MIGHTY RIVER POWER SUBMISSION TO THE GAS INDUSTRY CO: CURRENT ISSUES FOR DOMESTIC AND SMALL BUSINESS GAS CONSUMERS 28 OCTOBER 2008

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1 Page 1 of 33 MIGHTY RIVER POWER SUBMISSION TO THE GAS INDUSTRY CO: CURRENT ISSUES FOR DOMESTIC AND SMALL BUSINESS GAS CONSUMERS 28 OCTOBER 2008

2 Page 2 of 33 1 TABLE OF CONTENTS 1 TABLE OF CONTENTS 2 2 EXECUTIVE SUMMARY Outcomes from the review Mighty River Power endorses 4 3 INTRODUCTION Relevance of the review to the Electricity Commission 6 4 DEVELOPMENT OF THE MODEL CONTRACT GUIDELINES Use of must versus should in voluntary Guidelines 9 5 GOVERNMENT POLICY STATEMENTS ON GAS GOVERNANCE Model Contract terms and conditions 11 6 JURISDICTION AND DUPLICATION OF FUNCTIONS EGCC Gas Consumer Code of Practice Electricity Commission Model Contract arrangements 15 7 TESTS FOR WHETHER TO RECOMMEND REGULATION Compliance test Competition test Net benefit test 20 8 CONCLUDING REMARKS AND RECOMMENDATIONS Recommendations 24 APPENDIX: RESPONSES TO THE GAS INDUSTRY CO S QUESTIONS 27

3 Page 3 of 33 2 EXECUTIVE SUMMARY 1. Mighty River Power is generally comfortable with the Model Contract Guidelines. We support the review of the Guidelines though we differ in our views to the Gas Industry Co in a number of key areas. 2. Firstly, Mighty River Power believes regulation of network access arrangements (including terms and conditions) of gas distributors should be given a higher priority by the Gas Industry Co than the domestic and small business customer Model Contract Guidelines. Regulation should focus on the natural monopoly sectors of the gas market rather than on the competitive sectors. 3. Secondly, Mighty River Power believes fuel substitutability and competition can and should be relied on to discipline gas retailers practices. Domestic and small business consumers, in particular, have discretion as to whether they use gas rather than electricity. This is illustrated by the fact that less than half (44% penetration) of properties which have access to gas mains take up gas services. 4. Mighty River Power s retail arm, Mercury Energy, has no gas incumbency and only started its gas retailing operations in 2003/04. We have built up a customer base of almost 37,000 from scratch through competitive activity. All our customers have made a conscious decision to switch to us. Mercury Energy has no substantial market power in gas retailing. If our contractual arrangements were not fair and reasonable customers would be unlikely to switch to/stay with us. 5. Thirdly, we do not believe the Gas Industry Co has demonstrated that current practices fall short of reasonable consumer expectations and/or are unfair. To the extent the Gas Industry Co believes this is the case it should detail retailers and their practices that fall into these categories. We question whether The nature and extent of gas consumer complaints suggests a problem. The number of complaints the Electricity & Gas Complaints Commission (EGCC) receives from gas consumers is substantially lower than for electricity, even when adjusted to reflect that there are a larger number of electricity customers than gas customers. We also question the extent to which the consumer forums genuinely represent the views and interests of residential and small business customers. 6. Fourthly, Mighty River Power believes the Gas Industry Co should be able to establish effective compliance monitoring arrangements. Mighty River Power does not believe the Gas Industry Co has demonstrated that a mandatory approach to the Model Contract arrangements would be to the long-term benefit of end-users. 7. It is instructive to observe the Electricity Commission has developed voluntary Guidelines in various areas such as Model Contracts and procedures for dealing

