Caught in the middle

Energy NZ talks with David Caygill (pictured), the chair of the Electricity Commission on the EC’s often controversial role as the industry watch dog.

Q. In the 1990s New Zealand, inspired with the privatisation of the of the UK’s electricity supply market under the Thatcher Government, deregulated its own electricity market, but without the widespread privatisation that characterised the UK example. Looking back, do you think we could have been done better?

A. My understanding is that far from de-regulating, the UK actually set up a specialist electricity industry regulator, in order to aid its prime policy of privatisation. New Zealand’s objective at the time was more to raise the performance of our economy.  Breaking up NZED/ECNZ into multiple generators put downward pressure on wholesale electricity costs by creating a wholesale electricity market. It also spread the risk of investment decisions across multiple firms. In both respects I believe the country has benefited. The key issue for New Zealand remains how to increase competition given the isolation of our system and the economies of scale that prevail in this industry.

Q. The Electricity Commission took over control of the electricity market from self-regulating bodies five years ago. Among other functions, it was charged with addressing the country’s reliance (60 percent) on hydroelectric power. Yet we are still at risk to serious supply shortages and experiencing higher electricity prices. Does the commission take any responsibility for this?

A.  As you say, we are charged with responsibility for the country’s overall security of supply. Yet we have no power to direct when or where new generation is built. So our approach has been to review the adequacy of generation investment and to alert the sector to any looming difficulty. 

In recent years the nation’s dependence on hydro resources has diminished. (The figure used to be nearer 80 percent than 60 percent). Wind power is increasing, along with the contribution from geothermal. On the demand side, smarter meters should enhance retailers’ ability to engage directly with consumers. The Commission meanwhile is reviewing the design of the electricity market to identify ways to improve both wholesale and retail competition. We are also reviewing the events of this past winter to discern any lessons for the future.

Q. You have said yourself that New Zealand’s experiment with industry self-regulation failed because the industry was unable to agree on the way forward in areas such as price transmission and setting rules that determine voltage and frequency. There seems just as much disagreement about these matters today, you say. What is the solution from the commission’s standing?

A. A simple conclusion would be that it would not make sense to revert to industry self-regulation. But then few other countries have attempted such an approach, so we are still in the mainstream, as it were, in having a general competition authority and a specialist electricity regulator, rather than pursuing industry self-regulation. In its first four years the Electricity Commission has put rules in place to determine the pricing of transmission as well as the management of voltage and frequency. Whilst the former remains controversial (more especially the pricing of the HVDC link) parties are no longer suing each other in court over this, and the methodology can always be reviewed.

Q. The government tasked the commission with approving a grid-pricing methodology for Transpower. The commission has been criticised for its decisions on transmission pricing and the uncertainty it has created on future pricing methodology proving a “minefield for misunderstanding”, in your own words. Could you comment please?

A. As I said above, the commission has addressed these matters as part of its early workload. Transmission pricing remains controversial and the commission is aware of strong demands that it revisit this issue. When other priorities (such as transmission investment reviews) allow, it is likely to do so.

Q. Since 2005, the Commerce Commission has been investigating activities of participants in the electricity industry as to any breaches of the Commerce Act (36) by taking advantage of a substantial degree of market power for an anti-competitive purpose. How is the Electricity Commission involved/positioned in this investigation?

A.  As the competition authority, the Commerce Commission is responsible for enforcing the Commerce Act. The Electricity Commission is aware of this investigation and has been kept briefed about it. We are interested in particular in the possible implications for our own work on the overall design of the electricity market. We will ensure that any findings of the Commerce Commission are taken into account in our work.

Q. The Government Electricity Governance Rules requires the commission, whenever possible, to use its power of persuasion and promotion, and provision of information of and model arrangements to achieve its objectives rather than recommending regulations and rules. Has the commission been provided with the ‘teeth’ to do its job? Would it help if the commission had broader powers?

A.  I think the preference for persuasion and promotion reflects a simple cost/benefit approach: The commission needs to be able to demonstrate that regulation is preferable to alternative approaches before it can so recommend.  But if we can’t do that, why would we recommend regulation?  If the Commission thought its powers were inadequate then we would certainly draw that to the government’s and the public’s attention. There is no obvious area where our powers are currently inadequate.

