crown Entity, but must have regard to statements of Government policy concerning the electricity industry. Its functions are described in the general policy statement. It has specific powers to require persons to co-operate with it in performing its monitoring, etc, functions. Security and Reliability Council, and other advisory groups Clauses 22 to 25 require the Authority to establish a Security and Reliability Council and allow it to set up other advisory groups. Rulings Panel Clauses 26 to 29 provide for the continuation of the Rulings Panel that is currently established under the Electricity Governance Regulations The transitional provisions provide that the current members remain in office but are deemed to be appointed under clause 27. The functions and funding of the Rulings Panel are dealt with in these clauses, but the details about the Panel s membership, operation, and procedures will remain in regulations. These are intended to largely replicate the equivalent provisions in the Electricity Governance Regulations Subpart 2 Registration Clauses 30 to 34 set out the information that industry participants must provide, and keep up to date, for registration purposes. Infor-

19 Explanatory note Electricity Industry Bill 19 mation contained in the existing register maintained by the Electricity Commission will be transferred into the new register. Unlike the present situation, industry participants are obliged to comply with the Code whether or not they are registered. Non-registration is an offence. Subpart 3 Electricity Industry Participation Code Clauses 35 to 46 are about the content, status, making, and amending of the Code. The Code s features, and how it is made and amended, are described in the general policy statement. Clause 47 carries forward section 172KA of the Electricity Act 1992, which allowed Electricity Governance Rules to require Transpower to enter into transmission agreements relating to the national grid. Subpart 4 Monitoring and enforcing Code Authority s powers and procedures Clauses 48 to 54 set out the Authority s powers in relation to monitoring and enforcing the Code. The Authority may seek an interim injunction against an industry participant in relation to a breach of the Code. It may also suspend a generator s or purchaser s rights to bid or offer under the Code in certain circumstances (such as insolvency). The Authority may require industry participants to provide information, permit their officers and employees to be interviewed, allow access to premises, and provide all other assistance to enable the Authority to carry out its functions and exercise its powers. The detailed procedures relating to monitoring compliance with and enforcing the Code will be set out in regulations that largely replicate the current provisions of Part 4 of the Electricity Governance Regulations However, protections for industry participants (for example, maintenance of legal professional privilege) are set out in the Bill. Rulings Panel s powers and procedures Clauses 55 to 63 are about the Rulings Panel. The Rulings Panel hears complaints about breaches by industry participants of the Code and regulations. It has remedial powers including the power to order

20 20 Electricity Industry Bill Explanatory note payment of a pecuniary penalty of up to $2 million, to make compliance and compensation orders, and to terminate rights to bid or offer under the Code. These are the same remedial powers as it currently has and they will continue to be subject to limitations set out in the regulations. The procedures of the Rulings Panel are, and will continue to be, set out in regulations. Appeals Clauses 64 to 73 are about appeals from the decisions of the Rulings Panel. They largely replicate the current provisions of the Electricity Act Part 3 Separation of distribution from certain generation and retailing Part 3 replaces, with various changes, the rules relating to separation of industry activities (previously in the Electricity Industry Reform Act 1998). Subpart 1 Separation of distribution from certain generation and retailing Subpart 1 contains the separation and other rules. The main rules are as follows: ownership separation rules if a person is involved both in a distributor and in a generator with more than 100 MW of generation connected to the national grid: corporate separation and arm s-length rules if a person is involved both in a distributor and in either or both of (a) a generator that generates more than 10 MW of generation connected to the distributor s network: (b) a retailer that retails more than 5GWh per year to customers connected to the distributor s network: use-of-systems agreement rules if a connected retailer retails more than 5 GWh per year to customers connected to the distributor s network: rules preventing persons involved in distributors from paying retailers in respect of the transfer of the retailer s customers:

21 Explanatory note Electricity Industry Bill 21 no-discrimination rules that apply when distributors, and electricity trusts or customer co-operatives that own them, pay dividends or rebates. Subpart 2 Enforcement and general provisions Subpart 2 relates to enforcement. The main features are as follows: various remedies are available from the High Court. These are pecuniary penalties, injunctions, damages, and other orders. These remedies are carried forward from the Electricity Industry Reform Act 1998: sections 54 (Court may order divestiture of assets or voting securities) and 55 (additional penalty for contravention involving commercial gain) of the Electricity Industry Reform Act 1998 are not carried forward, as they are no longer necessary: the maximum pecuniary penalty that the High Court may order under this subpart remains, for a corporate, the greater of $10 million or 3 times the value of any commercial gain or 10% of turnover. The maximum amount has, since 1998, been linked to the maximum amount for pecuniary penalties that can be ordered under section 80 of the Commerce Act 1986 in respect of restrictive trade practices. The maximum amount under section 80 of that Act has been as described above (ie, $10 million, etc) since 2001: appeals against High Court decisions under this subpart can be made in accordance with the general rules in the Judicature Act 1908 about appeals to the Court of Appeal: the major change in this subpart of the Bill is that responsibility for initiating enforcement of this Part will shift to the Authority, from the Commerce Commission: various provisions of the Commerce Act 1986 are applied to enforcement of the Part with necessary modifications, for example, investigatory powers. These are the same provisions that were applied when the Commerce Commission had responsibility for initiating enforcement: disclosure under the Part must be made to the Authority, rather than the Commerce Commission:

22 22 Electricity Industry Bill Explanatory note responsibility for granting exemptions from the Part will also shift to the Authority, from the Commerce Commission. Part 4 Industry participants and consumers Subpart 1 Dispute resolution Clauses 97 to 100 relate to dispute resolution schemes for consumers and others. They are based on provisions in the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and replace section 158G of the Electricity Act Transpower and every distributor and retailer must be a member of the scheme. The scheme is either an approved scheme (designed and established to deal with both electricity and gas) or the regulated scheme. The details about these alternatives are set out in Schedule 4. Any person other than a member may take a complaint to the scheme. No fee may be charged for investigating or resolving a complaint. If resolution is not achieved by mutual consent and a binding settlement is ordered, it can be enforced through a District Court order. If the order is for payment of money, the order can be enforced as a judgement. Failure to comply with any other order is an offence. Subpart 2 Financial statements of customer and community trusts Clauses 101 to 106 relate to the financial statements of customer and community trusts (which are carried forward from sections 158A to 158F of the Electricity Act 1992). Subpart 3 Continuance of supply Clauses 107 to 110 replace section 62 of the Electricity Act A replacement for section 62 was set out in the Electricity (Continuance of Supply) Bill. That Bill was introduced in 2008 and reported back from the Select Committee in April 2009, with the recommendation that the Bill be passed with the amendments shown. Clauses 107 to 110 replicate the amended version of the provisions, with only those amendments necessary to align the text with this Bill and to improve the drafting.

23 Explanatory note Electricity Industry Bill 23 Subpart 4 Price restraint for line charges for domestic and rural consumers Clauses 111 to 115 set out provisions to enable price restraint for line charges for domestic and rural consumers. These are carried forward without change from sections 88 to 93 of the Electricity Industry Reform Act 1998 and are discussed in the general policy statement. Part 5 Miscellaneous Subpart 1 Regulations Clauses 116 to 122 set out regulation-making powers relating to different aspects of the Bill. Clause 117 provides for class exemptions from the obligation on industry participants to register: comply with the Code or specific provisions of the Code. Clause 118 provides for class exemptions from the obligation to be a member of a dispute resolution scheme. Clause 119 provides for regulations relating to the monitoring and enforcement of the Code. This clause authorises the making of the regulations that will replace Parts 4 to 8 of the Electricity Governance Regulations Clause 120 provides for regulations relating to consumer issues. It includes a regulation-making power that would authorise the making of the current Electricity (Low Fixed Charge Tariff Option for Domestic Consumers) Regulations These regulations will continue in force under the new Act. It provides for regulations regulating distributors and retailers dealings with consumers and requiring their compliance with policies, practices, procedures, etc. Clause 121 provides for regulations (equivalent to those that could be made under section 172C of the Electricity Act 1992) ensuring accountability by electricity trusts. Clause 122 is the residual regulation-making power.