4 Page 4 of 33 with low income and vulnerable consumers. The Electricity Commission has not had to rely on regulated contract disclosure to monitor compliance. Rather the Electricity Commission has simply written to the relevant parties seeking details of their compliance and any reasons for non-compliance. The parties should have adequate incentives to respond. If they did not this could provide the Electricity Commission with strong grounds for presuming a mandatory approach was warranted. If the Gas Industry Co does not consider this to be sufficient, Mighty River Power would not object to the introduction of regulated compliance monitoring requirements. 8. Lastly, Mighty River Power does not see merit in the Gas Industry Co developing Model Contract terms and conditions in addition to the Model Contract Guidelines. 9. It is not clear from the Discussion Paper what the Gas Industry Co sees as the benefit of introducing Model Contract terms and conditions, over and above what could be achieved by the Model Contract Guidelines. It may be that the Gas Industry Co is concerned there is not enough specificity in the existing Model Contract Guidelines. For example, Guideline 2 states that The contract must permit changes to be made to the terms and conditions of the consumer contract upon specified notice being given, but does not define what the specified notice period should be. Model Contract terms and conditions would presumably specify this. The adoption of Model Contract terms and conditions is, however, unnecessary to achieve this. The Gas Industry Co could simply make the Model Contract Guidelines more prescriptive, for example, by adopting clause CA10.1 of the Gas Consumer Code of Practice which prescribes that this period is no less than 30 days. 2.1 Outcomes from the review Mighty River Power endorses 10. The outcomes Mighty River Power believes are appropriate for the Gas Industry Co s Model Contract Guidelines review are: a. The Gas Industry Co recognises that regulation of the natural monopoly sectors of the gas industry should be a higher priority than the competitive sectors (even if they are not fully competitive). The Gas Industry Co should develop gas distribution access regulatory arrangements. b. The Gas Industry Co recognises that the ability of gas retailers to comply with some of the Model Contract Guidelines is contingent on gas transmitters and distributors providing back-to-back commercial arrangements. Guideline 3, for example, envisages that equipment used in the provision of line function services will be monitored and maintained in line with good industry practice prevailing in New Zealand. This Guideline can only be met if gas distributors satisfy it. At the present though, the Gas Industry Co has imposed this requirement on gas retailers but not gas distributors.

5 Page 5 of 33 c. The Gas Industry Co moves to ensure there is only one regulatory body responsible for setting minimum contractual standards for gas services. The duplication between the Model Contract Guidelines and the EGCC s Gas Consumer Code of Practice should be removed by: (i) abolishing the latter; and (ii) the Gas Industry Co adopting parts of the Code of Practice into the Model Contract Guidelines, as appropriate. d. The Gas Industry Co ensures it does nothing that could preclude gaselectricity retailers from offering a single set of standard terms and conditions for gas and electricity residential customers. As things presently stands, if there were conflicts amongst the Gas Industry Co, EGCC and Electricity Commissions Guidelines and Codes, electricity-gas retailers would not be able to offer a single contract for both electricity and gas services and comply with all the requirements. e. The Electricity Commission and Gas Industry Co consider whether their respective Model Contract arrangements could be aligned, rather than having separate electricity and gas arrangements. f. The Gas Industry Co recognises there are a number of legitimate grounds for non-compliance with voluntary Guidelines. If this was not the case there would be no point ever considering a voluntary approach. g. The Model Contract Guidelines remain voluntary. h. The Gas Industry Co introduces a compliance monitoring regime (regulated or not) for the Model Contract Guidelines, which aims to identify the extent of compliance and the reasons for any non-compliance. i. The Gas Industry does not introduce Model Contract terms and conditions for retailing but, if Model Contract terms and conditions are introduced, they are not mandated. j. The Gas Industry Co formalise a framework for determining whether voluntary Guidelines or mandatory regulations should be adopted. The tests should revolve around compliance (the extent of compliance and whether reasons for any non-compliance are justified), the competitiveness of the market (mandatory requirements should be targeted at the less competitive parts of the market); and a net benefit test (mandatory regulation should only be introduced where it is to the long-term benefit of end-users).

6 Page 6 of 33 3 INTRODUCTION 11. Mighty River Power welcomes the opportunity to make a submission to the Gas Industry Co in response to the Discussion Paper Current Issues for Domestic and Small Business Gas Consumers, and the Summary Paper version, both dated 13 August No part of our submission is confidential and we are happy for it to be publicly released. 12. Answers to the Gas Industry Co s specific questions are contained in the Appendix to this submission. 3.1 Relevance of the review to the Electricity Commission 13. Mighty River Power believes there are a number of issues common to both the Gas Industry Co and the Electricity Commission, including: a. Mighty River Power s view that regulation of terms and conditions has been misdirected at the competitive (retail) sector of the market, whereas the regulatory focus should be on the natural monopoly (distribution and transmission) sectors of the market. Retailers cannot fully comply with some of the Model Contract Guidelines if gas transmission and distribution businesses do not provide back-to-back arrangements (section 4). b. The inappropriateness of wording voluntary Guidelines with must rather than should (section 4.1). c. There is duplication of responsibilities with the Electricity & Gas Complaints Commission (EGCC) and its Consumer Codes of Practice (section 6.1). d. Problems can arise if the Gas Industry Co and Electricity Commission s Model Contract arrangements conflict, particularly for gas-electricity retailers wanting to offer domestic customers a single set of terms and conditions for both gas and electricity (section 6.2). A legitimate reason for non-compliance with the Gas Industry Co s Model Contract arrangements is if a gas-electricity retailer has adopted the Electricity Commission s arrangements, and vice versa. Mighty River Power considers that the Gas Industry Co and the Electricity Commission should work together to determine whether the gas and electricity Model Contract arrangements could be combined. e. The tests Mighty River Power recommends be used to determine whether voluntary or mandatory regulatory arrangements should be put in place are equally relevant to the Gas Industry Co and the Electricity Commission (section 7).

