The Commerce Committee has examined the Electricity Industry Reform Amendment Bill and recommends that it be passed with the amendments shown.
Introduction
This bill amends the Electricity Industry Reform Act 1998. The original Act required full separation of the ownership of electricity lines and of electricity supply businesses. The Act was amended in 2001 and 2003 to allow electricity lines businesses to own generation up to specified quantities if they complied with corporate separation and arm’s-length rules. This bill seeks to encourage lines companies to invest in permitted generation, particularly renewable generation. It proposes to achieve this by
relaxing some of the corporate separation and arm’s-length rules relating to generation and retailing
allowing electricity lines businesses to sell more electricity
allowing electricity lines businesses to hedge the output of their generation
allowing electricity lines businesses to invest in generation and retail without limit outside their own lines areas.
This commentary focuses on the major issues we examined and the amendments recommended. We also recommend amendments to clarify the intent of the bill and other minor changes which are not discussed.
Submissions not leading to amendment
Submissions fell mainly into two opposite schools of thought: one of them that nothing short of repeal of the entire Electricity Industry Reform Act would suffice, and the other that the amendments in the bill are more than is needed.
Complete repeal of the Act
Several submitters suggested that the bill does not go far enough and some advocated the complete repeal of the Electricity Industry Reform Act to remove all ownership and corporate separation and arm’s-length restrictions. They argued that continuing restrictions were unnecessary and imposed compliance costs, thus discouraging investment.
Amendments go too far
Several other submitters were concerned that the bill goes too far, and that relaxing the corporate separation and arm’s-length rules would create incentives and opportunities for lines businesses to inhibit competition in the electricity industry.
Corporate separation and arm’s-length rules
Involvement in lines business
The ownership separation requirements are triggered when a person is involved in a lines business that is in breach of the connected generation cap rule in new section 17A, or in breach of the connected customer selling cap rule in new section 17C. The corporate separation and arm’s-length rules apply to an electricity business or a person involved in a business, if the business or person has an involvement in connected generation above the 10MW threshold in new section 17D.
We recommend inserting new section 7A (clause 7) to make it clear that only the proportion of generation that is owned by the lines business is counted towards its connected generation. New section 7 (clause 7) defines “involved” in the context of involvement in an electricity business. There was some concern that the definition of “involved” would include the entire quantity of connected generation, even if the lines business owned only a proportion of that generation. This definition is important for the calculation of the connected generation and customer selling cap rules.
We recommend amending section 19(1) and new section 19(1A) (clause 11) to disregard generation and conveyance of less than 5GWh per annum and retail sales of less than that amount, to allow for load growth in smaller networks since the principal Act’s introduction. The bill as introduced, by comparison, disregarded involvement if the line conveyed less than 2.5GWh per annum.
We recommend amending new section 17B (clause 8) to make it clear that generation disregarded for the purpose of calculating the connected generation cap rule in new section 17A would nevertheless be counted towards the threshold for corporate separation and arm’s-length rules in new section 17D. Some existing exemptions granted by the Commerce Commission would therefore continue to apply.
New section 17A (clause 8) appears to render unlawful some existing lawful investments in generation under section 5(2)(e) of the principal Act. We recommend amending new section 17A to make it clear that only generation with a total capacity greater than 5MW is counted towards the connected generation cap.
New section 17D (clause 8) sets the threshold for corporate separation and arm’s-length rules at involvements with more than 10MW in generation, or retailing more than 87,600MWh, which equates to 10MW operated at 24 hours for 365 days per annum. As the latter threshold is unnecessary, in the light of the former, we recommend that it be deleted.
Anti-competitive risks
Some submitters argued that raising the threshold for corporate separation and arm’s-length rules from 5 to 10MW increases the risk of lines businesses favouring their own retailing business. We agree that fair and equitable access to lines for competing retailers is important.
We recommend inserting new section 17EA (clause 8) to provide that a lines business that is involved in 5MW of connected generation and selling more than 5GWh per annum of electricity to connected customers must have a comprehensive, written use-of-systems agreement with its retail arm. This agreement should not discriminate in favour of that business, and it must be published on the generator’s Internet site. Failure to comply with these requirements would be an offence under new section 17EA(4).
Interpretation
Definition of “local network”
The current definition of “local network” does not give adequate guidance as to the boundaries of a local network and what it includes and excludes. We recommend amending the definition of “local network” to give clearer guidance on local network boundaries.
Definition of “manager”
We recommend inserting a new definition of “manager” to clarify that it does not include a director. The current definition of “manager” in the principal Act includes directors, which is inconsistent with some of the arm’s-length rules in proposed new Schedule 1, set out in the Schedule to this bill. For example, rule 9 seems to prohibit common management while permitting cross-directors.
As a consequence of this amendment, we recommend amending the definition of “material influence” contained in section 11(1)(a) of the principal Act by inserting new section 7B (clause 7) to include a separate reference to managers and directors, and replacing Schedule 1 of the principal Act with the arm’s-length rules (incorporating both directors and managers) set out in the Schedule to the bill.
Appendix
Committee process
The Electricity Industry Reform Amendment Bill was referred to the Committee on 11 December 2007. The closing date for submissions was 29 February 2008. We received and considered 22 submissions from interested groups and individuals. We heard 10 submissions.
We received advice from the Ministry of Economic Development.
Commentary
Recommendation
The Commerce Committee has examined the Electricity Industry Reform Amendment Bill and recommends that it be passed with the amendments shown.
