New look for lines regulation

Alan Jenkins, the chief executive of the Electricity Networks Association, representing New Zealand’s electricity distributors, takes a look down our electricity reforms and discusses recent changes to lines regulation.

Up to 1992 New Zealand’s electricity distributors were what the Americans call ‘creatures of statute’, that is non-profit making authorities operating in a parallel universe where their objective was simply to provide power within a monopoly franchise area, and where their accountability was primarily to local communities. 

However, from the day the old Electricity Division morphed into Electricorp back in 1987, the collapse of that universe was inevitable.

By turning its own electricity service industry into an almost unregulated commercial animal, the Crown created a need for commercially focused counterparties focused on keeping that animal at bay. A new form of bulk buying agency was needed to argue with

Electricorp over prices and terms, and to agitate for other reforms to correct the initial power imbalance (a deliberate pun). There was also a need, under the policies of the time, to lift the distribution industry’s horizons up towards new generation investment.

This last policy objective was a critical one. The Crown’s objective was to pull back from sinking tax revenues in commercial ventures like Huntly and Clyde, and to encourage the private sector (especially those parts of the sector with a direct interest in electricity) to make those investments themselves.

The first wave of regulation was designed to promote investment.

Distribution assets were required to be valued, and company structures were required that allowed commercial returns to be made. In parallel a rudimentary wholesale market was rolled out, and the first steps towards breaking down Electricorp’s upstream dominance were taken.  This all seemed to work, and by 1998 distributors were providing 50 percent of new capacity, and our power prices were still among the lowest in the OECD.

Somewhere along the way, however, something changed. The forced line/energy break-up, and the resultant buy-in of distributors’ generation and trading assets by state-owned generators was the key: government policy shifted its focus away from new investment, and towards wealth redistribution. Transpower became locked into a complicated dance with the new Electricity Commission, while distributors were bought under the control of the Commerce Commission, who’s priority understandably is to push costs down and service quality up.

In October 2008 the tide turned with the passage of two Acts amending the Commerce Commission’s brief. The Electricity Industry Reform Amendment Act removed another bloc of impediments to distributors generating (there had been two other, ineffective, reforms since they were pushed out of generation in 1998), while the Commerce Amendment Act shifted the regulatory focus – at least in part -  away from the blind alley of ever lower prices with ever higher quality and towards encouraging investment and innovation.

The remnants of the Electricity Industry Reform Act are still annoying, and tell you something about misplaced regulatory enthusiasms. Most distributors’ generation ambitions are limited to about five percent of a Huntly power station, and any plant they build over 10MW (in country with 9000MW of capacity) must be hemmed in by special arms-length ownership rules. Contrast this with the damage done to the economy by the tortuously complex ownership and financial arrangements we’ve seen being uncovered in the financial sector. We can only hope that what’s left of the EIRA is dealt to as soon as possible as the new Government targets unnecessary regulation.

Similarly, while the reformed Commerce Act is a big improvement, it still leaves in place a plethora of information disclosure requirements that cost a lot to administer and achieve very little. Consumers would probably be empowered if they had ready access to data on what the various elements of their power bills – energy, transmission and distribution – cost, but they don’t. However, if you are among the 5-10 people who trawl through a typical distributor’s web site disclosures every year you’ll find a lot that you will have no interest whatsoever in.

On the positive side, the new regulatory regime has been designed to reward energy savings, encourage new technologies and – most importantly – to provide up-front investment certainty.  In the past distributors building something new took their chances that the Commerce Commission would allow them to recover the costs involved, and faced the unknown risks of the so-called ‘2009 reset’, where the commission might have done almost anything. Under the amended Act there is no reset, and companies will know in advance the controls they’ll face going forward and the inputs that will drive both the current and the subsequent five-yearly control regimes.

The planned distribution industry works programme through to 2015 has an all-up cost of over $3.2 billion, not counting the similar sums that Transpower needs to spend in the same period. In parallel, I’d expect electricity distributors to be the leading players in rolling out  broadband services and, probably, in setting up the infrastructure needed for tomorrow’s world of electric vehicles. Along with everyone else, distributors are facing new unknowns as a result of the global financial melt-down.

Deciding what the key elements of the control regime should be, in advance, is challenging in these circumstances.

How do you establish a realistic cost of capital, or a realistic inflation factor that can be locked in through to 2015? We’ve got a reformed regulatory framework that looks capable of doing the job, and the next challenge is to find a pragmatic way to build on that framework in very uncertain times.