7 Page 7 of 33 4 DEVELOPMENT OF THE MODEL CONTRACT GUIDELINES 14. Mighty River Power is generally comfortable with the draft Model Contract Guidelines. We believe there is scope for improvement though, for example, by integrating the Model Contract Guidelines and the EGCC s Gas Consumer Code of Practice into a single document. We accordingly support the Gas Industry Co s review of the Model Contract Guidelines. 15. Mighty River Power shares the Gas Industry Co s view that Consistent with the overall policy framework facilitating competition is the primary vehicle for promoting good outcomes for all consumers Mighty River Power believes the focus and priority of the Gas Industry Co should be on regulation of the terms and conditions of the gas transmission and distribution pipeline businesses rather than the retail sector of the gas industry. 2 As the Gas Industry Co observes the level of competition in the retail market will be influenced by how easy it is for retailers to enter into contracts with distributors and the reasonableness of conditions of those contracts. 3 There should be a stronger presumption of a need to regulate gas transmission and distribution pipeline businesses given their natural monopoly position than for the competitive gas retail sector. We are therefore disappointed the Gas Industry Co has deferred further work at this stage while other key work streams are being progressed Gas transmission and distribution terms and conditions have a direct impact on retailers and consumers, and on what retailers are able to offer consumers by way of terms and conditions. The ability of gas retailers to meet Guideline 3 on Services standards is directly linked to their ability to obtain comparable terms and conditions from gas distributors. Guideline 3, for example, envisages equipment used in the provision of line function services will be monitored and maintained in line with good industry practice prevailing in New Zealand. This Guideline can only be met if gas distributors comply with it. At the present though, the Gas Industry Co has imposed this requirement on gas retailers but not gas distributors. 18. The Government recognised this in its Government Policy Statement on Electricity Governance 2008, though curiously is silent on the matter in the Government Policy Statement on Gas Governance (Gas GPS) 2008, stating at paragraph 113 (bullet 2): 1 Summary of conclusions section of the Discussion Paper. 2 Mighty River Power is of the view that the Gas Industry Co should develop a joint access regime for gas transmission and distribution. Refer to section 5 of Mighty River Power s Submission to the Gas Industry Co: Transmission Access Framework, 21 December Page 24 of the Discussion Paper. 4 Page 24 of the Discussion Paper.

8 Page 8 of 33 [Electricity distribution] Terms and conditions should take into account the interests of consumers, retailers and distributors and should be consistent with: obligations imposed on retailers as a result of arrangements relating to contracts between retailers and consumers. 19. The Electricity Commission recognised the interlinkages between the transmission, distribution and retail service terms and conditions in its development of Model Contract arrangements for domestic consumers, as depicted in the following diagram: Mighty River Power notes the extent to which gas retailers can comply with the Model Contract Guidelines depends on the extent to which gas distributors offer them equivalent terms and conditions. Mighty River Power recommends the Gas Industry Co treat development of gas transmission and distribution network access arrangements as a higher priority than retail Model Contract arrangements. 21. The Gas Industry Co has asserted The nature and extent of gas consumer complaints, coupled with feedback from the consumer forums, points to the fact that some retail contracts are not meeting expectations, or, put another way, not all small consumers are receiving the benefit of fair contract terms and conditions at all times. 6 Given this assertion, Mighty River Power recommends the Gas Industry Co review existing gas retailer Contract practices to identify current practices which fall short of reasonable consumer expectations and/or are unfair; and those that reflect good industry practice and could be usefully reflected in the Model Contract Guidelines. 22. There may also be practices the Gas Industry Co can usefully draw on from elsewhere. The Gas Industry Co has already mentioned overseas practices. In addition, it could consider the Electricity Commission s Model Contract Guidelines. In section 6, we discuss our concerns about the duplication between the Model Contract Guidelines and the EGCC s Gas Consumer Code of Practice and suggest this be resolved by removal of the Code and revising the Model Contract Guidelines to adopt some of the Code s provisions. 5 At paragraph 30 of the Electricity Commission s consultation paper Proposed changes to Model Domestic Contract and Model Use of System Agreement, March Summary of conclusions section of the Discussion Paper.

