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NEW ZEALAND ’ S POWER SECTOR REGULATORY ENVIRONMENT – AN UPDATE

The purpose of this paper is to provide an update on the electricity sector structure and regulatory environment within which New Zealand’s electricity generation, transmission and distribution network businesses operate. Recent events that have had an impact on the sector are reported and relevant factors and issues are discussed. The paper updates the author’s presentation on this subject to the 2005 CIRED conference. PUBLIC SECTOR REFORM IN THE 1980S Starting in the mid 1980s, the New Zealand Government, faced with the need to re-vitalise the economy and reduce debt, introduced a comprehensive programme of public sector reform. The programme was designed to support the Government's economic restructuring programme for the country as a whole by establishing a free market economy, abolishing many controls and regulations, re-establishing state trading enterprises as commercial organisations, selling many of them and promoting efficiency in all remaining public sector operations. These principles were embodied in the State-Owned Enterprises Act 1986 1 and were extended to the electricity sector through the introduction in 1991 of the Energy Sector Reform Bill and subsequent enactment of the Electricity Act 1992 and Energy Companies Act 1992. The new legislation was intended to introduce competition to generation and energy sales activities whilst recognising the natural monopoly characteristics of the transmission grid and distribution networks. Details of the reforms and the status of the industry prior to and after their introduction have been presented earlier by the author – see [1], [2] and [3]. Regulatory Framework The Government had decided upon a light-handed regulatory framework for the electricity distribution sector. Transparent pricing and information disclosure by energy companies, in accordance with regulations published pursuant to the Electricity Act 1992, were the central feature of the regime – see [4]. Customers or other parties who alleged anti-competitive practice had recourse to the Commerce Commission. The Commission was established under the Commerce Act 1 Entities established under this Act are referred to in this paper as SOEs. 1986. Its stated objective was "to promote competition in markets within New Zealand". The Act was and is a major feature of the regulatory environment in which businesses in New Zealand operate. The Commission has various powers as described by the author in 2005. Limited Competition The original concept of the Government's reforms included, amongst other things, the belief that competition could be introduced into the generation sector. However, it was not until 1995 that the Government split the then Electricity Corporation (ECNZ) into two SOEs, ECNZ and Contact Energy Limited, to help bring this about. The generation sector then comprised two SOEs controlling around 95% of the generation capacity in the country and some smaller private operators. Of concern to major energy users and others, however, the market remained voluntary and was characterised by the fact that approximately 75% of transactions by-passed the market or were backed by hedge contracts set up in earlier years with the then ECNZ. FURTHER REFORMS IN 1998 In response to a public perception that the electricity sector reforms had failed to deliver benefits to customers, and perceiving that the benefits of efficiency gains to date had been captured by shareholders (ironically the Government in the case of most generation companies), the Government enacted the Electricity Industry Reform Act 1998. The main features of this act were to: further split ECNZ into three SOEs giving four competing SOEs in the generation sector plus smaller private sector operators, mostly distribution lines companies with small, embedded hydropower plants; and to require the distribution lines companies to split their ownership, divesting themselves either of their natural monopoly lines businesses or their retail/generation activities. Other measures were included – see [2]. The aims of the further reforms remained much as before but with added pressure to see downward movement in the price of delivered energy. (The Government also announced its intention to sell its shareholding in Contact Energy through a public share float combined with a cornerstone share sale and it implemented this step.) These changes took effect early in 1999. The forced split of line and retailing activities resulted in a major structural change in the industry. All but a small number of distribution lines companies opted to retain their line functions and divest retail and generation activities. The C I R E D 19th International Conference on Electricity Distribution Vienna, 21-24 May 2007