Q. In relation to this question, and in the light of necessary global government intervention in the financial sector, is it possible to have a controlling body such as the EC without resorting to central planning and a more regulated market?

A.  Central planning implies a single document setting out what should be built, where, and (presumably) using what fuels. In that sense the commission is not a central planner.  Rather we are a regulator of certain limited functions, notably the wholesale market and transmission investment. Both are monopolies: Hence the need for regulation.  Transpower is the grid planner (and owner) and the industry plans the disposition of generation. These arrangements fit well with the government’s approach which has been described as “as much market as possible and as much regulation as necessary.”

Q. The commission is tasked with approving (with a yes or no) Transpower’s urgent plans to upgrade the national grid for security of supply. There have been criticisms from electricity quarters that the yard-stick that Transpower projects are judged on - the Grid Investment Test – needs an overhaul. Would you agree? 

A.  I see no evidence for that view. Rather I see that the GIT came into force only a short time ago and has been applied thus far to just four major projects. (In passing I think it is our function is better described as to look at ‘significant’ projects than at ‘urgent’ ones.  If the processes are working well then Transpower’s proposals should not all be urgent.  And indeed the commission has special procedures for dealing with projects that are unusually urgent).

Given the small number of projects to which the GIT has so far been applied it is my perception that we are all still learning how the transmission rules work in practice. But it is open to anyone at any time to propose that the rules be changed. Recently Transpower has proposed a number of changes, which the commission is currently considering.

Introducing the grid

Transpower owns and operates the 12,175 km of critical high-voltage transmission lines that transfer power from the generators to substations where it is supplied to local distribution.

The core of this national grid is the 220kV network in each island and the HVDC link between them. The 220 kV lines connect the largest power stations with the main load centres. Provincial centres and smaller power stations are connected by transmission lines operating at 110 kV, 66 kV and 50kV. Transpower also has some local lines operating at 33kV and 11kV.

The backbone of core 220kV circuits were built in 1950s, while the majority of the 179 substations were commissioned between 1920 and 1970. Assets also include a 110kV sub-transmission system which was the original grid and now operates, either in parallel with (or as radial feeds from) the 220 kV grid.

The rating of some transmission lines either cause constraints at present, or will certainly cause constraints within the next decade. These constraints result in either compromised load security or constrained generation dispatch. In most cases, the lines are not fully loaded in normal operation, but are highly loaded after an outage elsewhere in the system. The HVDC link capacity and associated AC system stability limits constrain HVDC transmission for about 10 percent of the time.

Both consumer demand for electricity and demand from generating companies to connect new power stations is increasing faster than previously forecast.

Troubled beginnings

The Electricity Commission is a Crown entity set up in September 2003 under changes to the Electricity Act to oversee New Zealand’s electricity industry and markets. It is funded through a levy (per megawatt) on electricity generators, purchasers and line owners.

The first EC chair was Roy Hemmingway, a Yale University-educated lawyer and former head of the Oregon state utility regulator. He lasted just one term when he was then removed from his job in October 2006 by the then Minister of Energy David Parker. Hemmingway left New Zealand very bitter after going head to head with the Government over the proposed Transpower 440KV line in the Waikato. “I have insisted that regulatory decisions be on the basis of law and the facts and not what politicians want,” he said. “If you’re going to have a regulatory commission, why bother putting qualified people in if you can simply ignore what they do?” David Caygill stepped down from the job of Commerce Commission deputy chair to take up the EC chair on in October 2007.

Caygill’s governance experience includes chairing the Ministerial Inquiry into the Electricity Industry (2000), and the Electricity Governance Establishment committee which designed governance rules for the electricity industry between 2001 and 2003. Caygill served as a Labour party member of Parliament for 18 years, including six years (1984-90) as a cabinet minister.

The commission consists of a core of between four and six members appointed by the Governor-General at the recommendation of the Commerce Minister. There are also a number of associate members, appointed by the Commerce Minister based on their specialist knowledge.