9 Page 9 of Use of must versus should in voluntary Guidelines 23. Mighty River Power questions the appropriateness of the use of the word must in voluntary guidelines. We consider this to be misleading and inaccurate as it implies the Guidelines are mandatory. Mighty River Power believes the use of the word should is more suitable. The comments made by Genesis Energy to the Electricity Commission on its Model Contract Guidelines are instructive: 7 Genesis Energy also considers that use of the strict imperative must in contract guidelines is not appropriate and would mislead readers as to the authority of the guidelines. At a minimum, it would be appropriate to replace must with should This would convey that the guidelines relate to what is desirable, rather than to what is obligatory. Of course, it is fine for guidelines to use must when describing requirements that are legally binding Adopting should for true guidelines and must for statutory obligations would improve the legibility and usability of the contract guidelines document. 24. Mighty River Power recommends the Model Contract Guidelines be amended to replace must with should, except in relation to the third paragraph of the Guideline 3 Service standards. 7 Page 4 of Genesis Energy s submission to the Electricity Commission Interposed guidelines and model contracts, 6 June 2008.

10 Page 10 of 33 5 GOVERNMENT POLICY STATEMENTS ON GAS GOVERNANCE 25. The October 2004 version of the Government Policy Statement on Gas Governance (Gas GPS) prescribed that the Gas Industry Co should recommend arrangements for The development of model contract terms and conditions between consumers and retailers. 8 This was flawed in that it prescribed the regulatory solution the Government sought to an unidentified (apart from the vague reference to ensuring effective outcomes 9 ) problem. 26. The April 2008 version of the Gas GPS is an improvement on the 2004 version in that it prescribes the Government wants the Gas Industry Co to ensure Contractual arrangements between gas retailers and small business consumers adequately protect the long-term interests of small consumers 10 without specifying how this should be achieved. This allows the Gas Industry Co to consider various options such as reliance on (i) the disciplines placed on gas retailers by fuel substitutability and competition; (ii) the EGCC s Gas Consumer Code of Practice; or (iii) arrangements such as a Model Contract or Model Contract Guidelines. 27. The Model Contract Guidelines, as they presently stand, appear to be modelled around the 2004 Gas GPS requirements, though with each of the Model Contract Guidelines prefaced with The contract must as opposed to The gas retailer must or The gas retailer should. This implicitly assumes the best or only way of meeting the Guidelines is through retail contracts. This is not necessarily correct. 28. Many of the obligations prescribed in the Model Contract Guidelines could be met without reference in the contractual terms between consumers and retailers. For example, retailers can give a month s notice of any price rise, including reasons for the price rise, without specifying they will do so in their retail contracts, as per Guideline 4 Prices, bills and payment. Similarly, Mighty River Power believes it would be more effective for gas retailers to provide details of the EGCC and how to contact it in, for example, welcome packs for new customers than in retail contracts, as per Guideline 8 on Disconnection and reconnection. 29. Depending on the nature of the changes to the Model Contract Guidelines that come out of the Gas Industry Co s current review, Mighty River Power s retail arm, Mercury Energy, may well find it simpler and less costly to meet the outcomes sought in the revised Guidelines by means other than changing our retail contracts. Mighty River Power recommends that reference to the contract in the Model Contract Guidelines be amended to gas retailer. 8 Bullet 3 of paragraph 11 of the Government Policy Statement on Gas Governance Paragraph 10 of the Government Policy Statement on Gas Governance Paragraph 13 of the Government Policy Statement on Gas Governance 2008.

11 Page 11 of Model Contract terms and conditions 30. Despite the broad mandate in the Gas GPS 2008 to ensure Contractual arrangements between gas retailers and small consumers adequately protect the long-term interests of small consumers, the Gas Industry Co s intention seems to be to align the Model Contract arrangements more closely with the 2004 GPS by converting the Guidelines into Model Contract terms and conditions. Mighty River Power does not believe this is necessary or desirable, and does not believe the Gas Industry Co has demonstrated this is the best way to protect or promote the long-term interests of small consumers. 31. The effect would be to reinforce and exacerbate the concerns we expressed above, in that the existing Model Contract Guidelines not only prescribe what the Gas Industry Co wants to achieve but how this would be achieved. Not only would gas retailers be expected to use their retail contracts as the means by which to meet the Model Contract Guidelines obligations, but gas retailers would also be directed as to the drafting of the terms and conditions used to meet these obligations. 32. This goes further than the Electricity Commission which has similarly taken the approach of issuing both Model Contract Guidelines and Model Contracts. The Electricity Commission has recognised there are any number of ways electricity retailers could satisfy the Model Contract Guidelines. Its Model Contracts are aimed more at providing electricity retailers an example of what arrangements would satisfy the Model Contract Guidelines: The MDC is an example of how the MDC Guidelines could be implemented. As long as an interposed domestic consumer contract implements the MDC Guidelines, the Commission does not require such a contract to be in the form of the MDC. 11 the MDC is an example of how the MDC Guidelines and DG Guidelines could be implemented The Electricity Commission also recognised it was undesirable for the Model Contract terms and conditions to be mandated: 13 Feedback from participants on early drafts of the MDC indicated that requiring the industry to implement the MDC word for word was unworkable because one size does not fit all, and that is was unnecessary from a policy perspective. Participants urged the Commission to instead adopt a set of principles that reflected the intent of the MDC, but gave industry participants flexibility as to how they implemented the principles. The Commission agreed with these views and developed the MDC Guidelines and DG Guidelines in response. 11 Paragraph 20 of the Electricity Commission s consultation paper Proposed changes to Model Domestic Contract and Model Use of System Agreement, March Paragraph 17 of the Electricity Commission s consultation paper Proposed changes to Model Domestic Contract and Model Use of System Agreement, March Paragraphs 15 and 16 of the Electricity Commission s consultation paper Proposed changes to Model Domestic Contract and Model Use of System Agreement, March 2008.