24 24 Electricity Industry Bill Explanatory note Subpart 2 Miscellaneous State-owned enterprise asset reconfiguration Clauses 123 to 125 contain provisions enabling Ministerial directions to be given in respect of the reconfiguration of the generating assets of State-owned generation, as discussed in the general policy statement. Levy of industry participants Clauses 126 and 127 contain provisions relating to industry levies. Authorisation for restrictive trade practices rule Clause 128 replicates section 172ZR of the Electricity Act Section 43 of the Commerce Act 1986 provides that Part 2 of that Act (Restrictive trade practices) does not apply to things specifically authorised under an enactment. Clause 128 specifically authorises acts done or omitted by the Electricity Authority, the Rulings Panel, or an industry participant in relation to this Act, regulations made under it, or the Code. Subpart 3 Transitional and consequential provisions Dissolution of Electricity Commission Clauses 129 to 135 provide for the dissolution of the Electricity Commission and the transfers of its employees, assets, liabilities, etc, to the Electricity Authority. Rulings Panel Clauses 136 and 137 provide for the continuance of the Rulings Panel and any investigations and proceedings before it. Commerce Commission Clauses 138 and 139 provide for the transfer from the Commerce Commission to the Authority of matters under investigation under the Electricity Industry Reform Act 1998, and the continuance of exemptions granted under that Act.

25 Explanatory note Electricity Industry Bill 25 Subpart 4 Amendments to other enactments Amendments to Commerce Act 1986 Clauses 140 to 150 make amendments relating to subpart 9 of Part 4 of the Commerce Act 1986, which is about the regulation of electricity lines services (ie, transmission and distribution). The substantive amendments to sections in that subpart are as follows: Clause 142 amends section 52T so that input methodologies about pricing methodologies may not be set if pricing methodologies are set out by industry-specific regulators (such as the Authority). Clause 144 amends section 54C, which defines electricity lines services, to clarify that the term includes services performed by Transpower as system operator; and the supply of electricity from an alternative source (in pursuance of the continuance of supply obligation in clause 107). Clauses 145 and 146 amend sections 54D and 54H to make refinements to the definition of consumer-owned. Lines companies that are consumer-owned are subject only to information disclosure regulation and not price-quality regulation under the Commerce Act Clause 147 repeals section 54M(6), which is added to new section 54V instead. The provision is an on-going requirement that allows the Authority (rather than the Commerce Commission) to set the quality standards for Transpower. Clause 148 repeals the provisions that deal with jurisdiction issues and the interface between on the one hand the Commerce Commission and the Commerce Act 1986 and on the other hand the Electricity Commission and the Electricity Act 1992 (sections 54R to 54U of the Commerce Act 1986). They are replaced by provisions that (a) give the Commerce Commission (rather than the Electricity Commission) obligations relating to the approval of Transpower s grid upgrade plans and capital expenditure proposals (new section 54R); and (b) require the Commerce Commission to determine an input methodology relating to those plans and proposals. Clause 149 substitutes a new section 54V dealing with the interface between the Commerce Commission and the Electricity Authority. Clause 150 amends the regulation-making power to authorise the Commerce Commission to refund parts of application fees.

26 26 Electricity Industry Bill Explanatory note Amendments to Energy (Fuels, Levies, and References) Act 1989 Clauses 151 to 153 make amendments to the Energy (Fuels, Levies, and References) Act 1989 to repeal Part 2 (which provides that the Minister of Energy must exercise, in respect of a range of different types of energy, powers under the regulated goods and services provisions of the Commerce Act 1986 that are conferred by that Act on the Minister of Commerce: to add a new purpose for which industry levies may be collected, namely the dissemination by the Ministry of information to assist consumers to choose, and alternate, between competing gas retailers. Amendments to Electricity Act 1992 Clauses 154 to 157 makes 2 substantive amendments to the Electricity Act 1992 and also consequential ones. The substantive amendments are: a replacement definition of electrical installation, to clarify a long-standing ambiguity: provisions that will allow different Ministers to make different codes of electrical practice. Miscellaneous provisions and Schedules Clause 158 provides for the repeal of the Electricity Reform Act Clause 159 provides that other enactments are amended as set out in Schedule 5. Schedule 1 sets out provisions relating to incorporation by reference. These provisions will apply to material incorporated by reference into the Code or regulations. Schedule 2 contains rules for determining when a person is involved in a distributor, a generator, or a retailer for the purpose of the rules in Part 3 relating to the separation of industry activities. These provisions are based on those currently in the Electricity Industry Reform Act 1998.