Introduction
This bill amends the Electricity Industry Reform Act 1998. The original Act required full separation of the ownership of electricity lines and of electricity supply businesses. The Act was amended in 2001 and 2003 to allow electricity lines businesses to own generation up to specified quantities if they complied with corporate separation and arm’s-length rules. This bill seeks to encourage lines companies to invest in permitted generation, particularly renewable generation. It proposes to achieve this by
relaxing some of the corporate separation and arm’s-length rules relating to generation and retailing
allowing electricity lines businesses to sell more electricity
allowing electricity lines businesses to hedge the output of their generation
allowing electricity lines businesses to invest in generation and retail without limit outside their own lines areas.
This commentary focuses on the major issues we examined and the amendments recommended. We also recommend amendments to clarify the intent of the bill and other minor changes which are not discussed.
Submissions not leading to amendment
Submissions fell mainly into two opposite schools of thought: one of them that nothing short of repeal of the entire Electricity Industry Reform Act would suffice, and the other that the amendments in the bill are more than is needed.
Complete repeal of the Act
Several submitters suggested that the bill does not go far enough and some advocated the complete repeal of the Electricity Industry Reform Act to remove all ownership and corporate separation and arm’s-length restrictions. They argued that continuing restrictions were unnecessary and imposed compliance costs, thus discouraging investment.
Amendments go too far
Several other submitters were concerned that the bill goes too far, and that relaxing the corporate separation and arm’s-length rules would create incentives and opportunities for lines businesses to inhibit competition in the electricity industry.
Corporate separation and arm’s-length rules
Involvement in lines business
The ownership separation requirements are triggered when a person is involved in a lines business that is in breach of the connected generation cap rule in new section 17A, or in breach of the connected customer selling cap rule in new section 17C. The corporate separation and arm’s-length rules apply to an electricity business or a person involved in a business, if the business or person has an involvement in connected generation above the 10MW threshold in new section 17D.
We recommend inserting new section 7A (clause 7) to make it clear that only the proportion of generation that is owned by the lines business is counted towards its connected generation. New section 7 (clause 7) defines in the context of involvement in an electricity business. There was some concern that the definition of would include the entire quantity of connected generation, even if the lines business owned only a proportion of that generation. This definition is important for the calculation of the connected generation and customer selling cap rules.
We recommend amending section 19(1) and new section 19(1A) (clause 11) to disregard generation and conveyance of less than 5GWh per annum and retail sales of less than that amount, to allow for load growth in smaller networks since the principal Act’s introduction. The bill as introduced, by comparison, disregarded involvement if the line conveyed less than 2.5GWh per annum.
We recommend amending new section 17B (clause 8) to make it clear that generation disregarded for the purpose of calculating the connected generation cap rule in new section 17A would nevertheless be counted towards the threshold for corporate separation and arm’s-length rules in new section 17D. Some existing exemptions granted by the Commerce Commission would therefore continue to apply.
New section 17A (clause 8) appears to render unlawful some existing lawful investments in generation under section 5(2)(e) of the principal Act. We recommend amending new section 17A to make it clear that only generation with a total capacity greater than 5MW is counted towards the connected generation cap.
New section 17D (clause 8) sets the threshold for corporate separation and arm’s-length rules at involvements with more than 10MW in generation, or retailing more than 87,600MWh, which equates to 10MW operated at 24 hours for 365 days per annum. As the latter threshold is unnecessary, in the light of the former, we recommend that it be deleted.
Anti-competitive risks
Some submitters argued that raising the threshold for corporate separation and arm’s-length rules from 5 to 10MW increases the risk of lines businesses favouring their own retailing business. We agree that fair and equitable access to lines for competing retailers is important.
We recommend inserting new section 17EA (clause 8) to provide that a lines business that is involved in 5MW of connected generation and selling more than 5GWh per annum of electricity to connected customers must have a comprehensive, written use-of-systems agreement with its retail arm. This agreement should not discriminate in favour of that business, and it must be published on the generator’s Internet site. Failure to comply with these requirements would be an offence under new section 17EA(4).
Interpretation
Definition of
The current definition of does not give adequate guidance as to the boundaries of a local network and what it includes and excludes. We recommend amending the definition of to give clearer guidance on local network boundaries.
Definition of
We recommend inserting a new definition of to clarify that it does not include a director. The current definition of in the principal Act includes directors, which is inconsistent with some of the arm’s-length rules in proposed new Schedule 1, set out in the Schedule to this bill. For example, rule 9 seems to prohibit common management while permitting cross-directors.
As a consequence of this amendment, we recommend amending the definition of contained in section 11(1)(a) of the principal Act by inserting new section 7B (clause 7) to include a separate reference to managers and directors, and replacing Schedule 1 of the principal Act with the arm’s-length rules (incorporating both directors and managers) set out in the Schedule to the bill.
Appendix
Committee process
The Electricity Industry Reform Amendment Bill was referred to the Committee on 11 December 2007. The closing date for submissions was 29 February 2008. We received and considered 22 submissions from interested groups and individuals. We heard 10 submissions.
We received advice from the Ministry of Economic Development.
Committee membership
Gerry Brownlee (Chairperson)
Gordon Copeland (Deputy Chairperson)
Dave Hereora
Hon Darren Hughes (until 2 April 2008)
Hon Luamanuvao Winnie Laban
Simon Power
Hon Mita Ririnui (from 2 April 2008)
Hon Paul Swain
Lindsay Tisch
Dr Richard Worth