12 Page 12 of It is not clear from the Discussion Paper what the Gas Industry Co sees as the benefit of introducing Model Contract terms and conditions, over and above what could be achieved by the Model Contract Guidelines. It may be that the Gas Industry Co is concerned there is not enough specificity in the existing Model Contract Guidelines. For example, Guideline 2 states The contract must permit changes to be made to the terms and conditions of the consumer contract upon specified notice being given, but does not define what the specified notice period should be. Model Contract terms and conditions would presumably specify this. The adoption of Model Contract terms and conditions is, however, unnecessary. The Gas Industry Co could simply make the Model Contract Guidelines more prescriptive, for example, by adopting clause CA10.1 of the Gas Consumer Code of Practice which prescribes that this period is no less than 30 days. 35. Mighty River Power recommends against the Gas Industry Co converting the Model Contract Guidelines into Model Contract terms and conditions and against either of these being mandated.

13 Page 13 of 33 6 JURISDICTION AND DUPLICATION OF FUNCTIONS 36. Gas and electricity retailers need to work through the competing requirements of the Gas Industry Co s Model Contract Guidelines, the EGCC s Gas and Electricity Consumer Codes of Practice, and the Electricity Commission s Model Contract Guidelines and Model Contracts. 37. Mighty River Power s retail arm, Mercury Energy, has a single standard terms and conditions for residential customers that applies regardless of whether the customer takes electricity, gas or both electricity and gas services from us. 38. As a consequence, if there were any conflicts amongst the Gas Industry Co, EGCC and Electricity Commissions Guidelines and Codes, Mercury Energy would not be able to comply with all the requirements. If the conflicting requirements were a result of differences in the electricity and gas Model Contract arrangements the only way Mercury Energy would be able to fully comply would be to introduce separate terms and conditions for electricity and gas services. This would be to the detriment of both Mercury Energy (at the very least adding regulatory compliance costs) and to our customers. We believe offering a single contract is simpler and easier for our customers than having to deal with two separate contracts. 39. The discussion below details Mighty River Power s view on how potential duplication and over-lap of functions between the Gas Industry Co and the EGCC, and the Gas Industry Co and Electricity Commission, should be best managed. 6.1 EGCC Gas Consumer Code of Practice 40. Appendix F of the Discussion Paper includes a comparison of the draft Model Contract Guidelines with the EGCC s Gas Consumer Code of Practice. There is substantial overlap between the Model Contract Guidelines and the Consumer Code of Practice. The main difference is that the Consumer Code of Practice tends to be more prescriptive than the Model Contract Guidelines. The Gas Industry Co also observes that There are a limited number of draft guidelines which are not included in the code of practice The level of overlap is not surprising as the two documents are essentially designed to achieve the same thing; provision of minimum standards to ensure provision of gas services to domestic consumers on a fair and reasonable basis. 42. While at the moment the Model Contract Guidelines and Code of Practice appear to be consistent there is no surety this will continue to be the case in the future. The Gas Industry Co flagged this as a potential issue in its 2005 consultation on the Model Contract Guidelines, observing that With two separate governance structures, there will be no certainty that the code of practice and model contract 14 Paragraph 117 of Appendix F of the Discussion Paper.

14 Page 14 of 33 rules and regulations will be consistent or that any non-compliance will not be considered by two separate governance bodies Mighty River Power considers the overlap and duplication of functions between the Gas Industry Co and the EGCC to be both unsatisfactory and wholly unnecessary. Either the Gas Industry Co or the EGCC should be responsible for setting minimum service conditions for domestic gas consumers, not both. Our preference is for the former, though either would be better than the status quo. 44. We raised this matter in our submission to the Electricity Commission and the Gas Industry Co on the Approval Criteria for a Complaints Resolution Scheme: 16 Mighty River Power is concerned about the existing situation whereby the EGCC has prescribed Codes of Practice and the Electricity Commission has translates these requirements in Model Contracts. This should be a matter that is either the domain of the EGCC (or the approved CRS) or the Electricity Commission/Gas Industry Co; not both. 45. In a previous submission to the Gas Industry Co we also suggested that the Gas Industry Co is the appropriate regulatory body for setting minimum service conditions, rather than the EGCC. 17 We do not consider it to be procedurally appropriate for the body hearing complaints to be setting the rules. We accept rule making and adjudicative functions are not always separated, but where they can be regulatory certainty and the independence of the adjudicative body are enhanced. 46. As a consequence, Mighty River Power recommends the Gas Industry Co: a. Remove the duplication of functions between itself and the EGCC in setting minimum service conditions for domestic gas suppliers; b. Liaise with the Electricity Commission (who faces the same issue) to clarify this function is the responsibility of the Gas Industry Co and Electricity Commission in the Approval Criteria for a Complaints Resolution Scheme; and c. Review the existing Gas Consumer Code of Practice to determine what parts of it should be adopted in the Model Contract Guidelines. 47. If the Gas Industry Co holds the view that the EGCC should be responsible for setting minimum service conditions for domestic gas suppliers, as reflected in its Gas Consumer Code of Practice, then Mighty River Power alternatively recommends the Gas Industry Co: 15 Page 40 of the Gas Industry Co s Consultation Paper Options for Consumer Contract Arrangements, November Paragraph 28 of Mighty River Power s submission to the Electricity Commission and Gas Industry Co Approval of a Joint Electricity and Gas Complaints Resolution Scheme, 12 May Mighty River Power Submission on options for consumer contracts, 12 December 2005.

15 Page 15 of 33 a. Withdrawal its own Model Contract Guidelines; and b. Direct the EGCC to consider adopting the parts of the Model Contract Guidelines not already reflected in the Gas Consumer Code of Practice. 6.2 Electricity Commission Model Contract arrangements 48. The Gas Industry Co should be cognisant that the majority of gas retailers are dual energy retailers. Any move to change the Model Contract arrangements should aim to ensure there are no conflicts between the Gas Industry Co and Electricity Commission. 49. While the Gas Industry Co s Model Contract Guidelines remain high level the chances of conflicts amongst the different regulatory body s Codes and Guidelines are minimised. If the Gas Industry Co introduces Model Contract terms and conditions conflict with the Electricity Commission s electricity Model Contract would be inevitable, unless those terms and conditions were essentially identical to the Electricity Commission s. Mercury Energy and other gaselectricity retailers would either need to not fully comply with one or both the electricity and gas Model Contracts, or impose two different contracts on our respective domestic electricity and gas customers. For obvious reasons, including inefficient usage of resources leading to pressure on costs, we do not consider that this would be a desirable or sensible outcome. 50. If the Gas Industry Co were to mandate its Model Contract arrangements, and the Electricity Commission s remained voluntary, this may well result in Mercury Energy and other gas-electricity retailers opting to adopt the Gas Industry Co arrangements for both gas and electricity and not fully complying with the Electricity Commission s Model Contract arrangements. 51. It is not clear to Mighty River Power that the Gas Industry Co s Model Contract arrangements should take precedence over the Electricity Commission s Model Contract arrangements or vice versa. 52. Mighty River Power recommends the Gas Industry Co accept that a legitimate reason for (partial) non-compliance with its Model Contract arrangements is if a gas-electricity retailer has adopted (alternative) Electricity Commission Model Contract arrangements or, if there is a conflict, the EGCC s Consumer Codes of Practice. 53. Mighty River Power also recommends the Gas Industry Co: (i) liaise with the Electricity Commission to determine whether the gas and electricity Model Contract arrangements could be aligned; or otherwise (ii) review the Electricity Commission s Model Contract arrangements to determine whether parts of it could be usefully adopted for gas.

16 Page 16 of 33 7 TESTS FOR WHETHER TO RECOMMEND REGULATION 54. Mighty River Power does not believe the Gas Industry Co should dismiss a voluntary approach to the Model Contract Guidelines. 55. The Gas Industry Co expresses the following views: 18 Gas Industry Co acknowledges that there are alternative approaches it could adopt, such as continuing to rely on general consumer protection law, facilitating a voluntary industry solution, development of model contracts or publication of contract guidelines. However, on the basis of its current assessment, Gas Industry Co considers that these are unlikely to be as effective as regulated minimum contract terms and conditions. Furthermore, it considers that in the absence of regulated contract disclosure, it is unlikely that meaningful monitoring of compliance with voluntary codes or model arrangements is achievable. 56. Mighty River Power does not agree with the Gas Industry Co s assessment. 57. It is instructive to observe the Electricity Commission has developed voluntary Guidelines in various areas such as Model Contracts, and procedures for dealing with low income and vulnerable consumers. The Electricity Commission has not had to rely on regulated contract disclosure to monitor compliance. Rather it has simply written to the relevant parties seeking details of their compliance and any reasons for non-compliance. The parties should have adequate incentives to respond. If they did not adequately respond, this could provide the Electricity Commission with strong grounds for presuming a mandatory approach would be appropriate. If the Gas Industry Co does not consider this to be sufficient, Mighty River Power would not object to the introduction of regulated compliance monitoring requirements. 58. Mighty River Power believes it would be helpful if the Gas Industry Co developed a framework for determining when a voluntary or mandatory approach is most appropriate. Mighty River Power has recommended to the Electricity Commission three tests which we in turn recommend the Gas Industry Co apply for determining whether to recommend (mandatory) regulation: a. Compliance test: (i) The Guidelines are not being fully complied with; and (ii) Adequate reasons for non-compliance have not been provided; and (iii) A warning would not be sufficient or has failed to bring about compliance. b. Competition test: (i) Competition in the relevant market is limited; and/or (ii) Regulation would promote competition; and/or (iii) Regulation is warranted on social policy grounds. 18 Summary of conclusions section of the Discussion Paper.

17 Page 17 of 33 c. Net benefit test: Regulation would be to the long-term benefit of acquirers or end-users. 59. The proposed tests are discussed in detail below The proposed tests have parallels with regulatory tests in other jurisdictions. 61. The statutory tests for whether to invoke price control, under section 52 of the Commerce Act 1986, is whether (i) competition is limited; and (ii) price control would serve the interests of consumers. The tests in section 52F of the Commerce Amendment Bill 2007, which will replace the existing section 52, are that: (i) competition is limited; (ii) there is substantial scope for exercise of market power; and (iii) the benefits of regulating clearly exceed the costs. 62. Similarly, under sections 18 and 19 of the Telecommunications Act 2001 the Commerce Commission is required to determine whether regulation would promote competition for the long-term benefit of end-users, having regard to the efficiency consequences of regulation. The Commerce Commission applies the following three tests to determine whether regulation is warranted: (i) whether competition is limited; (ii) would regulation promote competition; and (iii) would regulate be to the long-term benefit of end-users? 63. The principal difference between these tests, and the test Mighty River Power is advocating, is that the Gas Industry Co has the option of mandatory regulation or voluntary Guidelines. Without the voluntary Guideline option the compliance test would be redundant. 7.1 Compliance test 64. Mighty River Power recommended above that the Gas Industry Co apply a compliance test which consists of the following: a. Compliance test: (i) The Guidelines are not being fully complied with; and (ii) Adequate reasons for non-compliance have not been provided; and (iii) A warning would not be sufficient or has failed to bring about compliance. 65. As indicated above, if a party does not adequately respond to a request from the Gas Industry Co to detail its level of compliance and the reasons for any noncompliance it is reasonable for the Gas Industry Co to presume that conditions a.(i) and (ii) have been breached. Condition a.(iii) would also effectively be breached because the party had not provided the information required for the 19 The discussion substantially duplicates comments we made to the Electricity Commission on its Model Contract Guidelines and Model Contracts, available at:

18 Page 18 of 33 Gas Industry Co to determine what the breach is so the Gas Industry Co could not provide a warning to comply. 66. There are numerous reasons why non-compliance with voluntary Guidelines may be reasonable. If this was not the case there would be no reason for Guidelines to be voluntary rather than mandatory Regulations. 67. At one extreme, a party may not comply because the Guidelines are illegal. 20 Another example is where a Guideline lacks policy merit or justification. These two examples apply where Guidelines have been poorly drafted, or are unwarranted, and should be the exception rather than the rule. 68. More commonly, there may be alternative approaches to those in the Guidelines which would satisfy the Guidelines objectives. If a party can demonstrate it reviewed the Guidelines and decided to deviate from them on the basis that another approach would (equally or better) meet the Guidelines objectives, and the Gas Industry Co is persuaded the grounds are valid, this should be deemed acceptable. 69. Similarly, any set of Guidelines is likely to reflect trade-offs between the competing interests of different affected parties, such as the regulated party and consumers. If the party can demonstrate any deviation from the Guidelines is offset by exceeding the minimum requirements prescribed in other parts of the Guidelines this should also be deemed acceptable. 70. Gas and electricity retailers need to work through the competing requirements of the Gas Industry Co s Model Contract Guidelines, the EGCC s Gas and Electricity Consumer Codes of Practice, and the Electricity Commission s Model Contract Guidelines and Model Contracts. It would not make sense for a gas-electricity retailer to have different sets of terms and conditions for its gas and electricity services, particularly where it is providing both services to a single customer. Where the requirements differ, it would be reasonable for a gas-electricity retailer to not comply with one set of requirements because it was complying with another. 71. There can also be interdependencies amongst different regulatory requirements. The extent to which a gas retailer can comply with the Model Contract Guidelines depends, in part, on the terms and conditions of access provided by gas distribution businesses. The Service standards in Guideline 3 are an example of this. Gas distributors not gas retailers determine, for example, whether equipment used in the provision of line function services will be monitored and maintained in line with good industry practice prevailing in New Zealand. 72. Mighty River Power recommends the compliance test be applied as follows: 20 Clause 23 of the July 2007 version of the Electricity Commission s Low Income and Vulnerable Consumer Guidelines is an example of this. The clause was determined by Buddle Findley and the Human Rights Commission to be in breach of the Human Rights Act 1993.

19 Page 19 of 33 Fails compliance test Warrants Electricity Commission warning Passes compliance test Unaware of or disregards Guidelines. Makes inaccurate or inadequate compliance statement(s). Failure to address Gas Industry Co concerns and/or warnings re compliance. Internal policies comply actual practice but is noncompliant. Noncompliance due to misinterpret ation of the Guidelines. Inadequate (ex-post) justification provided for noncompliance. Partial noncompliance off-set by exceeding other parts of the Guidelines. Adequate (ex-ante) justification provided for all areas of noncompliance. 73. The key point is that not only is the level of uptake or compliance relevant, but so are the reasons for any non-compliance. Fully compliant. 7.2 Competition test 74. Mighty River Power recommended above that the Gas Industry Co apply a competition test which consists of the following: b. Competition test: (i) Competition in the relevant market is limited; and/or (ii) Regulation would promote competition; and/or (iii) Regulation is warranted on social policy grounds. 75. As a general rule, mandatory regulation should be unnecessary in markets that are workably competitive. Competitive market dynamics should, for example, be sufficient to protect the interests of consumers. Likewise, economic regulation should not be imposed on businesses that do not have substantial market power. 76. This is why whether competition is limited is one of the tests for determining whether price control should be invoked under the Commerce Act. Similarly, the Commerce Commission applies the test of whether competition is limited in determining whether to recommend the Government regulate transmission access services under the Telecommunications Act The purpose of regulation under the Telecommunications Act (section 18) is to promote competition for the long-term benefit of end-users. 77. Mighty River Power believes retail competition and fuel substitutability (even if direct competition is not as robust as it could be) will limit the extent to which gas retailers could offer unreasonable terms and conditions and therefore limit the potential benefits of regulation. 78. Mighty River Power s retail arm, Mercury Energy, has no gas incumbency and only started its gas retailing operations in 2003/04. We have built up a customer base of almost 37,000 from scratch through competitive activity. All our customers have made a conscious decision to switch to us. Mercury Energy has no substantial market power in gas retailing. If our contractual arrangements

20 Page 20 of 33 were not fair and reasonable customers would be unlikely to switch to or stay with us. 79. The figure below shows that less than half the potential customers that have access to gas supply to their properties are connected which demonstrates: (i) gas services are discretionary rather than essential services (like electricity); and as such (ii) gas customers (including potential customers), can choose not to take up supply if they are not happy with the service they receive. Figure: Gas Network Penetrations 2006 Region Total no. of properties fronted by gas mains Total no. of connections Penetration Rate Northland 6,780 1,680 25% Auckland 222,310 80,400 36% Waikato 78,730 41,980 53% Bay of Plenty 25,720 9,610 37% Gisborne 9,600 4,100 43% Hawkes Bay 15,620 4,690 30% Taranaki 38,250 19,120 50% Wanganui/Manawatu 59,170 33,220 56% Wellington 125,140 63,730 51% Average 581, ,530 44% Source: Gas Association of New Zealand 80. We question the Gas Industry Co s presumption that Generally speaking, it is the smaller consumers who are more likely to be at risk. 21 The statement is at odds with the Gas Industry Co s view that Competition with electricity as an alternative energy option, especially for small consumers, may also be important. 22 Smaller consumers (particularly domestic) are likely to have greater flexibility as to whether they use gas or electricity. As the Gas Industry Co has noted until the set of minimum arrangements required for effective competition are in place, it is premature to conclude that there is a case for intervention solely on the basis of weak competition Net benefit test 81. Mighty River Power recommended above that the Gas Industry Co apply a net benefit test: c. Net benefit test: Regulation would be to the long-term benefit of acquirers or end-users. 82. Even if the Gas Industry Co is persuaded the compliance and (if applicable) competition tests are satisfied this does not necessarily mean mandatory 21 Summary of conclusions section of the Discussion Paper. 22 Competition as the primary vehicle section of the Summary Paper. 23 Summary of conclusions section of the Discussion Paper.